The question of wages in the hospitality sector is a complex one.

One of the key problems is the relationship between wages and tips. By law, gratuities are subject to class 1 National Insurance contributions if they are directly or indirectly made by the employer from sums previously paid to it by customers, or where such sums are directly or indirectly allocated by the employer to the employees. To minimise exposure to National Insurance liability, tips are generally administered and independently controlled by “troncmasters” – typically a head waiter. A tronc was originally a wooden box used in French restaurants to collect cash tips: while the box is long gone, the role remains – and the deduction of income tax and National Insurance contributions in relation to such payments depends on the arrangements that exist between the employer, troncmaster, customer and employees.

Whether tips can also be used to make wages up to the national minimum is a murky area: however, a recent Employment Appeal Tribunal case has cleared things up. The court ruled that tips paid by customers via a credit card or cheque and then transferred to a troncmaster’s dedicated bank account are not sums paid by the employer and hence could not be taken into account for the purposes of the national minimum wage. The decision means that HM Revenue & Customs can serve enforcement notices on the employer in question to pay arrears in wages to their employees.

Other employers in the hospitality sector should take note. While employers can still use tips to top up wages under certain circumstances, MEPs are set to propose a new ruling forcing the hospitality sector to pay at least the NMW excluding tips. It seems that restauranteurs and hoteliers who rely on tips to make wages up to the national minimum do so at their peril.

Published in the Chartered Secretary, August 2008