The above Act will now come into force on 1st October 2024 (instead of 1st July 2024 as originally proposed).
Obligations for Employers w.e.f. 1st October 2024
In summary, the new rules provide that Employers must:
- Allocate “qualifying tips” to workers in a fair and transparent manner;
- Pay “qualifying tips” to workers within one month of the end of the month in which they were received, subject only to authorised deductions (e.g. PAYE where relevant);
- Have a written policy on allocating qualifying tips that is available to workers; and
- Maintain records of all “qualifying tips” distributed and make this available to workers on request.
What are “Qualifying tips”?
“Qualifying tips” are those gratuities received by the business from customers which are then distributed to workers; or those gratuities received directly by workers, but whose final distribution amongst the workforce is subject to the business’s control or significant influence.
Tips received directly by workers, and whose distribution amongst workers is not controlled or influenced by the business, are not within the scope of the new rules.
Statutory Code of Practice
Employers must take account of a new Statutory Code of Practice, [Distributing tips fairly: draft statutory code of practice – GOV.UK (www.gov.uk)] which sets out the overarching principles on:
- What constitutes ‘fairness’ for th purposes of the new rules;
- The areas in which businesses must make decisions on how they will comply with their new obligations; and
- How these principles should be applied in their places of business.
Any failure to consider the statutory Code of Practice when designing and implementing policies, systems and processes to comply with the new obligations may be taken into account by an Employment Tribunal.
Employment Taxes
Neither the Employment (Allocation of Tips) Act 2023 nor the statutory Code of Practice change the tax and national insurance (social security) treatment of tips.
How income tax on tips is reported and paid, and whether employee and employer National Insurance Contributions (NIC) are due, remains dependent upon who makes the payment to the employee and how the tips are managed / allocated.
Employers should remember that any changes they make to their systems and processes to comply with their new Act could affect their PAYE and NIC withholding obligations.
Employers should take advice from their accountants/auditors/payroll on PAYE/NIC queries, but we understand that:
- Where employees receive and retain tips directly from customers (e.g. cash tips left at a bar), employees should report the associated income through their personal tax account (or self-assessment), and no NIC is due. In these circumstances where there is no organised pooling or distribution arrangement, there are no employer payroll withholding obligations.
- Where an employer allocates tips to employees (e.g. by aggregating discretionary service charges added to bills and distributing them in line with their tip policy), PAYE and both employee and employer NIC obligations arise.
Tronc Arrangement
A tronc is an arrangement for collating and distributing tips and discretionary service charges run by a ‘troncmaster’, who must be independent of the leadership/ownership of the business (e.g., a site general manager or a head waiter) and is responsible for deciding how tronc funds are allocated to participants. Employers can appoint, replace or remove a troncmaster, but cannot direct how they allocate the funds (but the employer can provide certain practical and administrative support to the troncmaster).
Employers can appoint, replace or remove a troncmaster, but cannot direct how they allocate the funds (but the employer can provide certain practical and administrative support to the troncmaster).
Tips and voluntary service charges allocated through a properly operated tronc are subject to PAYE but not NIC. Please note: the potential NIC savings mean that tronc arrangements can be scrutinised by HMRC in employment tax compliance reviews.
Consequently, it is important to take tax and legal advice when implementing a new tronc arrangement or changing an existing one. If tronc arrangements are incorrectly structured or operated, liabilities such as additional student loan deductions, apprenticeship levy and pension contributions can arise in addition to underpaid NIC.
Enforcement of the Act
Workers will be able to enforce these new obligations through an Employment Tribunal.
The Act gives workers the following new rights:
- A right to receive a fair allocation of tips, gratuities or services charges. Failure by the employer can result in a compensation payment of up to £5,000 being made in respect of each worker. The time limit for bringing a claim (starting from date of non-payment or incorrect allocation) is 12 months.
- A right not to be subjected to a dismissal or detriment for asserting statutory rights in relation to tips (no qualifying period of service is required so a casual employee might bring a claim for automatically unfair dismissal).
- A right to ask the employer for records in relation to tips going back three years.
- A right to request the employer’s written policy on tips. A tribunal may make a declaration of non-compliance and order the employer to comply.
The record-keeping requirements in relation to this Act will be onerous, which is why some employers may outsource their obligations to a troncmaster (described above). Under the Act, such arrangements may be ‘deemed’ fair.
