Tronc Payments and Holiday Pay: Implications for Payroll in the Hospitality Sector

The treatment of tips and service charges within payroll has long been a source of uncertainty for employers in the hospitality sector. With the introduction of new legislation on tipping in October 2023, and the more recent tribunal decision in the case involving Palanki, payroll professionals are being urged to review their current practices and ensure they remain compliant. While this ruling is not binding, it provides strong indications of how tribunals may interpret tronc payments in relation to holiday pay and should be treated as an important development. 

The Background: New Tipping Legislation 

Legislation introduced in October 2023 requires employers to have a written tipping policy and to ensure that workers receive a fair share of qualifying tips. This was intended to improve transparency and fairness in the distribution of tips, addressing long-standing concerns within the sector. However, the recent case predates the new legislation, meaning the tribunal did not consider it directly. Even so, the findings shed light on the interpretation of tronc payments and how they should be factored into holiday pay. 

The Tribunal’s Decision 

The tribunal examined whether tronc payments, paid through PAYE and recorded on payslips, should form part of holiday pay. The judge concluded that they were “intrinsically linked” to the performance of contractual tasks. At times, they represented as much as half of the claimant’s remuneration. On that basis, they were deemed part of his normal pay and therefore relevant when calculating holiday pay. 

The claimant succeeded in claims for unpaid holiday pay and unlawful deductions from wages. Should the parties fail to agree on the sums owed, a future remedy hearing will determine backpay. This demonstrates the seriousness of the issue and the potential financial consequences for employers who fail to account for tronc in holiday pay. 

Precedent 

Many hospitality businesses have historically excluded tronc and service charges from holiday pay, instead basing calculations on basic pay. While this approach has long been questionable in light of case law, it remained common practice in the absence of a clear ruling. The changes to the Working Time Regulations in January 2024, which embedded case law principles into legislation, have now amplified the risk of claims. 

It can be noted that tribunals are increasingly willing to look at the totality of a worker’s remuneration. The thinking being: holiday pay should reflect normal pay to ensure that workers are not financially disadvantaged during leave. Although the ruling is tribunal-level and therefore not binding, it signals the direction of travel for future cases and highlights the need for employers to act. 

Legislative Framework 

Holiday pay calculations are rooted in the Employment Rights Act 1996 and the Working Time Directive 1998. Additional complexity arises because these interact with other legislation, including the National Minimum Wage Act 1998 and the Social Security Contributions Regulations. 

The tribunal made clear that its interpretation of holiday pay did not extend to National Minimum Wage or National Insurance calculations. This distinction is important. Payments of tips can count towards holiday pay calculations without being included for minimum wage purposes. Payroll professionals must therefore recognise that these areas, while related, are legally distinct and must be managed separately. 

Why This Matters for Employers 

The implications of the decision extend beyond the specifics of the case. If tronc payments are ignored in holiday calculations, businesses could face claims for unpaid holiday pay or unlawful wage deductions. For some employers, this could involve substantial liability for backpay. 

Equally, if tronc makes up a significant proportion of employee earnings, as it did in this case, excluding it from holiday pay leaves workers at risk of financial disadvantage during periods of leave. This undermines the very purpose of the holiday pay regime, which is designed to ensure workers receive equivalent pay while on holiday as when they are working. 

Practical Steps for Payroll Professionals 

While the ruling is not binding, payroll teams should view it as a signal to review current practices and policies. There are several key steps to consider: 

1. Assess the current tronc position.

If tips and service charges are routed through PAYE and appear on payslips, they are very likely to be considered part of normal pay for holiday pay purposes. This is the case in most hospitality businesses that use a tronc system. 

2. Conduct an audit of holiday pay calculations.

Employers should review how holiday pay is currently being calculated for staff on variable pay. If tronc is not being included, this could place the organisation at risk of underpaying holiday pay, creating a potential liability. 

3. Review contracts and policies.

Employers should consider removing references to tips and tronc from employment contracts. This avoids the risk of unintended contractual entitlements and reduces the potential for disputes. Policies should also be updated to reflect how holiday pay will be calculated going forward. 

4. Consider leaver holiday.

Based on the tribunal findings, tronc should also be factored into holiday pay for employees who are leaving the organisation. This is an area where employers often overlook obligations, but failure to account for it could result in claims. 

Wider Implications for the Sector 

Although the case focused on tronc payments, the reasoning applies equally to other elements of variable pay. Overtime, bonuses, and commission are all areas where non-compliance is common. Employers should not assume that because the case relates specifically to hospitality, it has no bearing on other industries. The broader principle is that holiday pay must reflect what is normal pay for the worker in question. 

Looking ahead, the creation of the new Fair Work Agency, expected in the near future, will further raise the stakes. This agency will have extensive powers to enforce breaches of holiday pay rules, including issuing penalties. Employers who fail to act now risk being caught out by a regulator with greater resources and a sharper focus on compliance. 

Case-by-Case Assessment 

It is important to stress that tribunal-level decisions are not binding and outcomes will always depend on the specific facts of each case. Factors such as the type of tips collected, the contracts in place, and the wording of tronc policies will all influence whether tronc is considered part of holiday pay. Nonetheless, the tribunal’s reasoning is consistent with the direction of both legislation and case law, and employers should assume that similar claims are likely to succeed in future. 

Conclusion 

The inclusion of tronc payments in holiday pay calculations is a significant development for the hospitality sector and a pressing issue for payroll professionals. The ruling underscores the principle that holiday pay should reflect normal pay, ensuring workers are not disadvantaged during leave. Employers who have previously excluded tronc from holiday calculations must now review their practices to avoid the risk of claims. 

Auditing payroll processes, updating policies, and ensuring clarity in contractual arrangements are all vital steps. While the specific facts of this case may not apply universally, the underlying principle is clear. Holiday pay must align with normal pay, and tribunals will not hesitate to uphold workers’ rights where employers fall short. 

By acting now, employers can not only ensure compliance but also demonstrate fairness and transparency to their workforce. With increased scrutiny on holiday pay and the impending establishment of the Fair Work Agency, the urgency of addressing these issues cannot be overstated.