Pooled tips and service charges – also known as ‘tronc’ payments – should be included in holiday pay, according to a recent tribunal decision thought to be the first of its kind.
In the case of Palanki vs The Big Table Group, the claimant worked for a branch of Las Iguanas restaurant in Wembley, London, where a discretionary service charge was levied on customer bills and a tronc system used to pool them and distribute among staff.
Monthly tronc payments are paid at the same time as staff wages and listed separately on employees’ pay slips. Mr Palanki complained when he only received basic pay during annual leave, and filed an internal grievance.
This was rejected. He then brought a tribunal claim for unpaid holiday pay and unlawful deduction from wages.
The tribunal noted that his employment contract determined that service charges would be shared between staff who participated in the tronc, although it stated that staff do not have a contractual entitlement to receive any payment in terms of tips and other gratuities.
Tipping law
It found that, although he had no contractual entitlement to tips in any given week, he was contractually entitled to receive whatever tronc payment was allocated under the company’s tipping policy during that week.
It determined that as long as there was a tipping policy entitling him to a share, he was entitled to this.
New legislation on tipping, introduced in October last year, requires employers to have a written tipping policy and that workers are paid a fair share of qualifying tips. However, this case did not consider the new Act because the facts predated it.
The tribunal also found that because the tronc payments were payable “by the employer to the worker” from its PAYE payroll and recorded on payslips, they should be taken into account when considering holiday pay.
The judge found that tronc payments were “intrinsically linked” to the performance of tasks under Palanki’s employment contract – at times they could amount to as much as 50% of his remuneration – and so therefore formed part of his normal pay.
Palanki succeeded in his claim for unpaid holiday pay and deductions from wages. If the company and claimant cannot agree on sums owed, the tribunal will hold a future remedy hearing to discuss backpay.
Glenn Hayes, partner at law firm Hill Dickinson, explained: “Many hospitality businesses have traditionally excluded tips and service charges paid to staff via a tronc from holiday pay and based it on basic pay alone.
“In truth, that approach has been questionable for some time based on case law, because tips are closely linked to the quantity and quality of the work done by the worker, for example, by giving good service to customers.
“However, in the absence of a decision suggesting it was wrong, employers were often prepared to run the risk of claims.
“The changes made to the Working Time Regulations in January 2024, which incorporated lots of the case law principles into the legislation itself, greatly amplified the risk of claims being brought by workers whose holiday pay does not include tips.
“This case demonstrates a willingness on the part of employment tribunals to look at the whole of a worker’s remuneration and ensure they receive equivalent pay whilst they are on holiday as when they are working.”
Workforce audit advised
Hayes recommends that hospitality businesses audit their workforce, contracts, policies and processes in light of this decision.
He added: “Employers should check what payments workers receive which they include or exclude from their holiday pay. While this decision is limited to tronc payments, other common areas of non-compliance relate to overtime and bonuses, for example, and we find many employers identifying issues when they conduct an audit.
“The new Fair Work Agency, which is due to be created in the coming year or so, will have extensive powers to enforce any breaches of holiday pay rules, including issuing penalties, so getting things right now is an urgent priority.”
Hayes further explained that decisions in such cases would be based on the particular facts of each claim.
“As this case is tribunal level, and therefore not binding, we cannot say tips paid via a tronc should always be included in holiday pay. That needs to be assessed on a case-by-case basis looking at the type of tips collected, contracts and policies that are in play.
“However, it is our view, based on the updated legislation and this case, that tips distributed by a tronc through an employer’s own payroll should probably be included in holiday pay in most cases.”
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