NEW SERVICE CHARGE LEGISLATION - COMMUNITY FAQs
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The Employment (Allocation of Tips) Act 2023 comes into effect from this Tuesday, October 1st and in anticipation we have had a flood of questions from employers regarding the nitty gritty of its implementation, and from employees expressing concern about its interpretation in their own workplace.?
The following article is not exhaustive. It will not dive into the pros and cons of different service charge distribution systems, or indeed the pros and cons of the new legislation itself. But we hope that it will provide a useful overview of some of the more common and more tricky questions.?
Our overarching advice for employers is this: make it as easy for yourself as possible?and do the right thing. An employee-led tronc system will always be easiest and best in terms of protection as it will automatically be considered ‘fair’ in the eyes of the law, but this may not be right for everyone (particularly very small companies). In those establishments, an emphasis on transparency is more important than ever.?
The legislation is set up to minimise ‘loopholes’?however there will always be bad players who will seek to stretch the interpretation of the law to suit their own activities. The emphasis on “fairness” allows for employees to challenge activities in this regard via tribunals, which some predict will result in the parameters of the legislation being further refined in the future.?
How do you work out how much service charge each employee receives?
The new Act does not dictate the exact method of distribution, but at the core of this new legislation is the principle of ‘fair’ distribution, which might seem a little vague. The Code of Practice sets out “overarching principles” on what is considered as fairness, but the Government has said that “it will be for each individual employer to determine which specific principles best apply to their business”. So what does that mean?
The Code of Practice explicitly states that fairness does not mean that all workers have to be allocated the same proportion of tips. These are the considerations laid out by the Act which are legally allowed to affect the amount given:
Most tronc distribution systems are points-based, which means that employees are given a proportion of the whole, and this is already usually based on all or some of the considerations above. From 1st October most employers are likely to lean towards a tronc system, i.e. a system that is guided by the staff themselves with a tronc master, to ensure that they are compliant.?
It is worth noting that clause 24 of the Code states that “Employers must take extra care to avoid indirect discrimination, which may be unintentional, which may be a risk when fewer tips are allocated to a group of workers which includes a disproportionate number of workers with a particular protected characteristic”, and this should be reviewed regularly: “There is a risk that a previously lawful method of tip allocation becomes unlawful and discriminatory if certain groups of workers become split on the basis of a protected characteristic. Employers should take active consideration of this, and ensure it is avoided.” For example, if all your kitchen porters are of a certain age or ethnicity which is not reflected elsewhere in the business, and they also receive the lowest tronc, that could be viewed as discriminatory.
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Can salaries that include service charge still be ‘guaranteed’?
Under the current system many businesses underwrite salary and pay levels based on expected service charge revenue, even though they can't legally guarantee a specific earning level. However under the new legislation coming into effect this will be much harder to achieve.
The Act and Code of Practice make it clear that tips and service charges cannot be used to meet National Minimum Wage requirements or form part of a guaranteed salary. Since all service charges must be distributed by the end of the following month, and service charge revenue will fluctuate, businesses won’t be able to rely on this income to underwrite consistent pay levels. This means business owners will need to adjust their approach to managing salary expectations.
Some businesses will however unofficially guarantee a set amount of ￡p/h in service charge to employees, and then top this up with a distribution of any excess following busy months. ‘Excess’ service charge is subject to the exact same requirements of fairness and transparency.
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Can business owners get paid out of service charge?
Yes and no. The new legislation exists specifically to prevent businesses from keeping any service charge at all, whether that’s for noble purposes (to stabilise pay through quiet months for example) or for nefarious purposes (e.g. willfully and unfairly withholding tips).?
The Tipping Act ensures this by specifying that tips must be distributed to workers who directly support service. Many businesses, particularly smaller ones, will have owners who are also in the kitchen or front-of-house either full time or very frequently, and will be on the payroll in that capacity too. In that case, they can receive a share of the service charge just the same as the regular employees. Their legal ownership of the company does not change their status as a worker too.?
Where a tronc or other employee-guided system is not in place, business owners who work in service could still legally allocate 100% of tips to themselves. The requirement for the distribution to be “fair and transparent” is intended to - and should - protect workers from losing out to such behaviour, but it would require employees raising this and challenging it in a tribunal.
In the case of owners and/or company directors who do not directly support service, they are not legally eligible for a share of the tips.?
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Can you pay admin staff out of service charge?
Again, if they are not involved directly with service or in supporting service roles, they would not be eligible for service charge payments. This can feel like a bit of a grey area - how about an Events Manager role, for example, who might be almost totally office-based and just liaising with the Restaurant Manager and Head Chef who then arrange the actual service? How far removed can you be from daily service to still qualify as directly supporting service??
Although the Act specifies that all tips earned in a specific establishment must be distributed within that establishment (ie cannot be pooled and distributed between branches), it specifies that this does not apply to those in non-public facing roles such as dark kitchens or head office, so we can be confident that service-adjacent admin roles such as Events Managers can be legally included (but the accounts department, for example, could not).
The key words here are “fair and transparent”. The Act insists on fairness to workers who actively provide service, and emphasises the need for total clarity to all staff in terms of written records and readily available distribution policies. It is worth noting that ‘fair’ can be open to interpretation, so the clause 25 of the Code of Practice?specifies that “Employers should consult with workers to seek broad agreement in the workplace that the system of allocation of tips is fair, reasonable and clear”. If the employees deem it unfair, they would then be able to take their concerns to an employment tribunal.
The issue of employee-approved fairness is also relevant and important when thinking about the rules around company directors and owners, above.?
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How should you consult with staff to get their approval of a fair system?
The important and interesting thing to note about the new legislation is that it all centres around fairness, which it then only defines in "overarching principles" (detailed previously). The emphasis on transparency then means that it is up to the employer to decide what is fair, and then up to the employees themselves?to police this. So in short, as it stands, if all of your employees are happy, then the law will deem your system to be compliant.
It should be enough to provide total transparency of the system, as the Act requires. Employers must have a written policy containing certain information, including all the factors considered by employers in the allocation of tips, and must make this available to all workers (employed and agency staff). This can be a physical or electronic document, but it must be written in “plain language” and available in accessible formats for workers with disabilities.?
All employees have the right to request their employer’s tipping record, which should state the amount of tips received and the exact method and principle of distribution. However it does not need to state the amount given to each individual, as this is considered confidential information.?
The safest course of action is to have an employee-led distribution system in place, with an independent tronc master, which ensures staff approval.?
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What are the rules regarding temp / agency / ad hoc staff?
Agency, temp and occasional staff must now be included in the distribution of tips, just like the regular team (with the exception of people who are self-employed, or invoicing through their own company). It’s important to check how the agency deals with service charge for the staff that they provide because, under the new legislation, if they fail in any obligations then the worker can make a claim against YOU, not the agency.
Tronc experts WMT have some excellent advice and insight into how tips should be allocated to agency staff, and we have excerpted ?as follows:
"The first thing a business must establish from the agency is the level of wage, basic pay or hourly rate paid to the agency worker. This must be their “gross rate” excluding any profit, mark up, admin cost, or employer cost such as NI, holiday pay or pensions. If the agency will not provide this – find a different agency!
The factors that are used to allocate tips should be clear and objective, fair and reasonable given the circumstances and nature of the business. This factor - “Level of basic pay and how engaged” ?- allows us to differentiate on the basis of pay rates. If an agency worker is paid more than an employed employee in the same role then it will be fair to take that into account and pay the agency worker a lower share than their directly-employed colleague, or even no share at all.
AN EXAMPLE:
Bartender A is directly employed by you and receives a basic wage of ￡11.50ph plus a further ￡3.50ph in tronc. Bartender B is supplied by an agency and receives a wage of ￡11.50ph but no share of tips. Under the Code, and unless there is another reason to differentiate, we will need to award Bartender B ￡3.50ph in tronc.
However, if Bartender B is paid a wage of ￡15ph by his agency to compensate for the fact he gets no tronc we can legitimately take this into account under the Code of Practice and award the agency Bartender no tronc. We will need to tell the Bartender B that he has been considered, but that given his level of basic pay no share (or a lower share) is to be awarded to him. Of course, if the agency pays the Bartender a wage between ￡11.50ph and ￡15ph then we will have to pay them an amount equal to what is needed to take their overall earnings on a similar level to Bartender A (employed by company).”
How might businesses get around paying service charge to agency staff?
If you have clauses which exempt agency workers from receiving service charge, they must apply to your regular workers too. Some businesses will set a certain period of employment after which workers can receive tips - for example, after a month or after their first 10 shifts - which is likely to take into account both agency/temp workers and staff on probation.
If you are planning on implementing something like this, there are two things to consider:
What can you do with surplus service charge??
The new legislation is very clear that any and all service charge must be distributed in full by the end of the following month - so for example, any tips gathered on October 3rd must be paid out by November 30th. If you have a system which leaves an ‘excess’ at the end of the month, for example you pay employees a set ￡p/h in tips, then this should be distributed in full too, and the same rules apply - namely that it should be fair and transparent.
Note that if you still have some surplus in reserve that had been built up before October 1st, it is exempt from the new legislation.?
NOTES
Please note that these answers are for general informational purposes and not legal advice. As this is new legislation, interpretations may vary, so we recommend consulting legal professionals or advisors if you're unsure about how the rules apply to your business.
With particular thanks to: