Employment Tribunal ruling may change holiday pay and tronc for hospitality businesses
The First Tier Employment Tribunal has just published its Judgement in a recent case concerning whether tronc awards paid by businesses are “earnings” for the purposes of holiday pay and, potentially, other worker entitlements laid out within the Employment Rights Act 1996. The case has major implications for those hospitality businesses who do not currently pay tronc to team members when away on approved annual leave.
The Employment Tribunal ruling
The Judgement is a First Tier Judgement concerning Big Table Group, the well-known operator of brands including Bella Italia, Banana Tree and Las Iguanas. The claim was brought by an employee working within a Las Iguanas site who received tronc while at work, but (and in accordance with the Rules of the tronc system at that site) not during periods of annual leave when they received only holiday pay based on their basic (house) pay. The worker in question claimed that he was entitled to receive holiday pay based on an amount to include tronc, and the Tribunal has backed that claim. At the time of writing, it’s not known if Big Table Group intend to appeal.
The case is a First Tier Judgement, meaning it does not create a binding legal precedent, but will be treated as “persuasive” in any future case where the facts are materially similar. The case did not involve any points that were specific to Big Table and are in line with the way that many other businesses operate, and all operators need to consider if they are affected by the Judgement and, if so, the steps they may wish to take.
The worker at Big Table Group had an employment contract which set out their rate of basic wage. It also gave the employee a right to participate in the tronc arrangement in place at their site, although it did not set out any specific or minimum amount that the employee would receive and stated the tronc to be non-contractual. Such a clause is common, as it does not fall foul of HM Revenue & Customs (HMRC) rules relating to National Insurance, which would only be an issue should an explicit sum or overall amount including tronc be incorporated.
The Tribunal was satisfied that the tronc arrangement in place was real and valid and not employer-controlled or a sham, and had no criticism of the way in which Big Table’s tronc was operated; nor was it suggested that the arrangements would not satisfy the conditions within legislation for exemption from National Insurance (NI). As is common practice, the physical tronc funds were held by Big Table Group in their bank account and then distributed to workers through the business payroll in accordance with the Troncmaster’s instructions and existing legislation (Regulation 100 Income Tax (PAYE) Regulations 2003).
In their findings, the Tribunal “conclude that, when read together, the references to tronc in the Claimant’s contract and terms and conditions provide him, not with a contractual entitlement to receive any particular guaranteed payment by way of tips, but with a contractual entitlement to receive what the tronc policy will give him on any given week…for so long as there is a policy entitling him to payments under the tronc, he is contractually entitled to those payments. If no tips are received by the employer in any given period, the employer will not be required to pay anything to the Claimant in respect of tips”. This Judgement seeks to differentiate between a contractual right under the Employment Rights Act, which it believes an “entitlement” clause provides, and a contractual right for National Insurance purposes, which it believes does not exist as the amount of the award was genuinely decided upon by the Troncmaster.
The Tribunal then considered an alternative argument in favour of the Claimant, which was that, because Big Table held the tronc funds in their own bank account and then paid it to the employee via their own payroll, means that the tronc payment was a “payment by the employer to the employee” and as such was “earnings” for the purposes of the Employment Rights Act. In doing so, the Tribunal have referred back to the Court of Appeal’s findings in the 2009 National Minimum Wage case concerning Annabel’s. The logic of that Judgement would support the Tribunal’s line of thought in this case, although it takes no account of the changes implemented by the Employment (Allocation of Tips) Act 2023, and once again seeks to suggest that what is correct and proper for the purposes of the National Insurance regulations can be wrong for the purposes of the Employment Rights Act.
Finally, the Tribunal summarised what they believe is the intent and purpose of the Working Time Directive, which is the legislation that sets out the principles of holiday pay. In the Tribunal’s words, “the purpose of payment for annual leave under the Working Time Directive is to put the worker in a position, as regards his or her salary, comparable to that enjoyed during periods of work. Workers should not be deterred from taking their full holiday entitlement by being financially disadvantaged as a result”. It is this principle which underpins their thinking throughout the Judgement.
Does this ruling affect you? Hospitality concerns answered
1. Am I exposed to the risk of a claim from my staff following this Judgement?
Leaving aside the question of binding case law, or whether Big Table Group will appeal or not, businesses will want to know if their workers may have grounds to bring Tribunal claims for back pay as a result of this Judgement.
2. I have paid “holiday tronc” to my workers based on their usual rate with no reduction.
Just as tronc payments when at work must be included in the calculation of holiday pay due, tronc paid when on holiday should also be counted towards a worker’s holiday pay entitlement. So if you have paid “full rate” holiday tronc, you will be protected from any back pay claims for underpaid holiday pay.
3. I pay “holiday tronc”, but at a fixed or lower rate.
Potentially your employees may be entitled to bring a claim for the difference between the holiday pay “due” if it had been calculated based on their “normal” tronc, and the fixed or lower rate actually paid. The normal rules around bringing a claim (has to be within three months of the most recent “breach”) will of course apply.
4. My staff receive cash or app tips, which aren’t paid to them via my payroll.
These amounts do not have to be included in the calculation of holiday pay.
5. Am I exposed to a claim for anything else apart from holiday pay?
Potentially your employees may have grounds to claim in respect of the initial periods of statutory leave (maternity, paternity and adoption), unless tronc was paid at a rate no lower than 90% of the usual award in the initial period when statutory pay is calculated by reference to normal earnings.
Former employees who have left in the preceding three months might have grounds to claim if tronc was not paid for any final accrued holiday payment, or for any statutory redundancy calculation based on “basic” pay only.
6. Does this have any impact on HMRC or National Insurance Contributions?
The Tribunal were clear that they did not believe anything in their Judgement had an implication on whether National Insurance Contributions are due on “holiday tronc” and that, while they believed an “entitlement” clause created a contractual commitment for the purposes of the Employment Rights Act, it did not do so for the purposes of the NI legislation.
7. Do I need to remove “entitlement” clauses from my contracts or other documentation such as handbooks?
If you are paying holiday tronc at the full rate, then there is no need to remove these clauses, but you may wish to do so to avoid any confusion or ambiguity.
8. Going forward, what should I say in employee contracts?
You should set out only the rate of basic (house) pay. Do not include phrases such as “plus tronc”, or that the employee will be entitled to join or participate in tronc. The contract and other documentation should be silent as regards to tronc.
9. What about offer letters?
An offer letter may include a phrase such as “earnings to £40,000 including tronc”. If this is issued, it is crucial that the contract of employment is issued and signed upon commencing employment, showing only the basic pay rate and silent on tronc. As now, it is always better to avoid any mention of tronc in offer letters altogether.
10. I don’t currently pay “holiday tronc” and I don’t wish to do so.
You may take a view that, as this is a First Tier non-binding Judgement, you are not obliged to follow its findings. This is of course correct, and we will keep you updated with further developments in this area, including any appeal that Big Table Group may make. There is a risk that it may be your own employees who try and bring claims against you if they feel that the facts in your business are materially the same as Big Table.
If you do not wish to pay “holiday tronc”, then it is critical that you remove any “entitlement clauses” that may exist in your employment contracts and other associated documentation. This, however, will not be sufficient to satisfy the Judgement in full, as even without an “entitlement” clause, the Tribunal’s view was that where the business retains custody of the tronc funds themselves, makes payment to the employee and distributes this via their own payroll, then this brings the tronc paid during worked time into the scope of the holiday pay calculation.
11. Will WMT Troncmaster Services be offering clients a facility to transfer and hold funds and pay via a separate payroll?
This has a number of implications for both ourselves and for you, as well as for your employees. We are currently considering if this a service we are able to offer and will advise in the New Year if so.
It will take some time for the full ramifications of this Judgement to become clear, and (as stated above) it is as yet unknown if an appeal will be lodged. It is probable that we will seek further legal advice, including potentially from Counsel regarding this case, and we’ll revert back in the New Year to clients regarding this.
Further guidance
Moore Kingston Smith, through its subsidiary WMT Troncmaster Services Ltd, offers expert outsourced Troncmaster services. If you need further guidance or would like to find out how we can help you, contact us today.