Date 14 August 2008
The Employment Appeal Tribunal has recently decided that bar or restaurant tips received by an employer but paid into a troncmaster’s bank account for distribution to employees under a tronc scheme were not “paid by the employer”. As such, three employers were required to pay sums in arrears to top up their employees’ earnings to the National Minimum Wage.
Background of the Cases
All three respondents were private members restaurants or clubs based in Mayfair, with each having a tronc system for the distribution of tips and a voluntary 15% service charge. The tronc system involved the monies firstly being paid into the respondents’ bank accounts, who then calculated the amounts to be paid to the employees. These sums were then paid into the troncmasters’ dedicated bank accounts, with the troncmasters being senior employees of each of the clubs. The troncmasters were then obliged to distribute monies (after deduction of tax) in accordance with the terms of their agreements with the employees, which included a points-based system based on length of service.
The employees received payslips from the troncmaster entirely independently of those given by their employers. The employers had no influence over the tronc arrangements, nor did they have the power to control how much the respective employees should receive. Without receiving the tronc payments, the employees would have received less than the National Minimum Wage, although with the tronc payments added all staff earned more than this threshold.
As such, HMRC issued enforcement notices against the respondents, who then appealed the decision on the basis that they felt that the tronc payments should be taken into account when determining whether the employees had received in excess of the National Minimum Wage.
The Decision
The Appeal Tribunal decided that the tronc payments should not be taken into account when determining whether the respondents had paid their employees the National Minimum Wage. The key issue was whether the monies that the employees had received was “paid by the employer”. When the money was in the troncmasters’ control, it was no longer the employers’ money and was held on trust for the employees. It was decided that the troncmasters and not the respondents owned the money at the point that it was paid to the employees. Consequently the Appeal Tribunal upheld the enforcement notices against all three respondents.
The Implications
The main incentive for businesses in operating tronc systems is that no National Insurance contributions (“NICs”) are payable on sums paid to employees in this way (although PAYE remains payable). A likely consequence of this decision is that employers in the hospitality industry will process internally the distribution of tips to employees to ensure that the payments made count towards the National Minimum Wage.
© SA Law 2008
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