It is well documented that the combination of rising staffing and operating costs, coupled with skills shortages, means that the UK hospitality industry is currently facing tough challenges. This concerning trend looks set to continue following the potentially seismic impact of a recent case that determined whether tronc payments should be included in the calculation of workers’ holiday pay: Palanki v The Big Table Group Ltd 3315213/2023 and 3304904/2023.
In its judgment, the Employment Tribunal came to a surprising conclusion that will potentially require many employers to include payments received through a tronc system in the calculation of holiday pay.
While this case is a first-instance decision of the Employment Tribunal (meaning that the decision is not yet binding), it is persuasive for other Employment Tribunal claims. If subsequent decisions do follow this case, employers will potentially have to match customer tips by including these tronc payments in holiday pay when workers take annual leave.
Case summary
The Big Table Group — which operates brands including Frankie & Bennies and Bella Italia — operated a discretionary 12.5% service charge to all customers’ bills at its Las Iguanas restaurant. This was paid by customer via card or cheque. These payments were credited to the Respondent’s bank account and paid out directly to employees along with their wages.
Like most large businesses in the industry, Big Table had a written Tronc Policy which was expressed as non-contractual and explained that it was not responsible for the allocation or distribution of any payments from the tronc, with this responsibility falling to the Restaurant’s General Manager, acting as the Troncmaster. Despite operating as Troncmaster, the manager did not use a separate bank account for tronc payments — the payments were paid directly to workers by Big Table through its payroll, as is common practice — HMRC were not notified of the Troncmaster’s position, and no PAYE scheme was set up in their name.
The key aspect for the Tribunal to determine, was whether the tips received through the tronc system amounted to wages payable by Big Table to Mr Palanki.
The Claimant argued that the fact that his employment contract referenced the operation of a tronc system, he had a contractual entitlement to such payments, while the Respondent highlighted that the Tronc Policy was expressly non-contractual and, therefore, there was no contractual entitlement to receive payments by way of tips, non-cash gratuities and service charges.
The Tribunal determined that that tips received through the tronc system were remuneration payable by Big Table to Mr Palanki and therefore should be included in the calculation of holiday pay. The Tribunal provided the following rationale for coming to this decision:
- While Mr Palanki did not have a contractual entitlement to receive a guaranteed payment by way of tips, the written Tronc Policy did provide him with a contractual entitlement to receive whatever the Tronc Policy would afford them on any given week; and
- As the Troncmaster did not have a separate PAYE scheme or bank account, Big Table retained all legal and beneficial ownership of the money before it was paid to Mr Palanki. This was despite the Respondent pointing to the HMRC guidance that expressly states that an employer may act as a payroll agent, operating PAYE on a Troncmaster’s behalf.
Implications
This decision is difficult to justify from a legal or common-sense perspective, and it poses some significant problems:
1. Employers have no control over the amount employees receive through a tronc system, and this will leave them with huge uncertainty about labour costs.
Case law regarding holiday pay over the past 10-15 years has determined that regular payments such as overtime and commission payments should be included. This has been a logical trend, as these are all aspects of pay that employers have control over their mechanisms and calculations — and for which they also receive the benefit. For example, an employer can carefully consider and structure a commission scheme to budget it against the economic benefit that the employer will receive. However, an employer has no control over the size or frequency of tips and payments in a tronc system.
It is not unusual for staff in certain establishments to receive more in tips than their basic salary. For organisations who have many employees receiving tips through a tronc system (such as restaurants), this could lead to holiday pay liability more than doubling. By way of example, a hospitality business processing £1m of tips through a tronc system would now automatically incur additional holiday pay liability of c.£110,000.
2. This decision creates administrative cost and burden for employers. A key deciding factor in this case was whether the tronc system itself could be seen as independent from the employer. The payments under the tronc scheme were ultimately considered to amount to “pay” by the employer because the payments were made directly through Big Table’s payroll and had not been transferred to a third party.
The implication is that there is a two-tier system, payments made through an employer’s payroll will be liable to be included in holiday pay, but that tronc payments made through a third-party tronc provider where the employer is not involved in the distribution to employees, do not need to be included in holiday pay calculations.
The effect of this is that even where employers can show they have no control over the distribution of tronc payments, they would need to set up separate tronc systems, including separate bank accounts, for the sole purposes of distributing tronc payments — the safest method being the use of a professional Troncmaster.
3. In this case, a mere reference to the tronc system in Mr Palanki’s employment contract meant that any payments made under the tronc policy were a contractual entitlement. This is hard to square legally.
Since April 2020, employers are required to set out in employment contracts all the potential benefits an employee may receive, even if these are not contractual. There is therefore a practical issue in how employers who operate a tronc scheme can comply with this obligation without inadvertently making these entitlements contractual, even where they are not intended to be. The decision seems particularly unusual given that the Employment Judge accepted that Big Table’s policy was clear that payments received through the tronc system were not contractual.
This creates an unnecessary ambiguity around whether all elements of remuneration referred to in an employment contract can be interpreted as contractual entitlements, even if they are explicitly said not to be. Employers have long been legally required to include information in employment contracts about disciplinary and grievance policies, and contracts will also often reference bonus plans, all with express qualifications that these policies are non-contractual.
This raises the question of how employers can carefully word contracts of employment to avoid “non-contractual” entitlements becoming contractual.
Recommendations
While the case will almost certainly be the subject of an appeal, the impact of the case is significant. In particular, as it is likely to take longer to determine in the Employment Appeal Tribunal than it would for new claims from individuals to get to a hearing in the Employment Tribunal. This means that this should be viewed seriously as a persuasive case for employers.
For those in hospitality, it is important to begin planning what response to adopt to this interpretation of tronc payments and holiday and to plan for the worst-case scenario — noting that this is not a change in the law but clarifying how the law should be interpreted, meaning that underpayments of holiday pay could go back 6 years.
Employers should review their employment contracts and determine what references should be made to any tronc systems in place. Where existing contracts contain references, they should be amended to address concerns that this gives rise to a contractual entitlement.
More controversially, employers may consider whether to remove tronc payments from existing “in-house” payroll systems, as this would remove the risk that these are seen as sums “payable by the employer”. There are external, professional, third party tronc providers, but this will obviously come at an additional cost and administrative burden. Businesses should explore the potential cost of these options and weigh them against the risk and potential holiday pay costs.
A further drastic option would be to remove the ability for customers to pay tips or service charges by card and allow only traditional “worker received” tips by cash. However, given that this would almost certainly result in a reduction in the amount that employees receive each month by way of tips, this will likely have a negative impact on employee engagement, recruitment and retention.
While we wait for this case to go through the inevitable appeal process, employers in hospitality will now have to address this further headache in order to minimise risk.