Tipping point reached for discretionary service charges

26 July 2022

The government has recently confirmed it will support legislation obligating employers to allocate all tips to workers. Many service workers in retail and hospitality rely on tips to supplement their incomes, but there is evidence that a large number of businesses that add a discretionary ‘service charge’ to their bills keep the money instead of giving it to their staff.

What will the Bill do?

The premise of the Bill is that 100 per cent of tips must go to the workers.

In its current form, the Bill introduces a statutory code of practice (to be designed by BEIS) that will promote fairness and transparency over the allocation of ‘qualifying’ tips, and that all stakeholders (unions, employers, trade bodies and professional advisers) will be invited to contribute to its design. The code will first be published as guidance and consulted on before the relevant sections of the legislation come into force.

The Bill will create a legal obligation for employers that either receive tips directly from customers, or that have control or significant influence over the distribution of tips that workers receive directly, to distribute tips to workers fairly and transparently. The obligation will apply to the total amount of the qualifying tips paid at, or otherwise attributable to, an employer’s place of business. The tips must be allocated fairly between workers at that place of business. So, in the case of a chain, the tips will be distributed to everyone who works at a particular venue, rather than across the whole chain.

However, the Bill will not cover instances where the customer gives a tip directly to the employee, unless that tip was paid via credit card, or where the employees have a tip jar.

The Bill will also prohibit employers from making deductions from tips, including credit card payment processing fees.

Who will it apply to?

It will apply to employees and workers but not the self-employed.

What about tronc systems?

The Bill will not regulate the operators of independent tronc systems; however, it will introduce the right for workers to bring a claim to an employment tribunal if they believe the employer’s use of the tronc system is unfair.

How will it be enforced?

Workers may bring a claim to the employment tribunal if they do not believe their employer is complying with the code, or not maintaining sufficient records regarding their tipping practices. Employment tribunals must have regard to the provisions of the code of practice when determining whether an allocation of tips or the making of certain tronc arrangements is fair.

The employment tribunal will have the power to:

  • revise the allocation of tips the employer has made;
  • recommend the employer deals with tips in a certain way; or
  • require the employer to make a payment to one or more of the workers so that they receive the tips they should have received.

In addition, the employment tribunal will have the power to compensate workers by up to £5,000 for financial loss attributable to a breach of the provisions, or if the employer has failed to keep sufficient records relating to tipping practices.

What about the taxation of gratuities and tips?

Nothing in the Bill will make changes to taxation for employers and employees.

Issues the code will need to address

The code will have to address the rules around allocating tips among workers. For example, must tips be shared equally among all workers, or will certain roles (such as waiters in a restaurant) be entitled to a greater share? And what about the allocation of tips for those working part time? Will that be on a pro rata basis?

In addition, while tips have been excluded from the obligation to pay National Minimum Wage since 2009, could such legislation create an additional holiday pay liability because the allocation of tips will more likely meet the definition of ‘normal remuneration’ to count towards holiday pay? If so, that will further increase the cost for some businesses – perhaps unfairly, if they have no control over the size of the gratuity paid by customers to workers.

What should affected employers be doing now?

During its second reading in the House of Commons, the Bill received wide cross-party support. With a fair wind, indications are that it could become legislation within the next 12 months.

However, it still requires a third reading in the House of Commons and must pass through the House of Lords. The statutory code will also need to pass through both houses before the enacting legislation commences. A 12-month timeframe is therefore ambitious, particularly with a change of government leadership on the horizon.

For the time being, affected employers may want to take a wait and see approach to see how the Bill progresses through the Houses of Parliament. Should it gather momentum, though, employers will need to turn their attention to any draft statutory guidance that is published and consider what steps they can take to prepare for the change.

If you have any concerns about how this change may impact your organisation, please contact Charlie Barnes.

Charlie Barnes
Charlie Barnes
Director, Head of Employment Legal Services
Charlie Barnes
Charlie Barnes
Director, Head of Employment Legal Services