Topping up the minimum wage with tips
Who benefits from restaurant service charges and tips? Unless a tronc system under which the troncmaster distributes the money to members is in place, it might not be the staff who served the customers, as consultant editor Darren Newman explains.
The wages received by waiting staff in restaurants and similar establishments have recently been the subject of public attention. The Independent newspaper recently carried out a campaign to stop restaurants using discretionary service charges added to customers' bills to discharge their obligation to pay the national minimum wage. The newspaper named a number of prominent restaurant chains that pay their waiters a basic wage below the minimum wage and rely on the money raised by the service charge to make their wages up to the legal minimum.
The coverage suggested that these restaurants are using "ploys" and exploiting "loopholes". Indeed, Stephen Byers, who introduced the national minimum wage as Trade and Industry Secretary, was quoted as saying that "loopholes in the system are being exploited by unscrupulous restaurant owners". This strikes me as somewhat unfair. When the minimum wage was being introduced, following the Labour election victory of 1997, the new government was anxious to build a consensus as to how the rules should operate. It appointed the Low Pay Commission to make recommendations, not only on the level of the minimum wage, but also on how specific payments such as bonuses, overtime and tips should be treated. The Commission recommended that tips paid to staff through the payroll should count towards discharging the employer's obligation to pay the minimum wage but that payments made directly from customers to staff should not. That recommendation was accepted by the government and is reflected in the legislation.
Of course, it is a perfectly coherent political position that the law should be changed and that no service charge payments should count towards the minimum wage. Indeed, the government has just announced that it is to amend the legislation so that tips paid to staff through the payroll can no longer be counted towards the minimum wage. However, there seems little point in ministers acting outraged about the fact that some restaurants are doing what the law was very deliberately drafted to allow them to do. They are not "exploiting a loophole" - they are complying with the law.
Or are they? In Commissioners for Her Majesty's Revenue and Customs v Annabel's (Berkeley Square) Ltd and others EAT/0562/07 , the EAT held that tips did not count towards the payment of the minimum wage. In this instance, a number of establishments operated "tronc" systems. Tronc is French for a church collection box, and under a tronc system tips paid by customers are gathered for distribution to staff. Most tronc arrangements involve a troncmaster, who is responsible for deciding how the tips should be shared out. In this case, the troncmaster in each restaurant was a senior manager. The tips were initially paid into the employer's bank account, but the money was then transferred to the troncmaster's designated account for distribution. The EAT decided that the tronc payments could not count towards the minimum wage because they were not payments made to the staff "by the employer". The employer made the payments to the troncmaster, who thus acquired legal ownership of the payments together with the obligation to distribute them.
So, until the government brings in its amendments to the legislation, one way of making sure that the service charge you pay in a restaurant is not used to subsidise the employer's duty to pay the minimum wage would be to ask if a similar tronc system is in operation. If it is, you can be reasonably sure that staff members are paid the minimum wage in addition to any tips that they receive.
Of course, that does not end the controversy. If a restaurant is paying its staff the minimum wage (which is hardly a princely sum), there is no legal requirement that it pass on any of the sums collected as a service charge to its staff. Drafting a law that required otherwise would be extremely complicated - although it might be feasible to require restaurants to publish and explain their policy on how service charges are distributed. Indeed, the government has said that it wants to "encourage employers to make it clear how tips are distributed so that customers know where their money is going". Another option would be a complete ban on levying additional charges. Meanwhile, if you feel strongly on the issue, leave a cash tip instead of paying for service via a credit or debit card. That is likely to be seen as a direct gift from you to the waiter and will not become the property of the employer. Bon appetit.
