Hospitality businesses may have to include tips in holiday pay

On 1 January 2024, the UK government introduced new legislation to clarify how holiday pay is calculated, making it clear that it isn’t just basic pay - other pay components such as commission, bonuses, allowances, and overtime need to be considered. 

Unfortunately, despite the change, there is still insufficient clarity on what needs to be included in holiday pay, highlighted by a recent tribunal case concerning tips.  

The decision will be a concern for hospitality businesses but serves as a warning for all employers to check their holiday pay calculations to ensure they are legally compliant.  

The case: tips allocated via the Troncmaster but paid by the employer

In the case, the employee argued that tips received during regular working periods should be included in the calculation of holiday pay because they formed part of his normal remuneration. This referred to tips paid by customers via credit or debit cards and distributed among staff through a tronc system. The system, used to allocate tips, was not controlled by the employer but instead managed by a "troncmaster”, who made decisions about how to distribute the tips based on employee input. The troncmaster had not set up their own bank account, HMRC had not been notified of her position as troncmaster and tips were still paid to employees via the employer’s PAYE scheme rather than a separate scheme.

Under the Social Security (Contributions) Regulations 2001 (SSCR), employers can use independent troncs to allocate tips to workers without incurring National Insurance Contributions (NICs) on the tips. However, the tronc must follow HMRC guidance, which states that employers operating an independent tronc must notify HMRC of the troncmaster so that a separate PAYE scheme can be set up, unless different PAYE arrangements need to be made. Unfortunately, HMRC’s guidance does not provide further clarification on when these different arrangements need to be made.  

Were tips considered employer-payable remuneration for holiday pay?

Tips qualify as remuneration because they are a reward for the work the employee has done. However, for the remuneration to be included in holiday pay, it must be payable by the employer to the employee (s.224 Employment Rights Act 1996 (“ERA”)).

In this case, the employer argued that tips were a non-contractual benefit, and therefore not required to be included in the calculation of holiday pay. The claimant’s employment contract confirmed his basic hourly pay and briefly referenced the tronc system, noting that tips would be shared among staff through this system. However, the contract made no mention of a guaranteed amount of tips. The employer maintained that the tronc system was non-contractual because there was no guarantee to tips and the employer was not involved in the allocation process. 

The tribunal agreed there was no contractual entitlement to guaranteed tips, but instead concluded that there was a contractual entitlement to receive what the tronc policy will give the employee in any given week. 

The tribunal then considered whether the tips were payable by the customer or by the employer. It decided they were paid by the employer, as the legal title to the tips had passed to the employer once left by the customer. Once the tips were paid via the payroll, they amounted to remuneration paid by the employer.

For this reason, it concluded that the tips were payable by the employer to the employee in accordance with the arrangements agreed via the tronc and should therefore be included in holiday pay.  

Does this affect the NIC disregard? 

The tribunal went on to consider a second point raised by the employer: that if the tips were deemed to be “remuneration”, then this would mean NICs would also apply to the tips being paid. 

However, the tribunal disagreed with that argument, stating that the meaning of “remuneration” under the ERA was separate from its meaning for the purpose of the SSCR. 

What this means for hospitality businesses

Although this employment tribunal ruling does not create a binding legal precedent, it raises important considerations for hospitality businesses. 

In this case, the contractual entitlement to tips, allocated in accordance with the tipping policy, led the tribunal to conclude that they were payable by the employer and should be included in holiday pay calculations. An additional feature of the case was that the tips were not paid via a PAYE scheme set up by the troncmaster, but were paid via the employer’s PAYE scheme. However, the tribunal’s decision indicates that the outcome may not have been different if the tips were paid via a separate PAYE scheme. 

A point not raised in the case was whether the allocation of tips already factored in holiday pay. For example, if the employee had been allocated tips even when he was on holiday, would the tribunal have come to the same conclusion? That point might be in doubt, given the tribunal’s focus on s.224 ERA and the terms of the contract of employment. 

Following the introduction of the Employment (Allocation of Tips) Act 2023 last year, and the government’s proposals to bring holiday pay enforcement under the remit of the Fair Work agency, hospitality businesses should be revisiting their tipping and holiday pay processes.

If you’re interested in hearing more about what this new legislation means then please contact Charlie Barnes.