The Employment (Allocation of Tips) Act 2023 comes into force on 1st October 2024. This legislation will significantly impact how tips are handled for employees and agency workers going forward.
What does the Employment (Allocation of Tips) Act 2023 mean?
Under the new legislation, employers (you, the client) will be required to pass on all qualifying tips, gratuities, and service charges directly to workers (Internal employees, agency workers - including Flexers) without any deductions.
This applies to tips received by the employer and distributed to workers, as well as tips received directly by workers but controlled by the employer.
Tips given directly to workers without employer involvement are not covered by this law. In this instance, workers should report these to HMRC by completing a tax return; this cannot be done via payroll.
Key Provisions of the act:
Mandatory tip allocation: Employers must distribute all qualifying tips to workers fairly and transparently, without any deductions except for income tax.
Enforcement through employment tribunals: Workers can enforce their rights through the employment tribunal system. Judges will consider the statutory Code of Practice when resolving disputes related to tipping practices.
Written tipping policy: Employers must maintain a written policy detailing how tips are managed and distributed, which should be accessible to all workers.
Record keeping: Employers are required to keep detailed records of all tips received and their distribution among workers. Workers have the right to request access to these records.
How does that impact the way Flexers receive tips?
In this instance, Flexers would come under the policies for agency workers.
For agency workers, employers must pay any tips to the agency (Indeed Flex) by the end of the month following the month in which the customer paid the tip. However, as Indeed Flex processes payroll on a weekly basis, clients are expected to report to Flex the total amount of gratuities/tips earned by each Flexer during the previous week by 11:59PM GMT/BST on the following Tuesday.
Example timeline:
1. If the customer pays the employer on 3rd October 2024, the employer must report the totals to Indeed Flex by 8th October 2024.
2. Indeed Flex will pay the worker by 11th October 2024.
What responsibilities does Indeed Flex have to manage tips?
As the labour provider, Flex’s role will be to facilitate the payment of tips from clients to workers. We will ensure that the full amount of tips received from clients is passed on to Flexers within one month of receiving the payment.
However, it is important to note that we will not be responsible for determining the method of tip distribution among workers. This responsibility will rest with you, and you will need to determine the process of distributing tips fairly.
You will need to have clear and effective policies in place outlining how tips will be allocated amongst staff. We recommend seeking advice from your legal team to ensure full compliance.
Clients will be billed for the 13.8% NI contribution due on the tips or gratuities. This is not an admin fee but simply an employer liability.
What does this process look like?
To facilitate the distribution of tips, we have implemented a new process.
You will need to record and upload any tips received that are to be allocated to Flexers via the timesheets tab on the client portal.
- At the end of each week, download your timesheets, add a column for tips, and allocate the tip amount for each worker (Flexers/Agency Partners). Share the total tip amount with Indeed Flex by emailing the completed spreadsheet to [email protected]. Ensure the subject line reads: "Tips Allocation—Client Name—Week Ending Date."
- Flex will then generate two separate invoices: one for worker hours and one for tip allocations.
- The tips will be paid directly to the workers via Flex’s payroll system, ensuring compliance with tax and national insurance regulations.
Flex will maintain accurate records of all tips received and distributed, including the client's name, the amount of tips, and the date of payment.
Please ensure that tips earned by Flexers during the previous week are reported by 11:59 PM GMT/BST on the following Tuesday. If you have any questions or require assistance, please contact your account manager.
View the process in full here
What should I consider when putting a tips distribution policy in place?
The Code of Practice recommends that employers use clear and objective factors when deciding which proportion of the tip each worker should receive. A handful of the non-exhaustive examples set out in the Code include:
- The number of hours that the worker worked when the tip was received
- Individual/team performance
- The seniority of the worker
- The length of service the worker has with the employer
It is crucial to note that the above factors are merely examples, and it is the employer who has final say on which factors they wish to adopt.
Whichever approach is taken when deciding what is fair will also need to be transparent, and workers will need to have a clear understanding of exactly how tips are shared and the criteria which is applied when allocation is determined.
How does this work when using Agency Partners?
Agency Partners will receive a spreadsheet with the tip amount using the same method they receive their timesheet.
Can tips be submitted monthly instead of weekly?
While Indeed Flex prefers weekly tip submissions, we understand many clients follow a monthly payroll schedule. Feel free to submit your monthly tip sheets, and they’ll be processed within a week of receipt.
How will I know when tips have been processed?
An invoice will be issued the same week tips are processed, providing confirmation.
Do I have to pay additional NI Contributions if using a Tronc scheme?
If a Tronc scheme is in place, please inform us promptly to avoid the 13.8% National Insurance charge being added to your invoice. Without a Tronc scheme, this 13.8% NI charge will be applied as required by law.
Please include whether you're using a Tronc scheme in your tips report to ensure everything is processed smoothly.
Is VAT added to tips?
VAT is not applicable to tips, as freely given tips are outside the scope of VAT.
Will workers receive their tips weekly?
Regardless of whether tips are submitted weekly or monthly, Flex ensures they are processed within a week. If submitted by Tuesday, workers will receive their tips by Friday.