If your staff receive tips you need to take action now to comply with the new law

New Gratuity (Tips) Law

With reports about Labour’s Employment Rights Bill currently dominating the employment related media headlines, it will have been easy to have missed a new employment law that has already come into effect in England, Scotland and Wales relating to gratuities.

Due to concerns that a lack of regulation of tips was leading to exploitative practices by employers, the Conservative government introduced the Employment (Allocation of Tips) Act 2023 (Tips Act), which received Royal Assent on 2 May 2023 and the substantive provisions came into force on 1 October 2024.

This new legislation introduces significant updates to how employers handle tips, service charges, and gratuities, and aims to ensure greater transparency and fairness for employees, particularly in the hospitality and service sectors.

Key Changes

1. Transparency requirements

The main change introduced by the Tips Act is that, if qualifying tips, gratuities and service charges are paid at (or are attributable to) an employer’s place of business on “more than an occasional and exceptional basis”, the employer must have a written tips policy which must be made available to all workers. The policy must clearly communicate how gratuities are shared and distributed.

If tips paid at the place of business do not amount to qualifying tips, the employer may still need to provide confirmation in writing to employees that it does not need to provide a written policy and explain why.

2. Fair distribution

The law mandates that all qualifying tips, gratuities and service charges are allocated fairly to workers (including eligible agency workers), and payment is made in full no later than the end of the month following the month in which the customer paid the tip.

Employers should consult with workers to seek broad agreement that the system of allocation of tips is fair, reasonable and clear. The factors considered when allocating tips must be stated in the gratuities policy shared with workers.

3. Employee rights

Employees now have the right to receive their gratuities without deductions for any business expenses (other than deductions required by law such as tax and national insurance contributions). Any contractual terms or written consent authorising deductions will not be effective.

4. Record keeping

Employers are required to maintain accurate records of gratuities received and the amount allocated to each worker for three years, beginning with the date on which the tip was paid. Records must be available to workers on request.

Action Steps for Employers

To ensure compliance with these new regulations, employers should:

1. Review and update policies

Evaluate existing gratuity and tip policies to ensure they comply with the new legal requirements.  Ensure that updated policies are communicated to all staff.

2. Train employees

Conduct training sessions for management and staff on the new regulations and how they impact the handling or gratuities. Emphasise the importance of transparency and proper recording.

3. Implement or review record-keeping systems

Establish or enhance systems for tracking gratuities, ensuring that all records are accurate and easily accessible.

4. Open communication channels

Create a process for employees to raise concerns regarding gratuity practices and ensure they feel supported in voicing any issues.

Consequences of non-compliance

Staff members can complain to an employment tribunal where there has been a failure to act in accordance with the new legal obligations relating to allocation, payment, and recording of qualifying tips.

The time limit for bringing a claim is 12 months from the date of the failure to comply and a tribunal may order compensation of up to £5,000 for financial loss suffered by the claimant because of the breach.

By taking steps now, if you have not already done so, you can avoid potential disruptions to your business, including legal challenge and financial penalty, and ensure that employees receive their rightful gratuities payments.

Should you need any assistance in implementing these changes or have specific questions about the new law, please do not hesitate to contact a member of our team.