Under the Payment of Wages (Amendment) (Tips and Gratuities) Act 2022, a tip is a payment a customer chooses to make, while a service charge is a fixed charge added to a bill. The Act came into force on 1 December 2022, and despite that definitional difference, it requires both to be handled the same way once collected electronically: passed on to staff.
Here’s what the law actually says, and what it means in practice for hospitality businesses and their staff.
Why the label doesn’t create a loophole
Before this Act, there was no statutory clarity on what a business had to do with money collected under the heading “service charge.” That gap allowed some businesses to add a service charge to bills without it ever reaching staff.
The 2022 Act closed that gap directly: any charge described as a “service charge,” or anything worded in a way that would make a customer reasonably believe it’s for service, must now be distributed to staff on the same basis as an electronic tip, regardless of how it was actually collected. It is also a specific offence for a business to use wording like “service charge” that implies the money goes to staff, if it doesn’t actually distribute it.
Employer obligations that apply either way
Once money comes in electronically, whether it’s a tip or a service charge, the same set of duties kicks in:
- Display a policy: Businesses must prominently display how tips, gratuities and service charges are distributed.
- Include it in core terms: New employees must be given the distribution policy as part of their core terms of employment, within five days of starting.
- Provide statements: Workers are entitled to a statement showing the total tips collected in a period and the share paid to them individually.
- Fair distribution: If a worker disputes the split, a WRC adjudication officer weighs a range of factors. This includes things like the worker’s seniority, the revenue or sales they generated, hours worked in the relevant pay period, full-time or part-time status, their role in dealing with customers, whether they were consulted on the distribution method, and any existing agreement between employer and staff.
Which businesses does this apply to?
The Act lists specific service sectors rather than covering every business. It applies to mainly to venues selling food or drink for consumption on-site (including casual trading), but also includes overnight accommodation providers (hotels, guesthouses, hostels, B&Bs and similar), guided tour operators and non-surgical cosmetic services (nail care, hairdressing, tattoo and piercing services).
Contract and platform workers, for example, gig-economy delivery riders working on a contract-for-services basis, are also covered. Businesses that engage them need a separate notice explaining how their tips and gratuities are handled.
What happens if a business gets it wrong?
Employees can bring a complaint to the WRC. Depending on the issue, this can lead to:
- Compensation of up to four weeks’ pay where a business fails to provide core terms within five days
- Redress under the Payment of Wages Act for unlawful deductions or unfair distribution of electronic tips and service charges
- Complaints must be made within six months of the alleged breach
