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Preparing Your Business For The Employment (Allocation of Tips) Act 2023
The landscape of tipping and service charges in the UK is set to undergo a significant transformation with the introduction of the Employment (Allocation of Tips) Act 2023 later this year.
This legislation aims to eliminate uncertainties surrounding the allocation of service charges and other tips, ensuring that employees receive their due share.
In this article, we delve into the current system and the forthcoming changes that businesses in the leisure and hospitality sectors should be aware of.
Current System: How Does It Work?
At present, “tipping” typically encompasses both tips (whether in cash or card) and service charges, which can be discretionary or mandatory. When customers give cash tips directly to staff, these tips essentially become the property of the employee. While their employment contract may stipulate otherwise, it is generally up to the individual to decide whether to share these tips with colleagues.
On the other hand, when tips and service charges are collected by the employer—whether through a tip jar on the counter or a 12.5% service charge added to the bill—the distribution methods can vary. These range from the employer determining the allocation of tips and service charges to the staff members themselves agreeing on the day’s distribution of cash tips.
Additionally, many businesses put in place a “tronc” system, being a mechanism which allows tips and service charges to be pooled and distributed among staff by a designated “Troncmaster” without direction from the employer. It is worth noting that the chosen method of collection and distribution carries tax and national insurance implications, which will not be covered in this article.
Currently, there are no restrictions on businesses deducting amounts from the collected tips and service charges before distributing them to staff. While there may be valid reasons for such deductions—such as the operational costs of administering a tronc scheme—media attention has increasingly focused on employers making significant deductions from service charges, particularly as around 80% of UK tipping now occurs via card payments.
Five key changes Under the Employment (Allocation of Tips) Act 2023 are as follows:
1. Prohibition of Deductions
Under the new legislation, businesses will no longer be permitted to make deductions from the tips and service charges collected. Every penny collected must be distributed to the staff, with deductions only permissible for tax or as otherwise authorised by law.
2. Obligation To Allocate Tips Fairly
Businesses will be obligated to allocate tips and service charges “fairly” among workers. Although the legislation does not specify what constitutes fair allocation, this is expected to be clarified in due course. Employers will be required to have a written policy outlining the fair, transparent, and consistent distribution of tips.
3. Time Limit For Payment
Tips and service charges must be paid to eligible workers no later than the end of the month following the month in which the tip or service charge was received.
4. Record-Keeping Requirements
Employers must maintain records of the allocation and distribution of tips for a minimum of three years from the date they are received.
5. Right To Claim In Employment Tribunal
Employees will have a separate right to bring a claim in an employment tribunal if there is a breach of these requirements. The tribunal may, among other remedies, order compensation of up to £5,000 to an affected employee to compensate for any losses suffered.
Final Comments
The implications of these changes are significant, particularly for employers in the leisure and hospitality sectors. With businesses already facing financial challenges, the additional administrative burden of distributing tips and service charges could strain resources. One alternative may be to pass these costs back onto customers, but this is unlikely to be popular in the current economic climate.
In light of the forthcoming legislation, it is prudent for businesses to start implementing the necessary policies, structures, and procedures now. By doing so, businesses can be better prepared to comply with the new requirements and ensure compliance from the outset.
To discuss any of the points raised in this article, please contact Adam Convisser or fill in the form below.
Stay Ahead of Corporate Compliance: Navigating the Changes to Corporate Regulations
The Economic Crime and Corporate Transparency Act 2023 (ECCTA) follows on from the Economic Crime (Transparency and Enforcement) Act 2022 which introduced the Register of Overseas Entities in 2022. The legislation is a concerted effort to prevent the criminal exploitation of the UK’s economy through corporate structures and improve the reliability of data held by Companies House.
Key Changes Introduced By ECCTA:
The first series of measures are to come into force on 4 March 2024, which will impact Companies and Limited Liability Partnerships (LLPs).
There will be new stringent regulations relating to registered office addresses – all companies and LLPs will be required to maintain an “appropriate” physical address. An address is considered appropriate if correspondence delivered at that address would be expected to be received by a representative of the company which can be verified by the representative’s acknowledgment of delivery. This means that PO Boxes will no longer be permitted.
Any non-compliant addresses will be changed to the Companies House default address. Failure to provide a suitable alternative address within the specified period may result in the company being struck off. If you consider your address may fall short of the new requirements, you should act now to rectify this.
Additionally, companies will be required to provide a registered email address, to enable the Registrar of Companies to communicate with the company via email for updates, notices, and reminders. The email address will not be published on the public register. New companies will be required to provide a registered email address at the time of incorporation, for new companies incorporated from 4 March 2024. Existing companies will be required to provide a registered email address with their annual confirmation statement for all confirmation statements submitted as of 5 March 2024.
Other important changes to be introduced include granting Companies House power to:
- impose fines up to £10,000 for non-compliance with the Companies House 2006 regulations, as an alternative to pursuing such non-compliance via the courts;
- evaluate the quality of data produced to the Registrar or contained on its register. Information can be cross-referenced against external sources for discrepancies and inconsistencies, in which case the Registrar may:
- reject or remove the data;
- require the production of supporting evidence to validate the accuracy of the data;
- annotate the public register to alert users where the information appears unclear or deceptive; or
- strike the company’s name off the register;
- scrutinise company names that have the potential to deceive the public or which do not otherwise meet the incorporation requirements and if appropriate to require such companies to alter their names, failing which the company may incur a fine or be struck off;
- require companies to deliver a statement that the company is established/operated for lawful purposes, and thereafter to annually declare that the company’s future activities will also be lawful. New companies will be required to provide this statement on incorporation, and existing companies will be required to provide the statement with their annual confirmation statement;
- share data with other government departments and law enforcement agencies;
- expand the types of information/documents that can be withheld from public view on the register.
How We Can Help At Quastels:
With these important changes on the horizon, it is crucial to take action promptly to ensure your company or LLP adheres to the new regulations and avoids the consequences of non-compliance, which could undermine your company’s integrity.
The Corporate Team at Quastels has specialised legal expertise to assist you in navigating and implementing the requisite measures for your business.
To discuss any of the points raised in this article, please contact our corporate team by filling out the form below.
Are You Ready For EU’s Corporate Sustainability Reporting Directive?
Formally adopted by the European Council in late November 2022, the EU’s Corporate Sustainability Reporting Directive (CSRD), will make almost 50,000 companies, including SMEs, subject to mandatory sustainability reporting.
As well as applying to EU-companies the Directive will also capture non-EU companies which have subsidiaries operating within the EU or which are listed on EU regulated markets. Affected companies will have 12 European Sustainability Reporting Standards (ESRSs) to apply, and these ESRS apply regardless of the sector in which you operate.
Affected entities must also disclose on Environment, Social, and Governance (ESG). There are over 120 metrics and targets. In addition, CSRD reporting will require far more rigour and detail, as well as compliance with mandatory limited assurance ESG reporting requirements.
What Is The Background To The Reporting Changes?
According to the Explanatory Memorandum, the European Commission saw a significant gap between what organisations are required to report on under the existing Non-Financial Reporting Directive (NFRD), and what the users of that information needed to know. For example, the reporting framework under NFRD does not guarantee that the data provided by companies is reliable, comparable, and relevant. Also, the reporting framework under NFRD lacks accuracy and companies often struggle to identify the information they need to provide.
The Explanatory Memorandum concluded:
“The primary users of sustainability information disclosed in companies’ annual reports are investors and non-governmental organisations, social partners, and other stakeholders. Investors, including asset managers, want to better understand the risks of, and opportunities afforded by, sustainability issues for their investments, as well as the impacts of those investments on people and the environment. Non-governmental organisations, social partners and other stakeholders want to hold undertakings to greater account for their impacts of their activities on people and the environment.
The current legal framework does not ensure that the information needs of these users are met. This is because some companies from which users want sustainability information do not report such information, while many that do report sustainability information do not report all the information that is relevant for users. When information is reported, it is often neither sufficiently reliable, nor sufficiently comparable, between companies. The information is often difficult for users to find and is rarely available in a machine-readable digital format. Information on intangibles, including internally generated intangibles, is under-reported, even though these intangibles represent the majority of private sector investment in advanced economies (e.g., human capital, brand, and intellectual property and intangibles related to research and development).”
When Does CSRD Reporting Apply?
The CSRD revises, expands, and strengthens the sustainability reporting requirements of the NFRD. It will be effective from 1 January 2024 for those entities already subject to the NFRD) (reporting in 2025) and from 1 January 2025 for all companies newly caught within its scope (reporting in 2026).
What Companies Will Be Subject To CRSD Reporting?
The following entities will need to comply with CRSD reporting requirements:
- All large companies based in the EU that exceed two of the following criteria; a) 250 or more employees, or b) €40 million in turnover, or c) €20 million in assets.
- All companies listed on EU regulated markets. This includes companies not established in the EU but are listed on EU regulated markets generating a net turnover of €150 million and which have at least one subsidiary or branch in the EU.
- From the 2026 financial year, all SMEs listed on EU regulated markets.
In relation to non-EU companies, in order to be within the scope of the CRSD, the global corporate group of a non-EU business must have generated a net turnover within the EU of €150 million for two consecutive financial years, and also either:
- have an EU subsidiary that meets the thresholds under Article 19a of the CSRD (e.g., is a large undertaking or public interest entity); or
- have a branch in the EU that generated €40 million net turnover in the preceding financial year.
The standards applied to SMEs will be less onerous than those applied to large companies. The Commission states:
“The Commission will adopt standards for large companies and separate, proportionate standards for SMEs. The SME standards will be tailored to the capacities and resources of such companies. While SMEs listed on regulated markets would be required to use these proportionate standards, non-listed SMEs – which are the vast majority of SMEs – may choose to use them on a voluntary basis.”
What Are Affected Companies’ Obligations Under The CRSD?
If your business falls under the new CRSD reporting standards, you will need to report on the following:
- Environmental protection
- Social responsibility and treatment of employees
- Respect for human rights
- Anti-corruption and bribery
- Diversity on company boards (in terms of age, gender, educational and professional background
The above requisites are currently mandatory under the NFRD. The below requirements cover the additional reporting under the CRSD.
- Your company’s strategy towards sustainable risks.
- Referring to investment and financial strategies:
- how your company plans to move its business model and overall strategy to ensure compatibility with the transition to a sustainable economy and limiting of global warming to 1.5°C, or
- a description of the time-bound sustainability targets the company has set for itself.
- Information relating to intangibles (social, human, and intellectual capital)
Conclusion
Reporting must be in line with the Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy Regulation.
When drafting reports, it is helpful to keep in mind the European Commission’s objective which is to ‘nudge’ organisations to direct capital towards sustainable investments to achieve viable and inclusive growth.
To discuss any of the points raised in this article, please contact Ann-Maree Blake or fill in the form below.