National Minimum Wage – Tips distributed by troncmasters

Monday, May 18th, 2009

In June 2008, in the case HM Revenue and Customs v Annabels (Berkeley Square) Ltd & Ors, the London Employment Appeal Tribunal allowed an appeal by HMRC that, in the particular facts of the case, the tips distributed by the troncmasters were not payments by the employers and did not, therefore, count towards the employers’ liability to pay employees at least the NMW.

Annabels and two other private members’ clubs and restaurants (“the restaurants”) operate troncs for the distribution of voluntary service charges, credit card tips and cash tips (described collectively as “tips” in this article) to waiting staff and bar staff. All of the monies taken by the restaurants, including the tips, were collected initially by the employer and banked. The full amount of the tips was then paid into each troncmaster’s personal bank account for onward distribution to the staff.

The troncmasters were senior managers of their respective restaurant and operating the tronc was part of their employment duties. The way in which the tips were distributed was decided by the troncmaster and the members of the tronc.

Each troncmaster operated a payroll in order to distribute the tronc monies, deducted PAYE tax, issued a wage slip and kept proper records. The restaurants, in addition, operated a separate payroll to pay the staff their contractual wages, from which were deducted PAYE tax and NICs, issued separate wage slips and kept proper records. All of the procedures involved followed statutory requirements correctly.

However, in March 2006, HMRC served enforcement notices on each of the restaurants, requiring them to pay NMW arrears to members of staff whose pay, in the view of HMRC, was below the statutory minimum rate. The amount of the tips received on top of wages was not taken into consideration as, according to HMRC’s understanding of the legislation, they were not paid to the employees by the employer. The NMW Regulations provide that only payments of service charges and tips paid by the employer serve to meet the employer’s liability to pay at least the NMW.

The restaurants appealed against the enforcement notices and the Employment Tribunal ruled that each troncmaster distributed the tips on behalf of the employer and, as a result, the tips counted towards the employer’s NMW compliance.

The Employment Appeal Tribunal, however, overturned the Employment Tribunal, deciding that

  • the tips, once passed to the troncmaster, were no longer owned by the employer,
  • the troncmaster could not be required to pay them back,
  • the employer had no control over the distribution of the tips, as long as they were distributed to those entitled to them, and
  • the tips were not therefore paid to the employees by the employer.

The employers subsequently appealed against the EAT decision to the Court of Appeal and that court’s decision was published on 5 May 2009. The key arguments propounded by the employers was that,

  • although the payments were actually paid to the employees by the respective troncmasters, they were also paid by the employer because the monies were paid by the employer to each troncmaster to pay to the employees, and
  • the monies remained the employer’s property until paid to the employees because the troncmaster was an employee of the employer and was holding and distributing the tips on behalf of the employer.

The Court of Appeal disagreed with both arguments. The responsibility for distributing the tips was given to the troncmasters without any involvement from the employers. When passed to the troncmasters, the employers no longer had any interest or involvement in their distribution. In fact, if the employers were to be involved in any way in the distribution, the provision for the tips to be paid without deduction of Class 1 NICs, the principal reason for the using the troncmaster procedure, would be lost. The appeal was dismissed.

As has been pointed out in the past in this newsletter, and as referred to in the Court of Appeal decision, employers may take advantage of the facility to pay tips without deducting NICs, or the facility to have tips count towards their NMW liabilities, but they cannot have both.

  • If the tips are to be paid to workers without any liability for NICs, they must be paid by a troncmaster who acts completely independently of the employer. The tips, however, cannot count towards the National Minimum Wage.
  • If the employer wants the tips to count towards the National Minimum Wage, they must be paid through the employer’s payroll. As a result, they become liable for Class 1 NICs.

Quite separately to these court decisions, the Government intends to change the NMW legislation from October 2009 so that tips may not, under any circumstances, be used by employers to meet their NMW liabilities.

Further information:
Annabels (Berkeley Square) Ltd & Ors v HM Revenue and Customs
HMRC wins minimum wage court battle
October go-ahead for fair tips

The UK Payroll News is sponsored by HRD & Payroll Solutions

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