In early August, the press reported that Pizza Express was retaining 8% of the available tronc funds to cover its various administration (admin) costs incurred in distributing these payments to its staff.
At the time, this was common practice across the sector with admin cost percentages ranging from zero, into single digits, the mid-teens and in some cases beyond. As the weeks passed, other operators found themselves in the spotlight for operating similar practices.
Some reacted to the potential PR risk and publically confirmed they would implement changes whilst others exercised their right not to comment. This article explores the history of the tronc admin charge, the fallout over the late summer and whether in fact this arrangement has much of a shelf life left.
2009 – the last major overhaul of troncs
Until October 2009, operators could rely on tronc payments to count towards their obligations to pay the National Minimum Wage (NMW). The key criteria was that payments from a tronc had to be shown on the same payslip as house pay (on the basis that the total hourly rate could be monitored to ensure compliance with NMW legislation).
This led to many businesses moving the processing of tronc payments onto the company payroll (with historic separate payrollsand PAYE schemes run by the troncmaster becoming largely defunct).
Following representations to the then Department of Business Enterprise and Regulatory Reform (BERR), Government enacted the National Minimum Wage Regulations 1999 (Amendment), of which Regulation 5 specifically put a stop to any tronc funds being used to meet NMW obligations.
The result – as of 1 October 2009, the NMW had to be met entirely from the employer’s own funds. Suddenly facing an increase in labour costs, awareness grew amongst operators that they could legitimately retain amounts from the tronc fund and thus seek to mitigate the extra costs in paying NMW. So was born the ’admin charge’.
Taking an admin charge from tronc to cover costs associated with the distribution of the monies was left to the discretion of businesses. A voluntary code of practice issued in October 2009 by BERR and the British Hospitality Association (BHA) provided suggestions of amounts to retention. Examples included 10% for credit cards and payroll costs and/or 20% to cover breakages, till shortages and walk outs.
HM Revenue & customs’ stance
It is worth reiterating HMRC’s viewpoint on a business retaining elements of tronc funds. At the point any customer gratuities (tips and discretionary service charge) are received by the business, the monies legally become its property. If the business decides to retain some or all of those monies, it is entitled to do so and this becomes trading income in the normal way.
Where tronc arrangements are in place, on receipt of the gratuities the business will typically retain a percentage and pass the rest over to a troncmaster for allocation. HMRC’s interest is then focussed on whether the monies allocated to staff are correctly subjected to PAYE and if appropriate, National Insurance Contributions.
In summary, retention of any sums to cover admin costs does not fall foul of any employment tax legislation.
Where we are now
The various press articles throughout the last few months prompted many operators to carefully consider potential damage to their trade and reputation, should they continue with a tronc admin charge.
Whilst some brands were applauded for having never applied an admin charge, the press (with the backing of Unite) sought to name and shame many of those that did. Feedback from the public was equally damning with threats of boycotts and refusals to pay non cash tips and service charge.
Some operators acted immediately, issuing statements that they had removed any admin charge. Others held back initially, but latterly took the decision to remove their existing charge on the tronc. However, some have chosen to retain either their original percentage or reduce it, but certainly not to remove it.
This has naturally led to an inconsistency across the sector. Whether bar, restaurant or hotel operator, as we head into 2016 there continues to be an array of different views and attitudes to applying admin charges. In addition, this of course advantages some operators from an accounting perspective. Those that continue to take an income stream by way of an admin charge clearly enjoy enhanced earnings and profitability in comparison to peers who do not retain any of the gratuities received.
Finally, not content with publishing articles on admin charges, the press moved on to highlight those that were not operating troncs and those that were requiring waiting staff to hand over a percentage of their tips received. In both scenarios, journalists failed to explain the arrangements in full to the reader. For example, in the scenario where waiters were asked to hand in a percentage of their tips, the press did not then explain that these monies were pooled and used to pay non-customer facing staff.
The business secretary, Sajid Javid MP was drawn into the debate and promises of government intervention were made. The Department for Business, Innovation & Skills (BIS) was instructed to take action and on the 1 September 2015 they issued a ‘Call for Evidence’ to address the perceived issues in the sector.
The document invited responses from employers and workers in the hospitality, as well as customers. Questions covered:
• Awareness of the law around gratuities (NMW etc)
• Awareness and adherence of the 2009 voluntary Code of Practice
• Customer awareness and tipping habits
• Tronc arrangements in place and admin charges
• Treatment of cash tips.
Finally, the document asked for suggestions as to how government might address the concerns raised within the sector. The Call for evidence closed on 10th November 2015. BDO has established from BIS that responses are now being analysed and collated. Publication of the key findings is expected in approximately three months time, but may take longer if further clarification or referrals are required.
Summary
As already mentioned, the industry does not currently have any standard approach when it comes to admin charges. Those that continue with taking a deduction from tronc are not breaching any legislation but could suffer from the negative PR. Those that pass 100% to the tronc are praised by employees, unions and the public, but are penalised financially.
It is difficult to predict the outcome of the recent Call for Evidence and what BIS might recommend in terms of change. Will troncs be outlawed – very unlikely; will customers shift to leaving cash tips – so far feedback from the sector suggests no noticeable change in customers’ tipping habits.
Will Government enact legislation to prevent operators taking monies from tronc? If say a system similar to NMW compliance was put in place, with penalties for those found to be in breach of their obligations, would Government and/or HMRC really have the resource to police this, when in reality this is a single issue in a single business sector – again unlikely.
If anything is to change, it is likely to be a revisit to the Code of Practice to require operators to disclose exactly what happens to customer tips and service charge payments. History has shown that many voluntary codes do not work because it is left to selfregulation, so any revised code would need to be mandatory.
It is clear that the subject of admin charges is an emotive one for employers, employees and customers alike. Various practices have been publicised across a range of newspapers and websites. Even BBC breakfast news recently ran a story on the issue. Although currently quiet, it is inevitable that these issues will come back into focus as soon as BIS publish the results of the Call for Evidence.
