Must tips be included in holiday pay calculations?

Must tips be included in holiday pay calculations?

An employment tribunal has ruled that pooled service charges and tips which are paid via a tronc and go through the employer's PAYE payroll should be included in the calculation of workers' holiday pay. Where does this decision leave you?

Holiday pay complaint

Case law has made it clear for some years that a worker should receive an amount equivalent to their normal pay when on annual leave, at least in respect of four weeks' leave, and the Working Time Regulations 1998 were amended from 1 January 2024 to codify that case law. In particular, payments which are intrinsically linked to the performance of tasks which a worker is obliged to carry out under the terms of their contract must be included when calculating holiday pay for four weeks' annual leave for "standard workers" and for 5.6 weeks' annual leave for "regular [four/52] year workers". A tribunal has now considered whether holiday pay should also include service charges and tips which are collected from customers and paid to workers via a "tronc" system (although the facts of the case pre-dated the legislative amendments).

Tips added to bills

Mr. Palanki (P) worked at a branch of Las Iguanas restaurant in London, where a discretionary service charge was added to customers' bills. These payments were credited into the employer's bank account and then pooled and distributed to staff via a tronc system under the terms of a written "policy" policy. The "troncmaster" was the restaurant's general manager but she had no separate bank account and she didn't operate a separate PAYE scheme. Rather, tronc payments were paid to staff from the employer's bank account through its PAYE payroll at the same time as wages and they were listed on payslips. P's contract stated that there was no contractual entitlement to receive any payment by way of service charges and tips, but it also said that service charges and non-cash tips would be shared between staff who participated in the tronc. P only received basic pay during annual leave and he brought a tribunal claim for unpaid holiday pay and unauthorised deductions from wages.

Successful holiday pay claim

The tribunal held that, although P had no contractual entitlement to service charges and tips, he was contractually entitled to receive whatever tronc payment was allocated to him under the terms of the tipping policy in any given week. It went on to find that these tronc payments should be taken into account when calculating P's holiday pay because: (1) they were "payable by the employer" to him in accordance with the arrangement operated via the tronc system; and (2) they were "intrinsically linked" to the performance of tasks which he was required to carry out under his contract and so they formed part of his normal pay.

What are the implications?

This ruling indicates that service charges and tips paid to staff via a tronc which are also distributed through the employer's payroll should be included in holiday pay calculations. However, as it's only a tribunal decision, it's not legally binding on other cases (but it may nevertheless be persuasive).

Tip. This case is limited to tronc payments distributed through the employer's payroll. It didn't say that the following should be included in holiday pay calculations: (1) cash tips which workers receive directly from customers and then retain themselves; and/or (2) service charges and tips which are paid via a troncmaster through a separate bank account and payroll to the employer. In those cases, tips are not "payable by the employer".

If you are in the hospitality or a similar sector and you pay service charges and tips to workers through your PAYE payroll system, you may wish to check your compliance with holiday pay rules if you don't yet include those payments in holiday pay calculations. The ruling isn't legally binding, but it may well be persuasive in other cases with similar facts.