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In a decision given in the case HM Revenue and Customs v Annabels (Berkeley Square) Ltd & Ors on 13 June 2008, 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 at least the national minimum wage (NMW).

Annabels and two other private members’ clubs and restaurants (described together as “the restaurants” in this article) 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 passed to the troncmaster each week for distribution, on a length of service basis, to the staff.

The troncmaster in each of the restaurants was a senior manager 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.

HMRC has statutory responsibility for NMW compliance. 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 through the employer’s payroll.

The two relevant requirements of the National Minimum Wage Regulations 1999 are that:

1. a worker’s total remuneration in a reference period is calculated by adding together all money payments made by the employer in the reference period, and
2. the total remuneration is reduced by deducting amounts paid by the employer representing service charges and tips paid by customers, but that are not paid through the payroll.

The restaurants appealed against the enforcement notices to an Employment Tribunal. The tribunal took the view that

• the tips were paid by the employer and were only held by the troncmaster for distribution purposes,
• each troncmaster, as an employee of the restaurant, distributed the monies as part of their employment duties, and
• the troncmaster’s payroll was therefore part of the employer’s payroll.

Based on this interpretation of the arrangements, the tribunal found that the tips could not be deducted from each worker’s total remuneration and, as a result, the enforcement notices were rescinded.

The Employment Appeal Tribunal, in its consideration of HMRC’s appeal against the employment tribunal’s decision, decided that

1. the tips, once passed to the troncmaster, were no longer owned by the employer,
2. the troncmaster could not be required to pay them back,
3. the employer had no control over the distribution of the tips, as long as they were distributed to those entitled to them,
4. the tips were not therefore paid to the employees by the employer, and
5. the tips were not therefore distributed by means of the employer’s payroll.

HMRC’s appeal was allowed on the basis that the amount of tips paid had to be deducted from each worker’s total remuneration in order to determine NMW compliance. Without the tips, the wages were less than the NMW and the enforcement notices were therefore reinstated.

Employers considering the implications of this decision must remember that it is based on the particular facts of the case. The key factors were the independence of the troncmaster and the ownership of the tips once in the troncmaster’s hands.

There are two conflicting interests at stake where the payment of tips is concerned:

1. If the tips are to be paid to workers without any liability for employer and employee Class 1 NICs, the troncmaster, whether or not appointed by the employer, must operate completely independently of the employer. The workers, however, must be paid at least the NMW rate.
2. If the employer wants to pay basic rates that are below the NMW and rely on tips to increase the pay for NMW compliance purposes, the tips must be paid through the employer’s payroll. The tips, however, become liable for Class 1 NICs.

Further information:
Revenue and Customs v Annabels (Berkeley Square) Ltd & Ors
Friday 13th a good day for the UK’s bar and restaurant workers

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The UK Payroll News is sponsored by HRD & Payroll Solutions

Written by Ian Congreave - Payroll writer and lecturer

Filed under: National Minimum Wage on June 23rd, 2008

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