Tips, gratuities and service charges

Holding back tips and service charges from workers is illegal from 1 October 2024 and, by the end of 2026, employers will have additional obligations under the Employment Rights Act 2025.

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.

2026 changes

The Employment Rights Act 2025 requires employers to consult with trade union representatives or, if none exist, to consult with other worker representatives or affected workers directly when developing or revising their tipping policies. Employers will also be required to review their tipping policies at least once every three years and to provide workers with a written, anonymised summary of the views expressed during any consultation on those policies.

Further details can be found in the draft statutory Code of Practice on Fair and Transparent Distribution of Tips. Among the substantive changes that have been made to the revised version of the code, compared to the 2024 version, are:

clarifying that employers must not rebrand service charges to circumvent the legislation
strengthening guidance on which workers should be regarded as providing service
discouraging fixed or guaranteed tip allocations to specific workers
providing additional guidance on factors relevant to avoiding equal pay disputes
encouraging employers and tribunals to assess the fairness of an entire tip allocation scheme rather than isolated instances; and stating that data protection obligations should not be unduly relied upon to withhold information from workers about tipping records

Employers are also encouraged, but not required, to publish their tipping policies publicly.