Dear Auntie, 
I am the HR director of a large chain of restaurants and am concerned about our current pay system and whether it is in line with the law. 
We all know that waiters and waitresses are given tips by customers and that their basic pay is not all they receive for the work they do. On that basis, our Company currently pays its waiting staff a basic hourly rate of less than the National Minimum Wage (“NMW”). We also have a “tronc” system in place (an arrangement used to pool and distribute tips paid by customers). The total amount of tips received by the Company from customers (through credit/debit card payments) every week is paid by the Company to the “troncmaster” (an employee of the Company who runs the tronc) who then distributes the tips to the wait staff based on a pre-agreed formula for distribution. The tronc operates its own payroll system and deducts PAYE from the tronc payments. The Company monitors the amounts paid out by the tronc and, if a worker’s tronc allocation together with his/her basic pay does not reach the NMW, it makes up the difference. So the end result is that staff are always paid at least the NMW. An ex-colleague of mine at another restaurant chain says the Company’s got it all wrong. He says that we can’t use the tronc money to meet our obligation to pay at least the NMW. Is that correct, even though it’s the Company that gives the money to the tronc and the troncmaster effectively just passes it on?
I’ve also heard that, following the recent Government consultation on the national minimum wage and tips and gratuities, there will be a change in law set to take effect on 1 October 2009. What is that change and what does it mean in practice?
Yours sincerely,
Vera Baffled
 
Answer:
Dear Vera,
I’m afraid the simple answer to the first part of your question is that your ex-colleague is right and that the money paid out from the tronc does not count towards workers’ pay and so the Company is not paying its waiting staff at least the NMW.
The current state of the law
The NMW legislation is incredibly complicated, but what it essentially says is that workers’ pay must be at a certain level (currently at least £5.73 per hour for workers aged 22 and over). There are rules and exceptions in relation to what payments can and cannot be counted as part of a worker’s pay when trying to work out whether they are receiving the NMW. In short, all money paid by the employer is taken into account. However, tips and service charges (other than cash tips) that are not paid through the employer’s payroll don’t count and that’s where the Company has a problem even though, arguably, it owns the money that is paid out by the tronc.
There has recently been a case in the Court of Appeal where it was confirmed that money paid to workers through a tronc arrangement similar to that you have described does not count towards a worker’s pay for the purposes of working out whether they are paid at least the NMW. The Court held that the money paid by the tronc was not money “paid by the employer”. The employers in that case argued that the tronc arrangement was similar to a payroll agency paying wages on its behalf and that the money in the tronc was its money. The fact that the “agency” or tronc paid the money, they said, did not mean that it was not paid by the employer. They also argued that the money in the tronc effectively belonged to the employer and that it could demand to have it back at any point before it was paid out to the employees.
The Court of Appeal rejected the employer’s arguments and found that the task of setting up the arrangements based on which the tronc monies would be allocated and the job of paying out the monies in accordance with those arrangements was allocated to the troncmaster by the employer. In that sense, the troncmaster acted independently of the employer and did not allocate the tronc money or pay it out on behalf of the employer. Further, the Court said that the money in question ceased to be the money of the employer once it was paid over to the tronc and so it cannot be said that payments from the tronc are payments made by the employer. 
If the employer in that case did not have a tronc arrangement in place and simply distributed the tips received itself and divided the amounts up between workers based on its own discretion, the tips would have counted towards workers’ pay. However, that would have meant that the employer could not have taken advantage of the NIC (National Insurance Contributions) relief that applies to tronc arrangements.
The consequences of not paying workers the NMW are serious. Following a recent change in the enforcement mechanisms, with effect from 6 April 2009, officers of the HMRC can investigate the Company and issue it with an “notice of underpayment”, requiring it to pay each underpaid worker the difference between what they were paid and what they should have been paid (i.e. the NMW) and this could go back for a period of six years. The Company would also have to pay an additional financial penalty of 50% of the total underpayment of the NMW (up to a maximum amount of £5,000). Payment of the penalty must be made within 28 days of the notice being served, but it will be reduced by 50% if the employer complies within 14 days.  Workers can also bring claims against the Company themselves for unlawful deductions from wages or for breach of contract and, in all cases, it will be presumed that the worker has not been paid the NMW unless the employer can prove otherwise. It is also a criminal offence to (among other things) refuse or wilfully neglect to pay the NMW. It is vital, therefore, that the Company changes its practice as soon as possible. 
The change in law
The change in law you mention is to take effect from 1 October 2009. Its effect will essentially be to make it clear that it will be unlawful for employers to use service charges, tips and gratuities to take workers’ pay up to the NMW. In particular, it will also prohibit payment of tips through an employer’s payroll counting towards payment of the NMW (something which is unclear under the current law). 
In short, regardless of whether the employer’s method of paying service charges, tips and gratuities to its workers amounts to them being “paid by the employer”, from 1 October 2009 the employer will be unable to use those payments in working out whether it is paying its workers the NMW.
Change in culture?
The simplest way to ensure compliance with the NMW legislation is, of course, to increase the basic hourly rate of wait staff to at least the NMW. One possible method of dealing with the additional cost this would give rise to, is for the Company to dissolve the tronc, remove the requirement or ability of customers to pay tips by credit/debit card and to increase the prices on the menu accordingly. If the Company were to adopt this approach, it should make clear to customers that the prices stated in the menu are “all inclusive” and so there is no expectation or requirement that they leave any tips. That would, of course, entail a gradual change in culture and it would always be open to customers to leave wait staff a cash tip in circumstances where they feel they have received exceptional service.   
Özlem Kulle is an Associate in the employment department and can be contacted for more information on this feature at okulle@foxwilliams.com.

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