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

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 Commissioners for Her Majesty’s Revenue and Customs v Annabels (Berkeley Square) Ltd, the Employment Appeal Tribunal (EAT) said that they cannot be included if they are distributed through a third party and not directly by the employers themselves.

Basic facts

Annabels (two private members’ clubs) operated a system for pooling tips among its staff known as the “tronc” system. This was administered by a “troncmaster” who was a senior manager at each of the clubs.

The credit card and cheque tips were paid directly into the club’s bank account and then transferred into the dedicated account of the “troncmaster” at each club 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

As the table and bar staff would often have been paid less than the minimum wage without the tronc system, HMRC, as designated enforcement officer, issued an enforcement notice requiring Annabels to pay their employees at least the National Minimum Wage. They argued that their 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 decision

The tribunal decided that the tips constituted money payments “made by the employer” under regulation 30 because they belonged to the employer from the outset. The troncmasters only held the money for the purposes of distribution, as they were contractually bound to do, and acted purely as a “conduit” for the employers.

To decide whether they should be counted as “reductions” under regulation 31, it then had to establish whether they were paid through the payroll or not. It decided that although the employer seemed to be running two payrolls, there was no reason why the payroll could not be seen as one whole consisting of two parts – one for tips and one for the basic wage. They did not, therefore, have to be deducted when calculating the NMW.

EAT decision

The EAT, however, disagreed. It said that the troncmasters were far more than just passive conduits “for paying pre-ordained sums to the employees from funds provided by the employer”.

They distributed the funds in accordance with an agreed formula that only they, or the employees, could change. They could not be required to pay the money back once they had it, and the employer could not tell the troncmasters how to distribute the funds. In effect, the employer had no control over the tronc “in any sense which involved an incident of ownership”.

As a matter of legal analysis, therefore, the EAT said that the property in the money passed from the employer to the troncmaster once it was paid into the troncmaster’s account and they therefore “owned” the money. That being so, the tips could not be taken into account when calculating the NMW because they were payments made by the troncmaster and not the employer..

It was not strictly necessary to deal with the second question, but the EAT agreed with the tribunal that “there was no sensible basis for concluding that those sums were any less paid through the payroll than were the basic wages.”