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Holding back tips and service charges from workers is illegal from 1 October 2024 and, from October 2026, employers will have to review their tipping policies every three years.

The Employment (Allocation of Tips) Act 2023 amends the Employment Rights Act 1996 by inserting new sections 27C-Y to create a statutory obligation on employers to allocate tips, gratuities and service charges to workers without deductions. It covers ‘qualifying tips, gratuities and service charges’, namely tips received directly by employers, associated persons, etc. (e.g. tips or service charges paid to an employer using a credit or debit card) and worker-received tips which are subject to employer control (e.g. where the employer directs that tips are shared amongst other workers). The Act does not interfere with existing tipping practices where tips are paid directly to workers in cash and kept or informally pooled by the workers themselves, i.e. where the employer does not exercise control or significant influence over the tips. There are specific provisions where tips are distributed via a tronc (s. 3 of the Act deems fair use of an independent tronc operator by an employer to be compliance with its obligations of fair distribution). Qualifying tips must be paid no later than the end of the month following the month in which they were paid by the customer. As well as those working directly for hospitality businesses, agency workers supplied to such businesses are also covered.

Employers have to ensure that the total amount of the qualifying tips is allocated ‘fairly’ between workers at the particular place of business. There is a statutory Code of Practice on Fair and Transparent Distribution of Tips to provide guidance to employers on what amounts to a fair allocation. This came into force on 1 October 2024. This is supplemented by non-statutory guidance for employers on distributing tips fairly. ACAS has also published some useful and straightforward guidance.

The Act introduces new rights for workers, including the ability to request information about how tips are paid and the right to bring a claim if their employer has failed to comply with the new obligations. Claims relating to the allocation of tips can be brought up to 12 months after the alleged failure to comply took place (unlike the usual 3-month limitation on tribunal claims). Tribunals have various powers, including the ability to order employers to revise the allocation of tips or to make a payment to one or more workers.

Where tips are paid on more than an occasional and exceptional basis, employers are required to have a written policy in place covering matters such as how they allocate tips, etc. Affected employers are also required to keep records of their tipping practices for at least three years beginning with the date on which the tips were paid.

October 2026 changes

From October 2026, the Employment Rights Act 2025 requires employers to review their tipping policy at least once every three years and to consult with workers when developing or reviewing the policy.

Further details can be found in the updated statutory Code of Practice on fair and transparent distribution of tips which includes the following new guidance:

• Employers should not seek to avoid the requirements of the law by describing tips, gratuities or service charges using a different label.
• Employers must review policies at least once every three years, consult with workers at the place of business when developing or reviewing their tipping policy and make an anonymised summary of the views expressed during consultation available to all workers at the relevant place of business.
• Cash equivalent digital tipping (where a customer uses a mobile app or similar method to directly tip members of staff) can be regarded as worker-received tipping and therefore out of scope for requirements on employers.
• Basic pay is one of the factors that may be considered by employers when allocating and distributing tips.
• When considering whether a method of allocation is fair, the operation of the scheme as a whole must be considered. Payments under a tipping scheme represent a share of the qualifying tips available for distribution and are not additional discretionary payments by the employer.
• Consultation should be genuine, considered and conducted in good faith, with sufficient time allowed for those participating. Further information about the process of consultation, including worked examples to help demonstrate proportionality for different types of employer, will be included in accompanying non-statutory guidance.
• The tipping record must be provided within four weeks of a request.
• A fair tipping policy should be clearly explainable without disclosing personal data, and data protection considerations should not be unduly relied upon as a reason for withholding information.