Tipping point

Annabels (Berkeley Square) Ltd v Commissioners for Her Majesty’s Revenue and Customs

The 1998 National Minimum Wage (NMW) Act says that all money payments made by employers can be taken into account when calculating the NMW. But what about tips? In Annabels (Berkeley Square) Ltd v Commissioners for Her Majesty’s Revenue and Customs, the Court of Appeal said that tips distributed through a “tronc” system did not count towards the NMW.

Basic facts

Annabels (which was made up of two private members’ clubs) operated a system for pooling tips among its staff known as the “tronc” system. This was administered by a “troncmaster” whereby credit card and cheque tips were paid directly into the club’s bank account and then transferred into the dedicated account of the “troncmaster” for distribution to staff.

The troncmasters operated their own payroll for distributing the money, having deducted any income tax due, along with a pay slip. The clubs themselves then operated a completely separate system for paying basic wages

HMRC said the clubs were not paying the NMW and issued an enforcement notice. The clubs, however, argued that staff wages already exceeded the NMW because tips paid through the troncmaster system could be taken into account.

Relevant law

Regulation 30 of the 1999 National Minimum Wage Regulations states that “all money payments made by the employer to the worker in the pay reference period…” can be taken into account for the NMW.

Regulation 31 says that reductions to be taken into account include “any money payment made by the employer to the worker representing amounts paid by customers by way of a service charge, tip, gratuity or cover charge that is not paid through the payroll…”

Tribunal and EAT decisions

The tribunal decided that the tips constituted money payments “made by the employer” under regulation 30 because they belonged to the employer, with the troncmasters only holding the money for the purposes of distribution. Although the employer seemed to be running two payrolls, it said there was no reason why it could not be treated as one whole consisting of two parts. The tips did not, therefore, have to be deducted under regulation 31.

The EAT, however, said that the troncmasters were far more than just passive conduits and distributed the funds in accordance with an agreed formula that only they, or the employees, could change. The employer could not tell the troncmasters how to distribute the funds and had effectively no control over them. The tips could not therefore be taken into account when calculating the NMW because they were payments made by the troncmaster and not the employer.

Court of Appeal decision

And the Court of Appeal agreed. It said that the payment by the troncmaster to the employees could not constitute a payment “by the employer” under regulation 30 because “at the point of payment, what was paid to the employee was money forming part of a fund constituting in equity the employees' commonly owned property”.

The club could not therefore claim that it paid the “relevant money to the employee because it was not its money that was so paid …..[although it] did admittedly derive from money that was once its own”. In other words, once the money passed into the tronc bank account, the employers ceased to have any right to it.

It said that the arrangement (which was in itself perfectly legitimate) had been set up in order to save paying National Insurance Contributions in respect of gratuities. This was a significant benefit but the way in which it had been achieved meant that the employer had lost the right to claim that the relevant payments fell within regulation 30.

It concluded that “many will see no injustice in this: they would wonder why employers should be entitled to use discretionary tips – probably intended by most customers to go direct to the staff - to satisfy their obligations to pay such staff the NMW”.