It's all about the money (or who owns it, at least...)
The Employment Appeals Tribunal has today handed down its Judgement on what does and what doesn’t, count when it comes to tips and gratuities, troncs and the National Minimum Wage (NMW) and confirmed that the single-payroll system now adopted by many businesses counts towards earnings. However, businesses that hand over the proceeds of their discretionary service charges and credit card tips to the troncmaster and who fail to meet the NMW from the business payroll alone, are likely to face a wave of inspections from HM Revenue & Customs (HMRC) seeking arrears of pay for underpaid workers.
In 2004, HMRC started proceedings against top London members’ club Annabels, claiming that the payments received by employees through a separate tronc payroll could not be counted towards the NMW even though a number of the club’s employees were said to earn enough through the tronc to result in them paying tax at 40%! Although the Employment Tribunal threw out the Revenue’s claim in September 2007, that decision has now been overturned on appeal.
The Appeals Tribunal’s view is that when a business collects a service charge or credit card tip then it takes ownership of that money, but that the act of handing cash to a troncmaster or paying the money into a bank account controlled by the troncmaster changes the ownership of the money from the business to the troncmaster. Hence, when the troncmaster distributes the money to the tronc members it is not a payment “from the employer” and does not qualify for the NMW.
Businesses that retain the monies within their own bank account, take instruction from troncmasters as to its allocation and then pay the money directly to their employees through their own payroll, may continue to count these distributions towards their NMW obligations.
Peter Davies of Vantis, who helped Annabels in its fight with HMRC, said “Naturally, the decision is disappointing. The Tribunal has chosen to place form over substance. It seems bizarre that the same pound of money can either count or not count for National Minimum Wage purposes simply on process. This decision is not concerned with how much money staff get, but the mechanism used.”
The Tribunal’s ruling can be summarised as follows:
- Cash tips given by customers can never count towards the NMW;
- credit card tips and discretionary service charges belong to the business when paid by the customer (as per the European Court of Human Rights’ ruling in 2002);
- if those monies, or a proportion of them, are physically given to the troncmaster (either in cash or by bank transfer) they then belong to the troncmaster and cannot be counted towards NMW earnings;
- monies which pass directly from the employer’s bank account to the employee count towards NMW even if they pass under the troncmaster’s instruction and do so free from National Insurance Contributions.
Unless subsequently overturned, this ruling will affect any business where the rate of house pay alone is insufficient to meet NMW (currently £5.52 per hour, rising to £5.73 from 1 October 2008). Businesses in this situation must take urgent action to rectify matters and avoid a continuing breach of the law. The full judgement can be assessed by the Employment Appeals Tribunal Website: www.employmentappeals.gov.uk
Vantis is one of the leading experts in providing solutions to hospitality businesses and is patron supplier to the British Hospitality Association. Vantis can assist by providing immediate advice and support and by merging together business and tronc payrolls.
Please contact Peter Davies on 0207 549 2497 if you would like advice. Alternatively, please enter your details and submit the online form below.