THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMS v 1) ANNABELS (BERKELEY SQUARE) LTD 2) GEORGE (MOUNT STREET) LTD 3) HARRY'S BAR LTD [2008] UKEAT 0562_07_1306

EMPLOYMENT APPEAL TRIBUNAL
BAILII case number: [2008] UKEAT 0562_07_1306Case No Appeal No. UKEAT/0562/07Venue 58 VICTORIA EMBANKMENT, LONDON EC4Y 0DS
Between
THE COMMISSIONERS FOR HER MAJESTY'S REVENUE AND CUSTOMSAPPELLANT1) ANNABELS (BERKELEY SQUARE) LTD 2) GEORGE (MOUNT STREET) LTD 3) HARRY'S BAR LTDRESPONDENTS
Before
Mr Justice WilkieDate 13 June 2008
[1]APPEARANCES For the Appellants MR ADAM TOLLEY (of Counsel) Instructed by: Her Majesty's Revenue and Customs Solicitors Office Commercial & Employment Team Room 2C/16 100 Parliament Street London SW1 2BQ For the Respondents MR TIMOTHY BRENNAN (One of Her Majesty's Counsel) Instructed by: Vantis Tax Ltd 82 St John Street London EC1M 4JN SUMMARY National Minimum Wage Where restaurant or bar service charges are paid by the customer to the employer, but are then paid into a troncmaster's bank account for distribution by him/her in accordance with a tronc scheme agreed between the troncmaster and employees, the sums so distributed to employees are not "paid by the employer" for the purposes of being included in the National Minimum Wage calculation. THE HONOURABLE MR JUSTICE WILKIE This is an appeal by HM Revenue and Customs in its capacity as the enforcement authority for the national minimum wage (NMW). It concerns the treatment for NMW purposes of payments made to certain categories of employees of the Respondents in respect of gratuities through the "tronc" system[2]On 29 March 2006 the Appellants, exercising their powers under section 19 of the National Minimum Wage Act 1998 , served enforcement notices on each of the Respondents. They required the Respondents to pay specified sums in respect of arrears of NMW. These arrears arose because the basic wage paid by the Respondents to the relevant members of their workforce did not exceed the NMW. If, however, payments made to those employees through the tronc system were included for the purposes of NMW then sums paid to the employees exceeded, in some cases significantly, NMW. Accordingly there would be no breach by the Respondents of their obligations under the 1998 Act.[3]Section 19(4) of the Act entitled the Respondents to appeal the enforcement notices to the Employment Tribunal. The Employment Tribunal upheld the appeal and the Appellants in turn appeal that decision to the Employment Appeal Tribunal. The facts[4]The Tribunal had the advantage of a statement of agreed facts. They were set out at paragraphs 11 to 18 of that document which was incorporated into the decision of the Tribunal. Amongst other things the agreed facts stated as follows:(i) The Respondents are private members' clubs and restaurants operating from premises in Mayfair, London.(ii) Each of them operates two separate troncs for the distribution of tips gratuities and service charges. One relates to waiting staff and the other to bar staff. All of the relevant monies (including voluntary service charges, credit card tips and cash tips) were collected by the relevant employer and handed to the relevant troncmaster on a weekly basis.(iii) The troncmasters allocated the tronc monies to the participating workers in accordance with a points based system depending on length of service. The troncmasters deducted and accounted for any income tax due via PAYE. The tronc monies were distributed in cash to the waiting staff weekly and to the bar staff monthly. Such payments were accompanied by wage slips prepared and issued by the relevant troncmaster. Each Respondent made a separate payment of basic wages to their workers by BACS transfer or cheque on a monthly basis. Each worker received a pay slip in respect of the basic wage. It was a separate pay slip to that issued by the troncmaster. The pay slips in respect of basic wages were prepared and issued by the Respondents.(iv) Each Respondent operated a payroll for the purposes of payment of basic wages and deducted income tax and national insurance contributions on a PAYE basis.(v) Each troncmaster operated a payroll for the purposes of distribution of tronc monies and the deduction of income tax on a PAYE basis.[5]In addition to these agreed facts the Tribunal made certain other findings of fact in paragraphs 6(i) to (vi) of the decision. They included the following. i) Each Respondent had two troncmasters. They were the two senior managers at their respective establishments. One would be the officially designated troncmaster. ii) Managers also participated in a tronc scheme but some employees were not invited to participate including kitchen staff and officers of the company. iii) Apart from there being a reference in the standard offer of employment letter to being able to participate in a tronc no reference was made to the tronc in any other document. iv) The troncmasters at each establishment were employees of one of the Respondents; part of their duties was to operate the tronc. v) The troncmasters would consult with members of the tronc about any changes in share entitlement. Any issues about entitlement under the tronc would be referred to Mr Bathia, the group financial controller, or to the human resources manager. No such reference has ever been made. vi) The Respondents added a 15 per cent voluntary service charge to their bills to customers. Most payments of tips or service charge were by credit card or cheque. Such payments went into the Respondents' bank accounts. The Respondents then calculated the tips and service charges etc and paid that sum into the respective troncmaster's dedicated bank account. The troncmasters then made a distribution to tronc members.[6]Although not a specific finding of fact, at paragraph 14 of the decision, within the conclusions, the Tribunal appears to have recorded the following finding of fact:
"Where tips were paid in cash, which was less frequent, the money was supposed to be paid direct to the troncmasters."
The law[7]The National Minimum Wage Regulations 1999 (SI 1999/584) are made under the National Minimum Wage Act 1998 . Part IV provides for "remuneration counting towards the national minimum wage". Regulation 30 provides for "payments to the worker to be taken into account" and provides, amongst other things, as follows:
"The total of remuneration in a pay reference period shall be calculated by adding together – (a) all money payments made by the employer to the worker in the pay reference period…"
[8]Regulation 31 provides for "reductions from payments to be taken into account". It provides amongst other things as follows:
"(1) The total of reductions required to be subtracted from the total of remuneration shall be calculated by adding together - … (e) any money payment made by the employer to the worker representing amounts paid by customers by way of a service charge, tip, gratuity or cover charge that is not paid through the payroll…"
[9]Part V of the Regulations provides for "records". Regulation 38 provides for records to be kept by an employer. It provides, insofar as is relevant, as follows:
"(1) The employer of a worker who qualifies for the national minimum wage shall keep in respect of that worker records sufficient to establish that he is remunerating the worker at a rate at least equal to the national minimum wage. (2) Records required to be kept under paragraph (1) shall be in a form which enables the information kept about a worker in respect of a pay reference period to be produced in a single document…"
[10]Reference was made before the Tribunal and before me to the decisions of the Court of Appeal in Wrottesley v. Regent Street Florida Restaurant [1951] 2KB 277 Div. Ct. and Nerva v RL & G Ltd [1997] ICR 11, CA. The issues[11]The tribunal had to decide two issues. First, whether the sums distributed to the workers by the troncmaster constituted money payments paid by the employer. Second, to the extent that they were, did they fall to be deducted, nonetheless, from remuneration paid by the employer for NMW purposes because they were not paid through the payroll? The Decision[12]The Tribunal first addressed the question "whether the tips, service charges etc were paid by the employer?" It concluded that they were. It was not in dispute that, by virtue of Nerva v RL & G Ltd , the tips, service charges and so on were the Respondents' money at the outset of the process of payment to the workers. This was certainly the case in respect of sums paid through credit cards or by cheque.[13]It is not clear from the decision whether that applied equally to tips paid in cash which were supposed to be paid direct to the troncmasters but where the agreed facts suggested otherwise. The parties to the appeal are agreed that nothing turns on this and invite me to deal with the issue on the basis that the monies in question were all passed through the Respondents' bank account so as to have become its property at least at the outset.[14]It was common ground that the Respondents would calculate the amounts relating to tips and service charges paid in that way and would pass the total calculated sum to the troncmasters for distribution to tronc members; and that the Respondents appointed the troncmasters who were their employees.[15]The Tribunal's view was that the money never became the troncmaster's money and that they only held it for purposes of distribution. The troncmaster held it as an employee of the relevant Respondent, was contractually bound to do so and to distribute the money in accordance with the tronc rules as part of his or her duties. In those circumstances the Tribunal accepted the argument that the troncmaster was merely the employer's conduit for payment of the money. The employment

judge said as follows in paragraph 14:

"The employer effectively controlled the tronc and the money in it. Any complaints about the tronc would have gone to the employer. I have no doubt that non payment of tronc money could lead to claims against the appellants for unlawful deduction from wages although I make no findings whether such claims would succeed ."
[16]The Tribunal set out its conclusions on the second issue in paragraph 16. The Tribunal could see no reason why "the payroll" could not refer globally to whatever relevant documents the employer possessed and could see no reason why the payroll could not consist of two parts one for basic wages and one for the tronc. The employment judge could see no reason why information from both pay rolls could not be collated into one single document to ensure compliance with regulation 38(2). In those circumstances he concluded that the role of regulation 38 in enabling the statutory authorities to ensure compliance with the NMW Act could be satisfied. He therefore concluded that the records kept by the troncmasters did form part of the pay roll so that the sums paid in that way did not fall to be deducted. Accordingly the appeal succeeded and the enforcement notices were rescinded The Appellants' arguments[17]On the first issue the Appellants say that the tribunal erred in law in a number of respects.a. The payments were made by the troncmaster, not by the Respondents as employer; the tribunal was wrong in fact and law to conclude the contrary.b. There was no basis for the conclusion that the troncmasters were acting as trustees or agents for the Respondents as the employer.c. The payments were not made pursuant to any legal obligation owed by the Respondents to the employees. Had payment not been made the employees would not have had a sustainable claim for unlawful deduction from wages otherwise than through the national minimum wage legislation.[18]The Appellants' first argument is that property in the money passed from the employer to the troncmaster when the employer paid it into the troncmaster's account. At that point the troncmaster obtained the benefit of a chose in action that his bank pay him cash in the account as and when required to. The Respondents had no claim on it whatever. It could not require the troncmaster to pay it back or dictate the manner of its allocation to the workers. His only obligation to the Respondents was to use it to discharge his obligations to those who were entitled to participate in the tronc in accordance with its rules from time to time. The Respondents had no power to change the rules. They could only be changed by the troncmaster, by agreement with, or after consultation with, the workers. The troncmaster did not obtain beneficial title to the funds held in the bank account but held it on trust for the employee members of the tronc. Thus, when monies were paid by the troncmaster to the respective employees it was not a payment by the employer and so did not count towards satisfaction of the obligation to pay the NMW.[19]The Appellants also relied on the evidence of Mr Bathia that the tronc monies were not, for accounting purposes, treated as an asset of the Respondents.[20]The Appellants also submit that the Tribunal erred in concluding that the troncmaster, when paying the sums to the workers, acted as agent for the employer or that the employer effectively controlled the tronc or the monies in it. On the contrary, the whole thrust of their evidence was that the troncmaster had a free hand to apply the sums in the tronc account as he saw fit. In his witness statement Mr Bathia said as follows:
"The company allows the troncmasters, as part of their responsibility, to determine the precise methodology by which the monies are allocated on a person by person basis, and to alter or change that methodology as he sees fit without notice to the company. They are, of course, required to act fairly and to devise an appropriate formula to achieve an equitable share out. In practice they use a points system which they agree with the relevant employees. Any employee who was aggrieved would no doubt make use of the company's grievance procedures."
[21]It was also contended by the Appellants that the argument that the troncmaster is simply a conduit for the payment by the employer to its employees of these sums is inconsistent with the Respondents' position in relation to liability for national insurance contributions. In relation to that issue, which remains undecided, the position of the Respondents is that the tronc earnings fall to be excluded from the employees' earnings being a payment which is not directly or indirectly allocated by the secondary contributor (employer). The freedom of the troncmaster to allocate tronc payments free from any direction by the employer is said to support that position, which benefits both employer and employee, that the tronc is not to be included for calculating earnings related contributions.[22]The Appellants also argues that the fact that the troncmaster makes PAYE deductions reflects the fact that, under the relevant statutory provisions, the troncmaster is required to be regarded as the employer for the purpose of making payments from the tronc account. The Appellants do not say that this is directly in point but indicates that it is consistent with its analysis.[23]The Appellants refer to Wrottesley . That case was brought under the Catering Wages Act 1943 and associated regulations. The question was whether tips, paid into a pool, kept in a locked box, and distributed each week to waiters, constituted "remuneration paid to the waiters by the employers". The Divisional Court concluded that it was not because, when the customer gave the tip to the waiter, it became the waiter's property and the employer had no title to the money, even when the tips were kept in a box in the custody of the employer. When the tronc money was shared out the waiters were dividing up their own money.[24]The Appellants also referred to Nerva v RL & G Ltd . That case concerned the Wages Act 1986 . The question to be answered was what was paid "by the employer". In that case cash tips were collected in a box and distributed weekly amongst the employees. This did not constitute a payment "by the employer". On the other hand the Court of Appeal concluded that tips, gratuities, or service charges, paid by inclusion in a cheque or credit card payment to the employers and distributed in full by the employers at the end of each week was the property of the employers. Thus, when the employer paid over the equivalent amount to the employees the employer was paying them with the employer's money so that remuneration was paid by the employer.[25]The present case was, it was argued by the Appellants, different from Nerva . In Nerva the gratuities or service charges paid by cheque or credit card went straight into the employer's bank account and were paid by the employer directly to the employees. Thus, at the point at which the employee received the money, it had become and remained the employer's money so that payment to the employee constituted payment by the employer. In the present case, it is argued, the service charge payments, which became the property of the employer when paid into its bank account, ceased to be its property when it was paid into the troncmaster's account in circumstances where the employer had no right to require the troncmaster to pay any of it back to the employer nor the right to dictate the manner in which the troncmaster applied the sums in the tronc account in performance of his obligations under the tronc system. On the contrary, the Appellants argue that, at that point, the property in the money ceased to vest in the employer and became vested in the troncmaster, impressed with a trust to apply it in accordance with the tronc scheme for the benefit of the employees, the beneficiaries of that trust. Accordingly, at the point at which the troncmaster paid cash to the employees, drawn from the tronc account, the money paid was not paid by the employer but was paid by the troncmaster. The Respondents' arguments on this issue[26]The Respondents in argument did not seek to contradict the strict legal analysis put forward by the Appellant as to ownership of the money. They accepted (and contended) that legal and beneficial ownership of the money passed from the customer to the employer (at the latest) when placed in the employer's bank account. They accepted that legal title to the money passed from the employer to the troncmaster by virtue of its being transferred into the tronc master's account in the circumstances where, it was accepted, the employer had no right to have it paid back (save in the highly unlikely case that the tronc master could not distribute it) nor did it have any power to dictate to the troncmaster how the monies should be applied. They did not accept that beneficial title to the money ever passed to the tronc master. They conceded that, at the point at which the troncmaster withdrew sums from his bank account and paid cash to the relevant employees then that was a payment of money legal title to which was, at that point and upon a strict legal analysis, owned by the troncmaster and not by the employer and beneficial title to which had passed from the employer to the members of the tronc for the time being..[27]The Respondents sought to uphold the decision on a more fundamental basis. Whilst they accepted that, in the cases of Wrottesley and Nerva , the crucial question had been who owned the money at the point of payment to the employees, that question was crucial only for the purpose of differentiating between a cash payment made by a customer to a waiter, which was then collected and pooled and a payment of a service charge by cheque or credit card where the customer pays the employer and where that sum is paid into the employer's bank account. The Respondents contend that it is misleading to regard the answer to the question, "were the money payments to the worker in respect of the tronc paid by the employer?", as definitively answered by the question whether in strict legal theory at that point legal title to the money was vested in the troncmaster or the employer.[28]The Respondents argue that the answer to the question posed by regulation 30 is one which calls for a more realistic analysis than is possible by unravelling the legal complexities surrounding credit card transactions and transfers between bank accounts. The Respondents point out that the payment of cash to employees from the tronc constitutes the end point in a process. That process begins with the employer having property in certain monies which then goes through a series of mechanisms and ends up in the hands of its employees. That money passes through the hands of the employer's employee, the troncmaster, who, in administering the tronc, is performing part of his duties as an employee. Furthermore, the monies paid by the troncmaster to the employees is in respect of work performed by the employees for the employer.[29]The Respondents say that the analysis must start with section 1(1) of the National Minimum Wage Act 1998 which provides:
"A person who qualifies for the national minimum wage shall be remunerated by his employer in respect of his work in any pay reference period at a rate which is not less than the national minimum wage."
On any realistic view, the Respondents argue that the employees in this case are remunerated by their employer in respect of their work at a rate which is significantly higher than the national minimum wage because the tronc payment is no less remuneration for that work than is the basic wage. Provided that is in substance the case, the mechanism by which monies pass from the employer to the employee is incidental and not to be regarded as definitive. The fact that there is interposed a party, who obtains legal title to the money which is ultimately used to remunerate the employees, is irrelevant where the monies originate from the employer, the intermediary is employed by the employer amongst other things to apply these funds, and the sums are paid to the employees in respect of work performed for the employer.[30]Accordingly, the Respondents contend that the tronc payments constituted money payments paid by the employer to the worker so as to count towards the national minimum wage. The involvement of an intermediary regulating payment under the tronc scheme from his own bank account makes the payment of the money no less a payment by the employer than, for example, where, in a city institution, discretionary bonus payments may be allocated by a section manager from a pool provided by his employer amongst the members of his team. The fact that, in such a case, the mechanism for payment is via the employer's bank account direct to the individual members of the team is an irrelevant detail.[31]The Appellants counters this argument by pointing out that what is meant by "remuneration" is provided for by detailed regulations. Section 2 of the 1998 Act concerns determination of the hourly rate of remuneration. Sub-section (5) provides:
"The regulations may make provision with respect to: (a) what is to be treated as, or as not, forming part of a person's remuneration, and the extent to which it is to be so treated… (c) the treatment of deductions from earnings…."
Regulation 30 of the 1999 Regulations makes such provision and requires that, for remuneration to be counted it must comprise "a money payment paid by the employer". Thus, the question is not simply whether, on a broad view, the net result of the arrangements is that remuneration passes from the employer to the employee via the mechanism of the tronc, but whether the money paid to the employee at the end of the process is paid by the employer. The Appellants argue that this necessarily involves a proper legal analysis of whose money it is that the employee receives. Any such analysis can only result in the conclusion that it is the troncmaster's money, albeit impressed with a trust giving the employees a beneficial interest in it. Such an analysis, it is said, precludes the conclusion that the employee receives money which is the property of the employer and, accordingly, precludes the conclusion that money payment is paid by the employer. In those circumstances it is said that the conclusion of the tribunal to the contrary was wrong in law. Conclusions[32]In my judgment the Tribunal was wrong in law to conclude that money paid into the tronc fund by the employer never became the troncmaster's money. The position is not at all analogous with that of a wages clerk. The troncmaster is far more than merely a conduit for paying pre-ordained sums to the employees from funds provided by the employer. As between the troncmaster and the employer, once the money was in his hands he could not be required to pay it back. Furthermore, the employer had no power to control how or to whom the funds were allocated provided that they were allocated to those entitled to participate in the tronc. The funds were, in the troncmaster's hands, impressed with a trust the beneficiaries of which were the various employees entitled to participate in the tronc. He distributed those funds in accordance with the agreed formula, which he could change but subject either to consultation with, or agreement by, the members of the tronc. In those circumstances, in my judgment it was an error of law for the Tribunal to conclude that the employer effectively controlled the tronc and the money in it. The fact that, if the tronc was not being administered properly, the employees could raise it as a grievance with management who in turn could discipline the troncmaster for failing to fulfil his duty to administer the tronc in accordance with the scheme does not affect the ownership of the tronc funds. It did not involve the employer having any control over the tronc funds in any sense which involved an incident of ownership.[33]It follows, in my judgment, that as a matter of legal analysis the property in the money passed from the employer to the troncmaster once it was paid into the tronc master's account. The troncmaster was the only person who had authority to dispose of it. The employer could not require it to be paid back to him. The employer could not direct the troncmaster to distribute the funds in the tronc in any particular way. The troncmaster held the money on trust for the members of the tronc from time to time.[34]If the question "were payments to employees from the tronc money payments paid by the employer to the worker?" is definitively determined by the answer to the question "who owned the money which was paid to the employees at the point of payment?", then the answer must be that the money payments were not paid by the employer.[35]In my judgment, both as a matter of statutory construction and by reference to the authorities already referred to, the answer to that second question is definitively determinative of the first question. Although the analysis put forward by the Respondents would have substantial merit were the question posed by section 1(1) of the 1998 Act to be answered in a broad brush way, the statutory scheme specifically defines what remuneration means by reference to the question whether money payments paid to workers were paid by the employer. That question calls for a precise legal analysis of that payment. Accordingly, in my judgment, the question is determined by the answer to the question "who owned the money which was paid to the employees at the point they were paid"? As indicated above, upon a proper legal analysis, the answer to that question is that the troncmaster owned the money at the point of payment, not the employer. Accordingly, on the facts of this case, the tribunal was wrong in law to conclude that sums paid from the tronc were paid "by the employer" so as to count for the purposes of calculating the national minimum wage.[36]It follows that the appeal must be allowed and the enforcement notices reinstated. The second question[37]In the light of my conclusion on the first question it is strictly unnecessary to determine the second question.[38]Were I wrong in answering the first question in the way that I have I would not have allowed the appeal in respect of the second question.[39]The facts of this case are that the troncmaster ran a properly regulated system of allocating payments in accordance with a formula from a fund provided by the employer. Those decisions were transparent in the sense that the troncmaster kept full records of the sums paid and the periods for which they were paid as well as making the necessary deductions in respect of PAYE. Furthermore, the troncmaster issued a wage slip to each member of the tronc in respect of the tronc payment which recorded the information required by statute. In that sense, and leaving aside the precise form of the documentation, this system paralleled the recording and monitoring system used in respect of the basic wage.[40]There was no dispute but that the basic wage was paid through the payroll. If, upon a proper analysis, sums paid by the troncmaster were paid by the employer, then in my judgment there can be no sensible basis for concluding that those sums were any less paid through the payroll than were the basic wages. The recording system was parallel, the party paying was the same, albeit the individual used was different, and the records were such that, pursuant to regulation 38, they were kept in such a form as would enable the information kept about an individual worker in respect of a particular pay reference to be produced in a single document.[41]In my judgment therefore the decision of the Tribunal in this respect cannot be faulted and if I had had to decide the case on this basis the appeal would have been dismissed.[42]Thus, the appeal succeeds on the first question alone. Permission to appeal[43]Administrative arrangements will be made for this judgment to be handed down to the parties. If either side wishes for permission to appeal the judgment then they should apply in writing within 14 days of the hand down. The other party should respond to any such application in writing within 7 days thereafter and I will decide whether or not to give permission to appeal to the Court of Appeal on the papers.