Should employees receive tips while on holiday?

In the recent Employment Tribunal case of Palanki v The Big Table Group the Tribunal was asked to decide whether an employee’s pay during annual leave should include an element for tips. 

Mr Palanki worked at a Las Iguanas restaurant where a discretionary service charge was added to all bills and this was distributed to staff via a tronc system run by the General Manager. Mr Palanki’s employment contract stated that service charges would be shared between staff who participated in the tronc, but that staff did not have a contractual entitlement to receive any payment in terms of tips. Tips were paid, together with salary, with the employer’s payroll but were listed separately on payslips. 

During periods of holiday, employees received only basic pay and did not receive any tips under the tronc scheme. Mr Palanki therefore brought a claim for unpaid holiday pay and unlawful deduction of wages in respect of the tips that he did not receive while on annual leave. 

Mr Palanki succeeded in his claim. In its decision the Tribunal found that the payments under the tronc were a contractual entitlement and that the tronc payments should have been taken into account when calculating holiday pay. A critical part of the judgment was that as the payment of tronc was through a company bank account (as is commonly the case) it makes the tronc akin to wages.

Although this case was issued prior to the Tips Act coming into effect, under this legislation, which has been in force since October 2024, hospitality businesses are now required to distribute tips fairly to all workers within one month of receipt and must have a written policy in place explaining how they do this. 

For some time, case law has indicated that holiday pay should be equivalent to an employee’s “normal” weekly pay, which may include elements in addition to basic pay. This was incorporated into changes to the Working Time Regulations made in January 2024, which confirmed that holiday pay must include an element for payments intrinsically linked to the performance of tasks which a worker is obliged under their contract to carry out; and payments which have been regularly paid to a worker in the 52 weeks preceding the calculation date. 

Although this case relates specifically to tronc schemes, issues can also arise in relation to other elements of pay including paid overtime, bonuses or commission with regards to the correct calculation of holiday pay.

The implications of this case for the hospitality industry are significant and cause a number of potential issues. Given that tips must be provided in full to employees, it is not something that an organisation has any control over or obtains any benefit from and from a logical perspective it would not seem just that an employer should have to provide an extra amount of holiday pay in respect of tips which they have already distributed in full. If this became necessary, this would create an additional workforce cost which would be variable and which could not be accurately forecast. An alternative method of ensuing that employees receive tips while on holiday would be to include them within the distribution of tips on days that they are on annual leave, which would then water down the amount of tips that any employee providing work on that day would receive. However, this would not work where employees work variable hours and are paid rolled up holiday pay and it is difficult to see how hospitality venues are expected to comply with the judgment in these cases.

In this particular case the tronc payments were paid via the employers main payroll and it is yet to be seen whether using an external third party tronc scheme would make a difference to the outcome.

To conclude

The case of Palanki v The Big Table Group is a first instance decision and is not therefore binding on other tribunals. The Big Table Group have appealed the decision and we will have to wait and see whether the Employment Appeal Tribunal agree with this decision or provide further guidance. However in the meantime, hospitality organisations may wish to audit their contracts and policies to minimise risk as far as possible.

A spokesperson for the Big Table Group (BTG) said:

“We are appealing the recent decision on tips and holiday pay, as we believe it misrepresents the role of tips and places an unfair burden on the whole hospitality industry.

“Tips are voluntary payments from customers, not part of an employee’s ‘normal wages.’ They are distributed through a tronc system managed independently by a Troncmaster and staff, with no involvement from BTG. Our contracts and tronc policy clearly state that tips are non-contractual and not guaranteed.

“The judgment suggests payments of tronc funds via an employer’s bank account equate to employer wages, obliging us to include them in holiday pay calculations. We strongly disagree. BTG merely acts as an administrative agent, a standard practice across the industry.

“If upheld, this decision could impose significant costs on hospitality businesses by requiring retrospective and ongoing holiday pay adjustments. This precedent risks damaging an already fragile sector, and we believe it needs urgent reconsideration.”