On 1st October the Employment (Allocation of Tips) Act 2023 will come into force in the UK, changing how hospitality businesses pass on tips and service charges to their employees. Chris Garner, managing director of HR and Employment Law specialist, Avensure, has outlined the key things that businesses need to be aware of ahead of the changes and the tripping points that could land employers in hot water.
The new rules require a swathe of changes to payment, payroll processes and record-keeping so it’s important that businesses take the time to properly understand the rules and ensure they’re prepared.
What are the changes?
From 1 October, businesses must pass on all tips and service charges to their team without deductions. Furthermore, those tips must be distributed among staff in a fair and transparent way, and there must be a written policy to outline how tips and service charges are dealt with. The policy must be clear and available to all employees at any time. A record must be kept of tips paid, plus their allocation between employees – again, staff must have access to this. The records must be kept for a minimum of three years.
Transparency and equity is key to the new rules so hospitality businesses would be well-advised to approach the new legislation in this spirit.
Because the change in legislation serves as an amendment to the Employment Rights Act, it’s important that businesses understand that they will be breaking the law if they continue to make deductions from tips and service charges they collect. There are no loopholes or methods to circumnavigate this, so it’s important that hospitality businesses get to grips with the rules and understand the potential penalties for failing to do so.
Legal pitfalls for businesses
Should a business fail to pass on tips or service charges to its staff, the new Code of Practice on Fair and Transparent Distribution of Tips encourages employees to pursue recompense through the employment tribunal system. Hospitality businesses will be keen to avoid finding themselves subject to legal action, particularly as the consequences are potentially significant, both for their business and their brand as well as their bottom line. Should a tribunal agree with the position of their employee, it can not only make a public declaration to that effect but also has the power to revise a previous allocation of tips or make a non-binding recommendation on a previous allocation of tips. In the worst-case scenario, it can also order a business to pay compensation, which may also include other employees who haven’t made a complaint.
Successful tribunal claims could attract awards of up to £5,000 and have the potential to result in further legal challenges, including unlawful deductions in wages claims.
In a situation where tips have been unfairly allocated in a way that disadvantages workers with protected characteristics, it’s not inconceivable that a business could also find itself facing discrimination claims under the Equality Act. Discrimination awards are uncapped and could run into tens or even hundreds of thousands of pounds so businesses should be mindful of this when drafting their new policies and allocating tips between staff members.
Hospitality businesses must also tread very carefully in the event of staff members asserting their rights regarding pay – any move to dismiss them could result in a claim for automatic unfair dismissal.
Businesses should be aware that the rules apply equally to permanent and part-time employees as well as agency workers. Civil action could also be pursued for particularly egregious breaches of the rules.
The final quarter of the year could be a tricky period for hospitality businesses while they put new policies into practice and seek to navigate the practical aspects of the changes day-to-day. It’s important to review tipping and service charge systems as early as possible to ensure full compliance in advance of October, allowing sufficient time for any necessary changes to be made. Failing to do so could reap potentially significant consequences for a business while disrupting one of the year’s busiest periods.