Tips and Troncs: The law on tipping and troncs is changing. Make sure you don't get caught out

Troncs

Harry's Bar is one of many clubs that operate the 'tronc' system. A 'tronc' is an arrangement to collect and distribute service charges, tips and gratuities to workers in the hotel and catering trade.

A troncmaster (usually a senior manager within the organisation) will have responsibility for deducting PAYE from the tronc, rather than the employer. The employer then separately makes any deductions for PAYE and national insurance contributions from the wages paid to the employees. In the case of certain lower-paid employees, they would only receive the National Minimum Wage when their wages were added to their share of the tronc.

It was previously thought that this arrangement would be compliant with the relevant provisions of the National Minimum Wage Act 1998 (NMW Act). But it is not.

The Act gives workers the right to a minimum hourly rate of pay. This is currently £5.73 per hour for those aged 22 or over; £4.77 for those between 18 and 21 and £3.53 for those under 18 but over compulsory school age, although the rate will change on October 1.

Any money payments from the employer to the worker are taken into account when assessing whether NMW has been paid, and it was thought that payments made by troncmasters would be included.

However, any money payments made by the employer to the worker that represent service charge, cover charges, tips or other gratuities, where such amounts are not paid through the payroll, are excluded from the calculation.

A case in point

An officer from Her Majesty's Revenue & Customs has the power to issue an enforcement notice to an employer, requiring that the workers are paid the NMW and to compensate workers for previous under payments. In the case of (1) Annabel's (Berkeley Square) Limited (2) George (Mount Street) Limited (3) Harry's Bar Limited v The Commissioners for Her Majesty's Revenue and Customs, the Court of Appeal had to decide whether an enforcement notice issued by the HMRC had been properly issued, or whether it should be rescinded.

In this case, the three employers all operated troncs to distribute service charges and tips.

These payments, which were usually made by credit card, were paid into the employers' bank accounts and each week the same amount was transferred into the troncmasters' bank accounts. Cash tips were given directly to the troncmasters.

The troncmasters deducted income tax and issued payslips and cash payments to workers, while the employers paid the workers' basic wage (being less than the NMW) after deducting tax and NICs. They issued separate payslips to the workers.

Initially, in 2006, an employment tribunal rescinded the enforcement notices on the basis that the sums paid by the troncmasters amounted to "money payments paid by the employer".

However, the Employment Appeals Tribunal (EAT) disagreed, and reinstated the enforcement notices. The EAT said the payments made by the troncmaster were not "paid by the employer" as required for NMW purposes.

Employers' appeal dismissed The employers sought to argue that the HMRC should look at the purpose of the legislation and take account of the fact that the employees did receive the NMW by virtue of their working for their employer. The money in the tronc had come from the employer and should therefore be treated as such for NMW purposes. This was, they said, no different from a payroll agency paying wages on the employer's behalf - even though the agency "paid" the employees, the employer would not be regarded as having failed to pay the employees.

The Court of Appeal dismissed the employers' appeal. Once payment was received by the employer for service charges, tips and gratuities, this money then became the employers' property. However, once that money was transferred into the troncmasters' bank accounts, the employers ceased to have any legal or beneficial interest in it. True, the troncmasters were expected to hold and distribute the sums in accordance with the troncmaster agreement, but the employers had no control over this agreement either.

The troncmasters operated this system to take advantage of a National Insurance exemption under regulation 25 of the Social Security (Contributions) Regulations 2001, which required them to act independently of the employer. In effect, the Court of Appeal was saying, you can't have your cake and eat it too.

What if you don't operate a tronc system?

The government has been looking into the treatment of service charges and tips, and published a consultation document on the subject. This was prompted by a widely held public view (quoted in the Court of Appeal case above) that employers should not be entitled to use discretionary tips, intended by most customers to go straight to staff, to satisfy the employers' legal obligation to pay the minimum wage.

From October 1, 2009, it will be unlawful for employers to use service charges, tips and gratuities to make up the minimum wage, regardless of whether the employer operates a tronc system or not. There will be secondary legislation to prohibit payment of tips through an employer's payroll counting towards payment of the minimum wage. The Department for Business, Enterprise and Regulatory Reform (BERR) has said that a new industry code of best practice will be published in due course.

So, whether you return to Harry's Bar or go somewhere else for your bellinis, you should be able to rest assured that the couple of quid you left on the plate will go to enhance the waiter's life rather than offset the employer's overheads. However, for the paymasters in the hotel and catering trade, they may feel that this is another burden to bear at a time when their businesses and revenues are badly hit by the recession.