Should holiday pay take account of tips and service charges paid via a tronc?

It has been clear for some time that a worker should receive an amount equivalent to their normal pay when they are on holiday, including not only basic pay but also any regular overtime, commission, and some other allowances/bonuses.  

Should holiday pay also include any tips and service charges collected from customers and then later pooled, shared and paid to workers via a ‘tronc’ system? This question was recently considered by an Employment Tribunal, in what is thought to be the first case to ever consider this point. 

Factual background and the operation of the ‘tronc’

The claimant, P, works in a front of house role at an Las Iguanas bar/restaurant in London. In common with many hospitality businesses, a discretionary service charge is levied on all customer bills and a ‘tronc’ system is used to pool these, share and distribute them amongst staff. The restaurant’s general manager is the ‘troncmaster’, responsible for operating the tronc system and ensuring staff receive their fair share of tips under the written tipping policy. The monthly tronc payments are paid at the same time as staff wages (from the employer’s bank account using its PAYE payroll) and listed separately on each worker’s payslip. A dispute arose about P’s holiday pay because he only received basic pay during annual leave. After the rejection of P’s internal grievance, he successfully brought claims for unpaid holiday pay and unlawful deduction from wages.

Was P contractually entitled to the tronc payments?

The Employment Tribunal began by noting that the employment contract provided that service charges would be shared out amongst staff participating in the tronc. The detailed statement of terms and conditions of employment provided that staff do not have a contractual entitlement to receive any payment by way of tips, non-cash gratuities and service charges. 

The tribunal concluded that, when read together, this meant that whilst P had no contractual entitlement to receive any particular guaranteed payment from the tronc in a given week, he was contractually entitled to receive whatever tronc payment was allocated to him under the tipping policy in any given week. So long as there is a tipping policy entitling P to receive tronc payments, he is contractually entitled to them (although the employer is not obliged to make tronc payments if it receives no service charges from customers within the relevant period).

Where the tronc payments payable by the employer?

A key question was whether the tronc payments were remuneration ‘payable by the employer to the worker’. The Employment Tribunal noted the following principles emerge from the case law:

• If cash tips are received by staff from the customer directly and retained by staff, they will generally not form part of the worker’s remuneration because they do not come from the employer, are never the employer’s property and are not payable by the employer;

• If tips are paid by customers on credit/debit cards, the legal title of those monies passes to the employer and, when the employer pays an equivalent amount to employees through its payroll, this will amount to remuneration paid by the employer; and

• If tips are paid via a tronc that is operated and paid from the troncmaster’s separate bank account/PAYE payroll, those payments are not considered to be ‘paid by the employer’ for the purposes of national minimum wage laws. 

Taking both its finding on the contractual status of the tronc payments and these legal principles in account, the Employment Tribunal held that the tronc payments in this case – which were paid by the employer from its own PAYE payroll and recorded on payslips – were ‘payable by the employer to the worker’.  These tronc payments should therefore have been considered when calculating P’s holiday pay.

Where the tronc payments intrinsically linked to contractual tasks?

Finally, the Employment Tribunal went on to express the view that the tronc payments were ‘intrinsically linked’ to the performance of the tasks under the employment contract and therefore formed part of P’s normal pay and ought to have been included in his holiday pay for the first four weeks of annual leave each year. The tronc payments amounted to as much as 50% of P’s normal remuneration and, if this was not paid whilst he was on annual leave, this loss of pay would deter him from taking holidays. 

Where does this leave employers in the hospitality sector?

Many of the legal principles about the calculation of holiday pay, which were established in case law over the last decade, were enshrined into the legislation in January 2024 (see our summary of those changes for standard workers here and for irregular hours or part year workers here). The facts of this case pre-dated those changes.

Of particular relevance is the express inclusion of the following elements in holiday pay calculations for the first four weeks leave for standard workers and for up to 28 days’ entitlement for irregular hours/part year workers (reg 16 (3ZA) Working Time Regulations 1998):

1. Payments, including commission payments, which are intrinsically linked to the performance of tasks which a worker is obliged to carry out under the terms of their contract;

2. Payments for professional or personal status relating to length of service, seniority or professional qualifications; and

3. Other payments, such as overtime payments, which have been regularly paid to a worker in the 52 weeks preceding the calculation date.

Depending on the specific circumstances and contractual arrangements, it seems likely that tronc payments paid via an employer’s payroll would likely fall within (a) or (c) above, and possibly (b) if the tipping policy takes account of seniority, length of service or other status. Therefore, although this decision is technically not binding, it is likely to be persuasive in disputes sharing similar facts. 

We strongly recommend that employers operating troncs should audit their compliance with annual leave rules. Contact one of the authors if you want details of our fixed-price holiday pay audit.

It is also worth noting that the Employment (Allocation of Tips) Act 2023 and accompanying Code of Practice on Fair and Transparent Distribution of Tips, which both came into force on 1 October 2024, require a written tipping policy, that workers are paid a fair share of qualifying tips, gratuities and service charges no later than the end of the following month after customer payment (with statutory deductions only), and that written tipping records are retained by the employer for at least three years. 

Palanki -v- The Big Table Group Limited [2024] Watford ET 3315213/2023; 3304904/2023