Employers now have until 1 October 2024 to comply with the "Tips Act” (the Employment (Allocation of Tips) Act 2023), which requires employers to ensure that all tips and service charges are distributed fairly and in full to workers. These requirements are separate to the rules and requirements relating to the tax and NIC treatment of distributing tips which still apply.

The requirements were due to come into force in July 2024, but the government announced that this would be delayed to October and published the final Code of Practice on Fair and Transparent Distribution of Tips which provides guidance on the obligations in the Tips Act. 

Although the deadline has been extended, the obligations are extensive, and employers should begin planning as soon as possible to ensure they are ready for the upcoming changes.

We have provided an overview on the requirements below.  

Who will it impact?

The Tips Act applies to all establishments where workers receive "qualifying tips, gratuities, and service charges," with a broad definition that encompasses any tip received by the worker but subject to the employer's control. That includes tips paid by card or other electronic means and tips paid to an individual worker that are subsequently distributed more widely. 

The new requirements are likely to have a significant impact on the hospitality sector, whether employers manage the distributions of tips, rely on a Tronc Master or if they outsource the distribution and management to a professional third party/Tronc Master.

What will change?

The Tips Act requires that employers: 

• Pass on payment in full: payments must be made without deductions, unless such deductions are required by law (e.g., tax deductions). 
• Maintain a written and accessible policy: including information on the steps taken by the employer to ensure that tips are handled fairly and transparently under the Act, and addressing how tips are accepted, allocated and distributed to workers.   
• Consult with workers: to seek broad agreement that any allocation system is fair, reasonable, and clear. 
• Keep a written record: of the amount paid and arranged to be allocated to workers for a period of three years following payment.
• Comply with statutory time frames for payments: payment must be made no later than the end of the month following the month in which the tip/service charge was paid by the customer. In the case of agency workers, payments may be made to the relevant employment agency.
• Have regard to the Code of Practice on the fairness and transparency of tip distribution.

Failure to comply with the requirements of the Tips Act could result in claims for unlawful deduction of wages and compensation in respect of financial loss (capped at £5,000 per employee).

Who is protected? 

The Tips Act protects employees and workers, including eligible agency workers. 

This may create administrative challenges for employers, as they will need to ensure payments are assigned to workers who may not be on the payroll. Additionally, employers may want to review agency worker pay if complying with the Tips Act obligations means a different approach to current pay arrangements. 

Tronc systems 

Under the Tips Act, employers can delegate allocation to an "Independent Tronc Operator," commonly known as a "Tronc Master." If implemented correctly, this system can reduce the risk of employer liability. Careful consideration is however needed given these new rules, in addition to the tax/NIC position of tips distributed via a Tronc.

How can Deloitte help?

At Deloitte, we have employment tax and employment law specialists who are well-equipped to support businesses in navigating these new employment law obligations alongside employment taxes considerations, including:

• Reviewing current allocation processes and practices; 
• Advising on any steps needed to ensure compliance with the Tips Act;
• Advising on the introduction of a Tronc System; 
• Drafting policy documents, communications to staff etc.

Your contacts 

Amy Douthwaite, Director, Deloitte Legal
Christopher Robson, Director, Deloitte LLP
Natalie Bell, Consultant, Deloitte Legal

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