June 2008

Troncs and the National Minimum Wage – a turnaround in the law

A recent judgment from the Employment Appeal Tribunal (“EAT”) has reversed the previous rule on Troncs and whether they count towards the National Minimum Wage (“NMW”).

A tronc is defined by HM Revenue & Customs (“HMRC”) as “an arrangement for the pooling and distribution to employees of tips, gratuities and/or service charges in the hotel and catering trade.” These payments are sometimes handled separately within a company by a troncmaster, who distributes the tronc to employees.

In the first hearing of the case of HMRC v Annabel’s (Berkley Square Ltd) and Others by the Employment Tribunal (“ET”) in 2007, it was held that wages in the form of tips distributed through a troncmaster do count as earnings contributing to the NMW. The Respondents were a group of private members’ clubs and restaurants who operated a system where troncmasters distributed tips to staff on a weekly basis. The troncmaster and employer each used separate payroll systems when distributing the pay to staff. HMRC issued an enforcement notice under the National Minimum Wage Act 1998, claiming that the staff were being paid a sum below the NMW. The employer took the case to the ET.

The ET found in favour of the employer and held that the tronc payments were payments which had been made by the employer, regardless of the fact that they had been paid through a troncmaster. The ET took the view that the payroll of the troncmaster, although distinct from that of the employer, constituted an integral part of the employer’s payroll. This was bad news for HMRC who had contended that employees had not received their NMW entitlement. However, supporters of the decision such as the accountancy firm Vantis, claimed that it was “a victory for common sense” since certain employees had been earning enough through the combination of their wage and tronc payments to be paying tax at the rate of 40%.

HMRC appealed against the decision of the ET and their appeal was allowed by the EAT in June 2008. The EAT reached the conclusion that the troncmaster was “far more than merely a conduit” for the payments to the employees. The employer did not exercise control over the way in which payments were distributed, and could not compel the troncmaster to allocate funds in a different way to that which had been agreed between the troncmaster and the employees. The payments made by the troncmaster were consequently not the property of the employer at the time of payment, and could not therefore be classified as payments made by the employer which could count towards the NMW.

It should be pointed out that businesses that keep tronc monies within their own bank account and transfer payments directly from that account to their staff through their own payroll system can continue to count these allocations towards the NMW. This is the case, even where the employer takes instruction from the troncmaster on how to distribute the payments. The important issue is who has ownership of tronc funds, a troncmaster or the employer.

Some business advisers have criticised this latest ruling, claiming it places too much emphasis on the process which is adopted in making payments, rather than the actual money earned. In reality, HMRC may not succeed in their aim of improving working conditions for hospitality employees because as a result of this latest decision, employers in this industry may phase out separate troncmaster payments in favour of operating tronc payments and wages from their own single payroll.

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