Court hears appeal on including tips in minimum wage calculations

Court of Appeal judges are mulling over a challenge by upmarket Mayfair nightclub Annabel’s to an Employment Appeal Tribunal (EAT) decision last year that tips cannot be counted as a contribution to making up the National Minimum Wage.

The club’s advocate, Timothy Brennan QC told the court that Annabel’s tips system benefited employers, customers and staff, and that the issue was important to hospitality and other sectors where tipping was commonplace.

He argued that under the so-called tronc scheme – an industry term for a centrally-organised tips system – employees and employers are not obliged to pay certain National Insurance contributions. Also, customers benefited as tips were not subject to VAT.

HMRC (Revenue and Customs) won an EAT ruling last June, that a tronc scheme was unlawful and money paid through it should not count towards the minimum wage as it was not paid directly to employees as wages. Also, tips shared through a tronc scheme were not subject to VAT and National Insurance contributions payments – thus depriving HMRC of revenue.

The EAT was told that all the Annabel’s staff involved earned above the minimum wage and some were higher-rate tax payers.

Judgment has been reserved to a later date.

Howard Lewis-Nunn, barrister at Howard Kennedy, said: “The key question is likely to be who owns the tips – or tronc.”

The regulations state that the National Minimum Wage rate is made up of “all money payments paid by the employer” and this can include tips. 

Until last summer’s ruling many restaurants and bars operated a system where the tips which were included in credit and debit card payments from customers were paid initially into the employer’s bank account. 

The money was then transferred to a senior manager’s account for them to act as ‘troncmaster’ and distribute to staff after deducting income tax. The employer paid a basic wage below National Minimum Wage on the basis that tips would be included when calculating it.

This appeal is against the ruling that tips distributed by the troncmaster belong to the staff and do not count towards “payments by the employer” for calculating minimum wage.  

In response to the earlier ruling HMRC has already made it clear that employers will have to ensure that they pay the National Minimum Wage rate regardless of tips. 

Employers who operated this system for payment will have had to adapt already, either by increasing basic wage rates or retaining tips before distributing them directly to staff to count towards the minimum wage. 

They will also have to pay National Insurance contributions on the increased wage bill. 

In the current economic climate a reversal of this decision would bring some relief to employers in the beleaguered hospitality industry.  But the government is committed to reviewing the treatment of tips and so if there is any reprieve it may be short-lived.

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