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National Minimum Wage: Levelling the Playing Field

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It may come as a surprise to much of the general public to know that some employers use service charges, tips, gratuities and/or cover charges ("Tips") left by customers to make up the required national minimum wage paid to their workers. The Court of Appeal recently heard the case of (1) Annabel's (Berkeley Square) Limited (2) George (Mount Street) Limited (3) Harry's Bar Limited v The Commissioners for Her Majesty's Revenue and Customs in which they dealt with one aspect of this issue.

The Law

The National Minimum Wage Act 1998 (NMWA 1998) gives workers the right to be paid a minimum hourly rate of pay. How the minimum wage in respect of each worker should be calculated is set out in the National Minimum Wage Regulations 1999 (the "Regulations").

Regulation 30 states that ‘all money payments paid by the employer to the worker' should be taken into account when calculating the minimum wage. However Regulation 31 excludes ‘any money payment made by the employer to the worker representing amounts paid by the customers by way of service charge, tip, gratuity or cover charge that is not paid through the payroll'.

Under section 19 NMWA 1998, should an employer fail to pay its workers the national minimum wage HM Revenue & Customs ("HMRC") can serve an enforcement notice requiring the employer to pay the national minimum wage and any arrears which might have accrued.

The Payment of Tips

Businesses use various different mechanisms in order to distribute Tips to their workers. One such method is the use of a ‘tronc' where all monies received by workers from Tips are paid into the tronc and are then distributed to the relevant workers under an agreed formula by a troncmaster.

The Facts

In Annabel's all the employers operated tronc systems in order to distribute Tips. Tips received in cash were given to troncmasters directly. Tips received from payments by cards or cheques were paid into the employers' bank account and each week this amount was then transferred into accounts held by the troncmasters. The troncmaster distributed the Tips in accordance with a formula agreed between the workers. The employer in this case paid workers a basic wage which fell below the national minimum wage and used the monies received by the workers in respect of Tips to make up the difference.

On 29 March 2006 HMRC served enforcement notices requiring the employers to pay the workers arrears of national minimum wage and thereby suggesting that Tips paid out of the tronc could not be included in calculating the wages paid to workers. The matter went to an Employment Tribunal which held that the monies distributed by the troncmasters were ‘money payments paid by the employer' for the purposes of Regulation 30 and therefore the Tips could be used by the employers to make up the national minimum wage.

HMRC appealed to the Employment Appeals Tribunal ("EAT") who found that the Employment Tribunal had erred in its decision. The EAT stated that the Tips distributed by the troncmasters did not fall within Regulation 30 and therefore could not be used by the employers to make up the national minimum wage.

The employers appealed to the Court of Appeal, however they were unsuccessful in overturning the EAT's decision.

Levelling the playing field

The Government has now published its response to a consultation on service charges, tips, gratuities and cover charges. The response supports the Court of Appeal's decision in Annabel's by announcing that as from 1 October 2009, employers will no longer be able to use service charges, tips, gratuities and/or cover charges in order to make up the required national minimum wage.

Commentators have noted that this change will level the playing field between those businesses which have so far used this practice and those which do not. The Government's impact assessment shows that the estimated annual cost to business will be in the region of £92.5 million however, it is concluded that delaying the change in legislation further would be unjustified. The change in legislation may be supported by public opinion and be advantageous to workers however, it is likely to prove a further handicap to businesses in this harsh economic environment.

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