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Court rules in favour of HMRC on minimum wage

The Court of Appeal has backed HM Revenue and Customs (HMRC) in a legal battle over the use of tips and the national minimum wage.

HMRC had argued that a Mayfair restaurant and nightclub, Annabel’s, was in breach of the national minimum wage rules because of the way it used tips and gratuities to pay staff.

The restaurant ran a tronc system whereby tips and gratuities were pooled and then distributed to employees.

Under the law, employers must pay their staff at least the national minimum wage regardless of any tips, gratuities, service charges or cover charges, providing they are not paid by the employer to workers through the employer’s payroll.

HMRC argued that payments via a tronc do not count towards the national minimum wage.

The Court of Appeal, which was hearing the case after Annabel’s appealed against an earlier Employment Tribunal ruling, agreed.

It decided that where restaurant or bar service charges are paid by the customer to the employer, but are then paid into a troncmaster’s bank account, the sums distributed to workers are not deemed to be paid by the employer and cannot be included in the national minimum wage.

Lord Justice Rimer, who was presiding with Lord Justice Mummery and Lord Justice Sullivan, said that people “would wonder why employers should be entitled to use discretionary tips, probably intended by most customers to go direct to staff, to satisfy their obligations to pay such staff the national minimum wage”.

Stephen Timms, Financial Secretary to the Treasury, welcomed the ruling, which is legally binding.

The minister said: “The government’s priority is to ensure that all workers are paid at least the national minimum wage. I am extremely pleased that the court has recognised HMRC’s commitment to ensuring that tips are correctly and fairly distributed to the people who earn them.”

The government has already announced its intention to prevent employers from using tips to make up staff pay to minimum wage levels by outlawing the practice completely as from 1 October this year.