How to share tips fairly and transparently

Businesses need to make decisions about how tips will be allocated and – crucially – ensure all staff know about it, says Holly Freuchen

Businesses will need to implement new rules on how tips are shared from 1 July 2024 or risk enforcement action from workers in a tribunal. With the tribunal able to award compensation to workers, as well as make a public declaration that a particular business does not share tips ‘fairly’ and ‘transparently’, it is important to get things right.

At the centre of the new rules are the words ‘fairly’ and ‘transparently’, but what do they mean in the context of allocating tips?

The new rules in brief

The new rules apply to tips, service charge and gratuities received directly by the business, as well as any tips that are controlled by the business. The rules say such tips must be passed on to workers in full, and must be distributed in a ‘fair’ and ‘transparent’ manner.

A draft Code of Practice has been developed to help businesses and staff understand how tips should be distributed under the new rules. We can expect to see the final version of the code over the next few months as well as further non-statutory guidance.

What do fair and transparent mean?

Importantly, a ‘fair’ distribution does not mean allocating the same proportion of tips to everyone. As long as a business uses a set of clear and objective factors, they can lawfully decide to allocate different workers different proportions of tips.

The draft Code of Practice sets out some examples of the factors that hospitality and catering businesses can look at when deciding how to allocate tips, such as type of role (for example, it may be reasonable to make a distinction between front and back of house workers), individual or team performance (it may be reasonable for people who are performing well to receive more tips than someone who is performing poorly), length of time an individual has worked for an employer and seniority or level of responsibility in the business.

Businesses can also use the customer’s wishes as a factor – does the customer want their tip to go to a particular staff member they want to recognise as providing excellent customer service?

Employers must ensure they carefully consider the factors they are applying to their staff. What is reasonable for one company may not be reasonable for another and therefore companies must check that the factors they are using are fair and reasonable in the circumstances that apply to their business.

The factors used must not discriminate against anyone, even if it is unintentional. For example, considering the length of time an individual has worked at a business as the key or only factor in allocating tips could be discriminatory against younger workers who perhaps haven’t worked there as long. If length of service is used as a factor, it should be used as part of a balanced set of factors. Businesses must carefully consider all the factors they are using and decide if, when taken together, they are fair and objective.

How to create a tipping policy

Going hand-in-hand with fairness and transparency is the requirement for a business to have a clear written tipping policy. If workers are not aware of how tips are shared at their place of work, how can their employer say that they deal with tips fairly and transparently?

Consulting with workers (whether informally or formally) and seeking genuine agreement on the factors used to allocate tips will help businesses show their policy is fair, reasonable and clear.

A tipping policy should clearly set out how tips are distributed in the workplace and the factors an employer is using to determine such allocation. As well as this, the policy should set out how tips are accepted by the business.

It is important to keep the policy, including the factors being used, under regular review. Business changes, such as an increase of staff at Christmas or in the summer, could mean that the factors being used are no longer fair.

Preparing for change

In readiness for 1 July, hospitality and catering businesses should start to consider the factors they will use to determine a fair allocation of tips, as well as consulting with their workers to seek broad agreement that the way the company is proposing to distribute tips is fair, reasonable and clear.

Holly Freuchen is a senior associate in the employment team at law firm RWK Goodman

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