New rules on allocating tips – five questions to ask yourself now

The Employment (Allocation of Tips) Act 2023 (the Act) is expected to apply from 1 October 2024. A change in UK government on 4 July could delay implementing legislation, but with cross party agreement on the legislation’s importance it’s time to prepare your business.

Once in full force, employers in England, Scotland and Wales must meet new legal requirements for how they allocate and distribute certain tips, service charges and gratuities (all referred to as ‘tips’ below). The new statutory Code of Practice (the Code) supplements the Act with more detail around the obligations on businesses. With reputational ramifications and new Employment Tribunal claims and potential inferences and uplifts for failure to comply – as well as a potential employment tax implications – the stakes are high. Here are five questions to think about now so you are ready when the big day comes.

If you have employees, workers (including zero hours workers) and/or agency workers who receive tips, service charges or gratuities you may be caught. The key question is whether those tips are ‘qualifying’. Qualifying tips caught by the new rules are those either:

•  Received by the employer and then distributed to workers; or
  
• Received by workers, but subject to the employer’s control or significant influence over their final distribution.

Provided they’re received, controlled or significantly influenced by an employer, qualifying tips can include non-monetary tips (such as a voucher, stamp or token – for example, a poker chip given as a tip at a casino).

Tips received directly by workers (including via an app), and whose distribution amongst workers is not controlled or influenced by the employer, are not within the scope of the new rules.

If you have qualifying tips in your business, you need to act now to ensure you can comply with your new obligations from 1 October.

Under the new rules, employers must as a minimum:

• Allocate qualifying tips to workers in a fair and transparent manner;
•  Pay 100 percent of those qualifying tips to workers by the end of the month after the month in which they were received;
• Have a written policy on allocating qualifying tips that is available to workers (unless tips are received only occasionally and exceptionally); and
• Maintain records of all qualifying tips distributed and make this available to workers on request.

New Employment Tribunal claims will be introduced to enforce these obligations with significant penalties. If you do not have the above in place, you need to act now. For example:

• Can you demonstrate that your current policy/process allocates tips fairly, transparently and not in a discriminatory manner? With finalisation of the Code, it’s imperative that employers ensure their policy distributes fairly and transparently – you need to ask:
  •  Is there any risk that current tipping policies may unintentionally lead to indirect discrimination?
  • Are there systems in place to ensure your tipping policy is accessible to all workers, including qualifying agency workers or workers with a disability?
  • Can you demonstrate that the factors you take into account to determine allocation are clear and objective?
  • Do you have a framework for reviewing your tipping policy to ensure continued compliance going forward?
• Do your current practices ensure that your workers receive 100 percent of tips? Under the new rules, workers must receive the 100 percent of qualifying tip payments following allocation (only statutory deductions can be made to qualifying tips – more limited than salary deductions – and importantly businesses will no longer be able to recover the cost of administering tips from the tips themselves). Is your payroll system set up to make sure inadvertent deductions don’t occur?
• Do you have a record-keeping system to track collective and individual qualifying tips?

No, there is still a positive obligation on employers who do not trigger the requirement to have a policy to notify their workers that this is the case. 

The Code expressly requires employers to consult workers to determine whether there is broad and genuine agreement in the workplace on whether their tipping policy is fair and reasonable.

Proper consultation takes time so it’s key to start that process now, well ahead of 1 October.

If an independent troncmaster is used to distribute tips, employers are largely deemed to have complied with the new employment law rules. Additionally, tips allocated through a properly run tronc are free of NIC (though subject to PAYE). This potential saving is increasingly attractive as employers look for ways to help employees with increasing costs. But it also means HMRC often examine how a tronc is run during employer payroll compliance reviews.

However, whilst an independent tronc can help an employer comply with their new employment law obligations from October, the employer remains under a positive obligation to act if they become aware that a tronc operator is acting unfairly or improperly. This can require careful management to minimise employment tax compliance risk. For example, employers can appoint, replace or remove a troncmaster – which might be necessary to ensure they act fairly and properly – but directing how the troncmaster allocates funds can jeopardise the NIC advantages, and give rise to additional liabilities such as further student loan deductions, apprenticeship levy and pension contributions.

We’ll revisit the potential use of troncs in a future article in this series.

KPMG’s Tax and Legal employment specialists can help you prepare for and comply with the new rules by helping you: 

• Identify what factors you need to consider for a fair and reasonable tipping policy;
• Design and implement tipping policies that do not run risk of discriminating against employees;
• Implement a framework for policy reviews;
• Implement an adequate and compliant record keeping system;
• Design and run a consultation process; and
• Ensure your employment tax systems and processes are robust.

Please contact Jennifer Singh, Laura Brown or your usual KPMG in the UK contact, to talk through how the prospective new obligations concerning tips, gratuities and services charges could affect your business.

For further information please contact:

• Jennifer Singh
  
• Laura Brown