Calculating holiday pay - a change in interpretation of tips - January 2025

Important Update: Holiday Pay and Tronc

A recent Employment Tribunal case (Mr. M. Palanki v. The Big Table Group Limited) has potentially set a key precedent for the hospitality industry on how tips and service charges should be treated when calculating holiday pay.

This is a bit of a departure from conventional thinking and so the decision could have a big impact on businesses that distribute tips.

What Happened?

Mr. Palanki, an employee at a Las Iguanas restaurant (part of The Big Table Group), claimed his holiday pay was underpaid because tips and service charges (paid via card) were left out of the calculation of his average weekly pay.  

Essentially they were not paying tronc to staff when on holiday, in line with the tronc rules.  This is not particularly unusual.

Key Tribunal Finding

The tribunal ruled in favour of Mr. Palanki, deciding that tips and service charges:

• Were "payable by the employer to the employee" under Section 224 of the Employment Rights Act 1996.

  
  

• Should have been included in his holiday pay because they were part of his "normal remuneration."

This seems a little confusing

For those of you thinking;

“Hang on, I thought tronc and tips didn’t count towards minimum wage, NI, (or furlough calculations for that matter), how can they be included in the holiday calculation?”

You are not alone - this has been the conventional approach.  

However there are a few key elements that the tribunal pulled out.  

Clarification

The holiday calculations go back to legislation in The Employment Rights Act (1996) and the Working Time Directive (1998).  

National minimum wage and NI calculations refer to the National Minimum Wage Act 1998 and Social Security Contributions Regulations.

Although all these bits of legislation cross over in terms of the areas they cover, they are distinct pieces of legislation and the Tribunal has clearly stated that their interpretation of holidays does not change the interpretation of NMW or NI.

So payment of tips can count toward your average pay for holiday, whilst also not counting toward an employers obligation of meeting National Minimum Wage.

This case has specifics around contractual wording, so it will not be applicable to everyone.  That said, we do expect this to have an impact for the majority of companies who pay tips to staff.

Potential impact

Leaving tronc payments out of holiday calculations could lead to claims for unpaid holiday pay or unauthorised wage deductions.

This decision makes it clear that holiday pay must reflect an employee’s "normal pay" so they’re not left out of pocket when taking leave.

Essentially, if you already pay tronc to staff who go on holiday, this is not likely going to have an impact on you.  However if you do not, you may need to update your practices and documents.

What do you need to do now?

At this stage, this ruling is not binding, but we suggest you review your current set up if you are paying tronc.

• Check your current tronc position: If tips and service charges go through your payroll system, they’re likely part of “normal pay” for holiday pay purposes (this is almost everyone).

  
  

• Audit How You Calculate Holiday Pay: review how holiday pay is worked out for staff on variable pay.  If you are not paying holiday tronc, you could be in a position where the company is liable for short paying staff holiday.

  
  

• Update Your Contracts and Policies:  To avoid complications, it’s best to remove all references to tips/tronc in employment contracts entirely. This ensures there’s no implied or unintended contractual entitlement, which could lead to disputes or claims.  

  
  

• Update the tronc policy and use this to pay “holiday tronc”:  as long as your tronc policy allows it, you can pay holiday tronc out of the normal monthly pool (i.e. this change does not need to increase 'house' holiday pay).  

  
  

• Tronc on leaver holiday: based on the findings, it is likely the updated holiday calculation will apply to leaver holiday (typically not something which normally attracts tronc).

What’s next?This ruling could lead to more employees raising similar claims across the industry.

Whilst it is only a First-tier Tribunal finding and therefore not legally binding, it is highly likely to influence future cases and could eventually become binding if considered by higher courts.

We suggest taking action now to minimise any future risk to your business.

Summary informationPlease remember - this is summary information and not exhaustive advice.  We have simplified and omitted some information to ease understanding; please consider the full implication of any changes before you take action.    You can read the full findings of the Tribunal by following this link