Tips & Service Charges: UK Employer Duties

Employers in hospitality, leisure and wider customer-facing sectors face detailed statutory duties when handling tips and service charges. The Employment (Allocation of Tips) Act 2023, commonly known as the Tipping Act 2023, has introduced a regulated framework to ensure that workers receive the full benefit of customer tipping practices. The Act marks a shift from custom and practice to legal obligation, with clear requirements for fairness, transparency and prompt payment, supported by a statutory Code of Practice that tribunals must take into account when deciding disputes about tips.

What this article is about:
This article explains what UK employment law says about tips, gratuities and service charges. It is written for business owners and HR professionals who need to manage compliant tipping arrangements and to design or review policy in line with the Tipping Act 2023 and the statutory Code of Practice on fair and transparent distribution of tips. It covers the legal definitions of tips and service charges, when the Tipping Act applies, how employers must allocate and pay tips, the scope of the Act for employees, workers and agency workers, and the rules around troncs, minimum wage compliance and dispute handling. It also sets out what should be included in a written tipping policy, the transparency and record-keeping requirements and the risks employers face if tips are not managed lawfully.

The rules on tips are not limited to restaurants and bars. Any organisation where customers provide gratuities—whether in cash, by card or through digital platforms—must follow the legislation if it exercises control or significant influence over the tipping process. This can include hotels, delivery services, casinos, personal services and other business models where customer tipping is common. Employers must understand which categories of tips fall inside the statutory regime and how to distinguish situations where the law does not apply because workers genuinely keep tips outside the employer’s control.

The Tipping Act 2023 requires employers to pass on qualifying tips in full, with no deductions other than lawful tax and National Insurance. Employers must also operate fair and transparent allocation processes that reflect the factors set out in the Code, follow the statutory minimum standards, issue a written policy, maintain clear allocation and payment records and ensure that employees and agency workers can access information about how tips are shared. These duties apply regardless of whether an employer operates a traditional allocation model or uses a tronc system run by a troncmaster or third party.

This introduction sets the context for the detailed sections that follow. Each section examines one area of the law so HR teams can ensure their tipping arrangements are legally compliant, transparent and capable of withstanding scrutiny from workers, HMRC, Acas or an employment tribunal. The later sections also outline the escalation routes available to workers, including internal grievance procedures, Acas early conciliation and employment tribunal claims, so employers understand the full compliance landscape.

Section A: Legal framework for tips and service charges

Employers need a clear understanding of the statutory framework governing tips, service charges and gratuities. The Employment (Allocation of Tips) Act 2023 establishes mandatory rules for how employers must handle customer tipping, supported by a statutory Code of Practice on fair and transparent distribution of tips that sets minimum standards and must be taken into account by employment tribunals. Together, the Act and Code create a comprehensive regime that applies wherever an employer has control or significant influence over tips, regardless of whether the organisation traditionally operates in the hospitality sector.

The Act uses the Employment Rights Act 1996 definition of “worker”, which includes both employees and limb (b) workers who personally perform work but are not in business on their own account. This means many individuals in casual, gig or agency-style roles may fall within scope even where the business does not regard them as employees. Where an organisation engages a combination of employees, workers and self-employed contractors, HR must be clear about who is covered and ensure that the allocation of tips reflects the statutory requirements.

1. The Tipping Act 2023

The Tipping Act 2023 is the primary legislation regulating the allocation of tips where an employer has control or significant influence over those tips. It requires employers to pass on qualifying tips to workers in full, allowing only lawful deductions for tax and National Insurance. No administrative fees, card processing charges, platform costs or general employer overheads can be taken from qualifying tips, whether or not the employer operates a tronc or uses third-party providers.

The concept of “control or significant influence” covers a broad range of situations. It will usually be met where tips go directly to the employer first, such as a compulsory or discretionary service charge added to a bill, or where workers initially receive tips but the employer collects and redistributes them through an internal system or tronc. The requirement can also be triggered when tips are routed through a card issuer, payment intermediary or digital platform and then remitted to the employer: the fact that funds pass through a third-party processor does not remove the employer’s legal responsibility once the money reaches them.

Employers must maintain a written policy explaining how tips are handled and must keep detailed records of all qualifying tips for at least three years. These records should cover, as a minimum, the total amounts received, the methodology used to allocate tips, the factors taken into account, the timing of payments and the categories of workers who benefit. Workers have the right to request information about how tips are allocated, and employers must respond within a reasonable timeframe. The purpose is to create transparency and accountability in organisations where tipping is part of the customer experience.

2. The statutory Code of Practice

The statutory Code of Practice on fair and transparent distribution of tips sits alongside the Act and carries legal weight. Employment tribunals must take the Code into account when determining disputes related to tips and service charges, so employers need to follow it closely and be able to evidence their compliance. While the Code does not replace the Act, it provides detailed guidance on how the statutory duties should operate in practice.

The Code sets out minimum standards for allocation, emphasising fairness, consistency and transparency. It requires employers to consider factors that are relevant to a fair distribution process, such as the type of work performed, levels of customer interaction, hours worked, the nature of the tipping environment and any objective performance factors that influence the service experience. It also makes clear that employers should avoid arbitrary distinctions that unfairly exclude certain groups of workers.

The Code applies to both employees and workers, including agency workers assigned to the employer. It excludes individuals who are genuinely self-employed. It reinforces the requirement for a written tipping policy and obliges employers to communicate allocation methods clearly in a way that workers can understand. This includes explaining how cash and card tips are handled, any tronc arrangements, the factors used in allocation, how and when tips are paid, and how workers can raise concerns or request information about tip distribution and records.

3. Who the Act does and does not cover

The Act applies to employees and workers, ensuring broad protection across the workforce. Agency workers are expressly covered where the end user (the business where they work day to day) exercises control or significant influence over the tips. In practice, this means that if a restaurant, hotel or other business controls the tipping arrangements, it must ensure that agency workers are included in the allocation on a fair and transparent basis alongside directly employed staff.

Self-employed individuals fall outside the Act and Code where they are genuinely in business on their own account and not working as employees or workers. In environments where businesses engage a mix of employed, worker and self-employed personnel, HR teams must be clear about who is entitled to benefit from statutory allocation protections and who is not. Incorrect classification can expose employers to employment status disputes, underpayment claims and wider compliance risks if people treated as self-employed are later found to be workers entitled to protection under the Act.

The Act also does not apply to tips over which the employer has no control. For example, where workers keep their own cash tips and the employer does not intervene in collection, storage or distribution, the legislation does not apply. Good practice, however, suggests explaining these arrangements to staff and customers to avoid confusion and complaints, especially where some tips (for example card or service charge payments) are subject to the statutory regime while purely personal cash tips are not.

Section A summary: Section A set out the statutory framework underpinning the rules on tips, gratuities and service charges. The Tipping Act 2023 creates binding duties on employers wherever they exercise control or significant influence over tips that reach them, including tips routed via card processors and digital platforms. The statutory Code of Practice establishes minimum standards of fairness and transparency and must be considered by tribunals. Together they impose clear obligations to pass on tips in full, maintain written policies, keep records, communicate allocation methods and ensure that all eligible workers—including agency workers—are treated consistently. Understanding this framework is the foundation for designing compliant tipping policies and systems.

Section B: What counts as a tip or service charge

Employers need to understand the different categories of tips, gratuities and service charges to determine when the Tipping Act 2023 applies. The Act focuses on employer control. If an employer exercises control or significant influence over a tip—whether it is cash, card-based, digital or part of a service charge—the statutory duties apply. Where workers receive tips independently and retain full ownership without employer involvement, the Act does not apply. This section explains how the law distinguishes each type of payment and outlines the compliance implications for HR teams, including how non-cash items and promotional vouchers are treated under the statutory framework.

1. Definitions

A tip or gratuity is any payment made by a customer as thanks for service. Although most tips involve money, the Act also covers certain non-cash items. For a non-cash tip to fall within scope it must have a clear fixed monetary value and be exchangeable for money, goods or services. Examples include vouchers, casino chips or gift cards with a defined balance. Items such as discount vouchers, promotional “money off” coupons or goodwill tokens that do not transfer a specific cash-equivalent value generally fall outside the Act.

A service charge is an amount added by the business to the customer’s bill before payment. This may be voluntary or compulsory. Whether the customer is free to decline the charge does not affect the employer’s duties under the Act; what matters is whether the employer receives and controls the payment. Where the business receives the service charge directly or indirectly—such as through a card processor—it becomes a qualifying tip for the purposes of the Act.

2. Cash tips

Cash tips create compliance obligations only where the employer collects or redistributes them. Cash left on a table, placed in a tip jar or handed directly to staff will fall within the Act if the employer gathers the money and allocates it across staff through a system under their influence or control.

If workers keep cash tips individually and the employer has no involvement in collecting, storing or distributing them, the Act and Code do not apply. This situation commonly arises in smaller venues where staff retain cash left on tables they personally serve.

Even where the law does not apply, employers should still clearly set out their position in internal policy documents. Organisations should also consider how they communicate these practices to customers to avoid confusion, especially where both controlled and uncontrolled tipping arrangements operate side by side.

3. Card and digital tips

Card-based tips are increasingly common. When a customer pays a tip as part of a card transaction—whether through a discretionary service charge or an optional addition at the terminal—the payment will fall within the Tipping Act 2023 if it reaches the employer directly or indirectly. This includes situations where the tip is processed through a third-party card issuer, merchant acquirer or digital payment platform before being remitted to the employer’s account.

If the card payment is routed directly to the worker, such as via a handheld terminal or app configured to send tips straight to staff, the Act does not apply because the employer does not control or influence the payment. Employers should ensure such arrangements genuinely operate outside their control and that workers understand how payments are being handled.

Digital tips paid through online platforms and apps follow the same rule. If the payment is routed to the employer—or transferred through an intermediary before reaching the employer—the Act applies. If the payment goes directly to the worker, for example where customers tip a delivery driver through an app that pays drivers directly, the Act does not apply.

4. Gifts

The Act only covers gifts that can be divided fairly or converted into money. Items such as wine, boxes of chocolates, small perishables or bespoke gifts that cannot be easily divided and lack defined monetary value fall outside the statutory regime. Nonetheless, employers should have a clear internal policy explaining how such gifts are handled, especially in customer-facing environments where tangible thank-you items are common. Policies should also distinguish between qualifying and non-qualifying gifts so workers understand when statutory protections apply.

Section B summary: Section B clarified which payments fall within the scope of the Tipping Act 2023. The Act applies broadly to cash, card and digital tips where the employer exercises control or significant influence, as well as to service charges added to bills. Tips kept directly by workers fall outside the statutory framework, but employers benefit from clear, well-communicated policies to maintain consistency and avoid misunderstandings. Understanding these distinctions enables HR teams to apply the law correctly, ensure transparent allocation and draft compliant tipping policies that reflect the organisation’s operational realities.

Section C: Distribution, payment timings and tronc systems

Once an employer understands which tips fall within the scope of the Tipping Act 2023, the next step is ensuring that allocation and payment processes comply with statutory requirements. The Act sets clear deadlines for when qualifying tips must be paid, imposes obligations on employers operating tronc arrangements and requires oversight even where tip distribution is delegated to third parties or troncs. HR teams must ensure internal processes reflect these duties to avoid regulatory breaches, worker disputes or systemic underpayment risks.

1. Payment deadlines

Employers must pay qualifying tips to workers no later than the end of the month following the month in which the tips were received. This rule applies regardless of whether the tips arise from cash, card, digital or service charge payments, and regardless of whether the employer uses an internal allocation method or a tronc.

For example, if a business receives £1,000 in service charges in July, the employer must allocate and pay this amount to workers before the end of August. The timing requirement prevents businesses from retaining tips to manage cash flow, using accumulated tips as part of an annual or ad hoc discretionary payment cycle or delaying payments to coincide with busy trading periods. Employers must therefore maintain robust systems for tracking monthly tip intake and ensuring prompt distribution within the statutory timeframe.

HR and payroll should work together to map allocation cycles against payroll cut-off dates, so that qualifying tips are processed and paid within the required period. Where tips are paid through a tronc, employers must still satisfy themselves that the troncmaster is operating within these legal deadlines and that there is a clear audit trail showing when tips were received and when workers were paid.

2. Tronc arrangements

A tronc is a system that pools tips and distributes them across eligible workers according to an agreed formula. Tronc arrangements are common in hospitality and leisure environments and can be either independent of the employer or set up by the employer but run by a worker. The individual responsible for operating the tronc is known as the troncmaster, who may be a worker, an external accountant or a specialist third-party provider.

Although troncs are often perceived as separate from the employer’s internal processes, the Tipping Act 2023 confirms that employers cannot outsource legal responsibility. Even if the employer does not directly handle tip allocation, they must ensure the tronc arrangement complies with the Act and the statutory Code of Practice. This includes ensuring that:

• qualifying tips are passed on in full without unlawful deductions for administration, card processing, software or management fees
• the distribution methodology is fair, objective and applied consistently
• the tronc operates within the statutory payment deadlines
• workers understand how the tronc works and what factors affect allocation

Where an employer uses an independent tronc, they should undertake due diligence before entering into the arrangement, reviewing the rules of the tronc, the allocation criteria and the governance structure. Contracts with third-party providers should require compliance with the Act and Code and allow the employer to access records to monitor how tips are handled.

3. Employer oversight duties

Employers using a tronc system must take reasonable steps to confirm that the arrangement is fair, transparent and legally compliant. This includes ensuring the tronc was established properly, follows the Code of Practice and allocates tips without improper deductions or discriminatory criteria. Employers should be able to demonstrate active oversight if challenged by workers, Acas, HMRC or an employment tribunal.

Where an employer suspects a tronc is distributing tips unfairly, withholding payments or making unlawful deductions, they are required to take corrective action. Options include raising concerns with the troncmaster, carrying out an internal audit or independent review, changing the troncmaster or ending the tronc arrangement entirely and moving to a different allocation model. Employers cannot rely on the independence of a tronc as a defence if workers are being underpaid or if tips are being misallocated.

Active oversight is therefore essential for compliance. HR teams should:

• monitor tronc processes and outputs at regular intervals
• review tipping policies and tronc rules annually against the latest version of the Code
• ensure workers know how to raise concerns about tip allocation
• retain clear records of total tips received, the allocation methodology and payments made

These measures help demonstrate that the organisation takes its statutory responsibilities seriously and reduce the risk that isolated errors or poor practices in a tronc become systemic issues across the workforce.

Section C summary: Section C outlined the operational duties employers must follow when distributing tips. The Act imposes strict monthly payment deadlines and requires employers to maintain oversight of any tronc systems, whether internal or third-party. Regardless of whether tips are distributed directly by the business or through a troncmaster, employers remain responsible for ensuring fair, timely and lawful allocation without unlawful deductions. Clear processes, regular monitoring, due diligence on tronc providers and effective communication with workers and troncmaster are vital for meeting statutory obligations and evidencing compliance.

Section D: Compliance risks and dispute handling

Compliance with the Tipping Act 2023 requires more than passing tips on to workers. Employers must ensure that allocation processes are fair, transparent and timely, that the written tipping policy is communicated effectively and that workers understand how tips are distributed. When systems break down, workers have access to several formal and informal routes for raising concerns. HR teams must understand these routes, the interaction between tips and minimum wage rules and the consequences of non-compliance. This section explains the key risks and the steps employers should take to prevent disputes and demonstrate full compliance.

1. Minimum wage interaction

Tips cannot be used to meet minimum wage obligations. The National Minimum Wage and National Living Wage must be paid through the employer’s own funds. Customer tips, whether cash, card-based or digital, cannot be counted towards a worker’s minimum wage pay under any circumstances.

If an employer relies on tips to top up a worker’s base pay to the minimum wage, they risk enforcement action by HMRC and potential tribunal claims. HMRC can issue arrears orders requiring employers to repay underpayments to workers, impose financial penalties and place the employer on public enforcement lists. HR teams should periodically review pay practices and payroll systems to ensure that tip allocation has no bearing on statutory wage compliance.

2. Worker complaints and internal resolution

Workers may raise concerns where tips are not paid on time, where deductions have been made or where distribution appears unfair or opaque. Workers may also challenge whether agency workers have been included on equal terms with employees. Employers should encourage early, informal resolution, as many issues arise from misunderstandings or administrative errors that can be corrected quickly once identified.

Concerns raised by agency workers must be treated in the same way as concerns raised by employees. The statutory Code of Practice emphasises parity between these groups to maintain fairness and transparency. Employers should therefore ensure that managers understand their responsibility to listen to and investigate concerns raised by all categories of workers covered by the Act.

Where concerns cannot be resolved informally or where the issue is serious or ongoing, workers may submit a formal grievance. Employers must then follow the Acas Code of Practice on disciplinary and grievance procedures. The Code requires employers to investigate concerns promptly, provide clear outcomes and give workers the opportunity to appeal. HR teams should ensure managers are trained in handling grievances impartially and documenting each stage of the process.

3. Employment tribunal claims and enforcement

If internal processes do not resolve the problem, workers may pursue a claim in the employment tribunal. Before issuing a claim, workers must usually contact Acas for Early Conciliation. Early Conciliation gives the parties an opportunity to resolve the issue with the assistance of Acas, without the costs and time associated with litigation. Employers should approach Early Conciliation constructively, as many disputes are capable of resolution at this stage with clear communication and remedial steps.

Tribunal claims may arise where:

• tips were not paid by the statutory deadline
• unlawful deductions were made from tips
• allocation was discriminatory or inconsistent
• the employer failed to follow the statutory Code’s fairness and transparency requirements
• workers were denied access to tipping records or information
• agency workers were treated differently without lawful justification

If a tribunal finds in favour of the worker, it can order the employer to repay withheld tips, compensate the worker and amend allocation practices for the wider workforce. This means a successful claim can have implications far beyond the individual claimant. Employers may also be required to produce allocation records, distribution policies and evidence of monitoring activities, so accurate documentation is essential.

Employers should minimise risk by maintaining accurate records, keeping tipping policies up to date, training managers, communicating allocation methods clearly and auditing distribution processes regularly. Early review of concerns can prevent claims, demonstrate good faith and reduce exposure to legal, financial and reputational consequences.

Section D summary: Section D addressed the key compliance risks employers face when managing tips, including minimum wage breaches, unfair allocation, poor transparency and late payment. It outlined the main routes workers can use to challenge unlawful practices, from informal conversations to grievances, Early Conciliation and tribunal claims. Understanding these risks helps employers build reliable systems, reduce disputes and ensure their tipping arrangements withstand scrutiny from workers, Acas, HMRC and tribunals.

FAQs

Do employers have to share tips with agency workers?
Yes. The Tipping Act 2023 and the statutory Code require employers to treat agency workers in the same fair and transparent way as employees where the employer has control or significant influence over the tips. If the employer controls the tipping arrangements, agency workers must be included in the allocation process on a fair and consistent basis.

Can an employer deduct administration or processing fees from tips?
No. Employers cannot deduct administrative charges, service fees, payment processing costs, platform charges or other overheads from qualifying tips, whether or not a tronc is used. The only lawful deductions are tax and National Insurance.

What is meant by “control or significant influence” over tips?
An employer has control or significant influence where it receives tips directly or indirectly, collects tips from workers for redistribution, or decides who receives tips, how much is paid or when tips are distributed. If the employer can influence the allocation or timing of tips that reach it, the Act is likely to apply.

Do the rules apply if workers keep their own cash tips?
No. If the employer has no involvement in collecting, storing or redistributing cash tips, the rules do not apply. However, having a clear policy remains good practice to avoid confusion, especially where some tips (such as service charges) are subject to the statutory regime while personal cash tips are not.

Can a business choose not to operate a tronc?
Yes. A tronc system is optional. If an employer opts not to use a tronc, it must operate its own fair and transparent allocation method that complies with the Act and the Code, ensuring tips are passed on in full and distributed according to objective and clearly communicated criteria.

Do digital app tips fall under the Tipping Act?
Digital tips fall within the Tipping Act if the payment reaches the employer directly or indirectly, for example via a platform or payment intermediary that then pays the employer. If the app routes the tip directly to the worker and the employer does not control or influence the payment, the Act does not apply.

How long must employers keep records of tips?
Employers must keep records of qualifying tips and their allocation for at least three years. Workers have a right to request information about tips and allocation, and employers should be ready to provide this within a reasonable timeframe to demonstrate transparency and compliance.

Can employers use tips to meet minimum wage requirements?
No. Tips do not count towards minimum wage pay. Employers must meet National Minimum Wage and National Living Wage obligations from their own funds and treat tip allocation as separate from base pay.

What happens if tips are paid late?
Late payment breaches the Act. Workers may raise a concern informally, submit a formal grievance or use Acas Early Conciliation and, if necessary, bring a tribunal claim. A tribunal can order the employer to pay the outstanding tips and may require changes to allocation practices for all affected workers.

Are service charges treated differently from voluntary tips?
No. Whether a service charge is voluntary or compulsory does not affect the employer’s duties. If the employer receives the payment and controls the distribution, the Act applies and the service charge must be treated as a qualifying tip and allocated in line with the Act and the Code.

Conclusion

The Tipping Act 2023 creates a clear and enforceable framework for how employers must handle tips, service charges and gratuities when they exercise control or significant influence over those payments. The legislation requires employers to pass on qualifying tips in full, operate fair and transparent allocation processes, follow the statutory Code of Practice, maintain accurate records and ensure that workers, including agency workers, can understand how tips are distributed. These duties apply across sectors and payment methods, from cash and card payments to digital platforms and service charges routed through payment intermediaries.

For HR teams, the Act demands structured processes, robust written tipping policies and active oversight of any tronc arrangements or third-party systems. Employers must ensure managers understand the rules, communicate allocation processes clearly, document the objective factors used in distribution and respond promptly to concerns raised by employees and agency workers. They must also safeguard against the unlawful use of tips to satisfy minimum wage obligations and ensure that any dispute is handled in line with the Acas Code and, where necessary, Acas Early Conciliation.

Failure to follow these duties can result in grievances, HMRC involvement, Acas conciliation and employment tribunal claims, with wider implications for the business if systemic failings are identified. A tribunal can require employers to change their allocation practices for all affected workers, not just the claimant, and will consider both the Act and the Code of Practice when assessing whether the organisation has acted lawfully and fairly.

A compliant tipping arrangement supports fairness across the workforce, strengthens trust, improves transparency and reduces legal exposure. By aligning policies and practices with the Tipping Act 2023 and the statutory Code, and by embedding regular monitoring and clear communication, employers can maintain consistent and legally robust tipping practices that protect their organisation from disputes and regulatory risk while ensuring workers receive the tips to which they are entitled.

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