I wonder... are tips just the tip of the iceberg when it comes to holiday pay?

Many workers in the UK rely on tips as part of their remuneration. For example, a study carried out by Biffa found that hospitality is the 3^rd largest employer in the UK, with over 1.8 million people working in the sector and generating over £40 billion annually to the economy. Employers may be confronted by questions from workers over whether tips and gratuities should be reflected in their holiday pay.

In this article, we examine this question in light of recent case law and legislative updates.

Holiday Pay: The Legal Framework

Under the Working Time Regulations 1998 (WTR), all workers are entitled to 5.6 weeks of paid annual leave. For the statutory four weeks of leave derived from Regulation 13 of the WTR (Regulation 13 leave), holiday pay must reflect a worker’s normal remuneration, a concept which has, over the past decade, been steadily redefined by case law.

The courts have consistently held that “normal” remuneration is not limited to basic salary. Where a worker regularly receives additional sums (such as overtime, commission or allowances) those sums must be included in holiday pay if they are intrinsically linked to the performance of duties.

As of January 2024, updated legislation in the WTR now states that normal remuneration must include these additional sums and payments if they are intrinsically linked to the performance of tasks the worker is required to carry out under their contract.

Where Do Tips Fit In?

The position on tips has historically been less clear-cut. There are broadly three categories of payments to consider:

• Voluntary Tips – Where a customer chooses to leave a tip in cash, and the employer has no control over its distribution, it generally falls outside the scope of holiday pay calculations.
• “Troncs” and “Troncmasters” – Where tips are pooled and distributed through a tronc system, typically overseen by a Troncmaster, the question becomes whether the payments are made by the employer or a third party. If the tips are genuinely distributed at the discretion of an independent Troncmaster, they may not be considered part of “normal remuneration”, but this is not guaranteed.
• Discretionary Service Charges – If service charges are added to a bill and then distributed amongst staff by the employer, such sums are likely to be seen as earnings under the employer’s control and therefore more likely to be considered normal remuneration, which must be included in holiday pay.

The crucial factor is whether the payments are regular, predictable, and intrinsically linked to the worker’s duties. Where that is the case, employers face significant risk if they exclude the payments from holiday pay calculations.

Recent Developments and Legislative Shifts

The Employment (Allocation of Tips) Act 2023 gives workers a statutory right to receive all qualifying tips, no later than the end of the following month after customer payment (with statutory deductions only). While the Act does not itself mandate the inclusion of tips in holiday pay, it reinforces the principle that tips are a significant component of a worker’s income and could influence future litigation.

In Mr M Palanki v The Big Table Group Ltd 2024, an Employment Tribunal (ET) held that tips and service charges processed via a tronc must be included when calculating holiday pay. Mr Palanki, a front‑of‑house employee, received tronc payments through his employer’s payroll under a policy that gave him a contractual right to participate. The ET found these payments were “payable by the employer to the employee” and “intrinsically linked” to the performance of his duties, sometimes amounting to as much as 50 % of his earnings. This is a first instance decision, so a future tribunal could reach a different conclusion, However, this judgement reinforces that, in sectors where tips form a regular part of a worker’s income, employers must include such payments in holiday pay.

What Should Employers Do Now?

For employers (especially in hospitality, leisure, and service sectors), the message is clear: it is no longer enough to treat tips as peripheral income. Where tips or service charges form a regular part of an employee’s earnings, they should be carefully assessed for inclusion in holiday pay, particularly for the four weeks of Regulation 13 leave.

Failing to do so exposes businesses to claims for underpaid holiday, which may stretch back years. Proactive measures include:

• Reviewing how tips and service charges are distributed;
• Ensuring tronc arrangements, if used, are genuinely independent;
• Assessing the regularity and amount of additional payments;
• Auditing current holiday pay calculations for compliance.

A Growing Iceberg Beneath the Surface

In summary, while the allure of tips may seem marginal, they represent only the visible portion of a broader remuneration structure that employers must now consider holistically. Holiday pay miscalculations, especially in sectors where tipping is customary, may have been overlooked for years. With legislative change and judicial scrutiny increasing, employers who fail to take a broader view may find themselves facing substantial liabilities.

Further Advice

If you have any queries on holiday pay practices or any other employment-related matters, our Peace of Mind Team is here to provide expert guidance. Our Document Audit Team can also assist in drafting relevant workplace policies.

Contact our Employment Team by emailing employment@warnergoodman.co.uk or calling 023 8071 7717.

Make Work Pay Programme

With the upcoming Employment Rights Bill, UK employers face increasing pressure to adapt their practices and stay compliant with new regulations.

Our Make Work Pay Programme offers a structured, six-month, fixed-fee solution that helps businesses:

• Understand and prepare for new employment legislation.
• Align internal processes with legal and commercial best practices.
• Minimise risk and build a stronger, compliant workplace.

Click here to learn more about how our Make Work Pay Programme can help your business.