England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE EMPLOYMENT APPEAL TRIBUNAL
Mr Justice Wilkie
UKEAT/0562/07/RN

		Royal Courts of Justice Strand, London, WC2A 2LL
		07/05/2009

Lord Justice Rimer :

Introduction

1. This is an appeal by Annabel's (Berkeley Square) Limited and two associated companies, George (Mount Street) Limited and Harry's Bar Limited ('the employers'). It is against an order dated 13 June 2008 of the Employment Appeal Tribunal (Wilkie J, sitting alone) reversing a decision dated 20 September 2007 of the London Central employment tribunal (Mr J.M. Edge, also sitting alone). The respondents are the Commissioners of Her Majesty's Revenue and Customs ('HMRC').
2. The appeal, for which Wilkie J gave permission, raises an issue of interest to the hospitality, catering and entertainment industry. It concerns the case in which discretionary service charges are paid by customers of a restaurant/club business to the proprietor/employer by credit or debit card or by cheque (but not the case in which such gratuities are paid in cash). It is agreed that such payments become legally and beneficially the employer's money. The question is whether, if the employer then passes equivalent sums to its employees via a 'tronc' system administered by an employee troncmaster, the payments count towards the employees' remuneration for the purposes of the National Minimum Wage Act 1998 ('the Act').
3. HMRC issued enforcement notices against each employer under section 19 of the Act. The notices were justified if, as HMRC claimed, the payments via the tronc system must be disregarded in computing the wages paid to the employees as not being 'money payments paid by the employer to the worker' within the meaning of Regulation 30(a) of the National Minimum Wage Regulations 1999 (SI 1999/584) ('the Regulations'): in that event, the wage paid by each employer was below the national minimum wage ('NMW'). If, however, as the employers claim, they should have been counted as 'money payments paid by the employer', their obligations to pay the NMW were met.
4. The employment tribunal agreed with the employers, held that the payments did so count and upheld the appeals against the enforcement notices. Wilkie J allowed HMRC's appeal, holding that they did not so count. The employers now challenge his decision.

The National Minimum Wage Act 1998

5. The following references to sections of the Act are to those provisions in force at the material time. Section 1 ('Workers to be paid at least the minimum wage') provides, by subsection (1), that:

'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.'

Subsection (2) describes who so qualifies and there is no dispute that the employees do. By subsection (3), the NMW shall be 'such single hourly rate as the Secretary of State may from time to time prescribe.' By subsection (4), a 'pay reference period' is such period as the Secretary of State may prescribe.

6. Section 2 is headed 'Determination of hourly rate of remuneration'. By subsection (1), the Secretary of State '… may by regulations make provision for determining what is the hourly rate at which a person is to be regarded for the purposes of this Act as remunerated by his employer in respect of his work in any pay reference period.' Sub-sections (2) to (4) confer a power by regulation to determine the hourly rate in various potentially complicated circumstances, none of which is relevant. Subsection (5) provides, so far as material, that:

'(5) 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; ….'

7. Section 17, in a part of the Act headed 'Enforcement', provides:

'17 Non-compliance: worker entitled to additional remuneration

(1) If a worker who qualifies for the national minimum wage is remunerated for any pay reference period by his employer at a rate which is less than the national minimum wage, the worker shall be taken to be entitled under his contract to be paid, as additional remuneration in respect of that period, the amount described in subsection (2) below.

(2) That amount is the difference between –

(a) the relevant remuneration received by the worker for the pay reference period; and

(b) the relevant remuneration which the worker would have received for that period had he been remunerated by the employer at a rate equal to the national minimum wage.

(3) In subsection (2) above, "relevant remuneration" means remuneration which falls to be brought into account for the purposes of regulations under section 2 above.'

8. Section 19 is headed 'Power of officer to issue enforcement notice'. By subsections (1) and (2), if an officer acting for the purposes of the Act is of the opinion that a qualifying worker has not been remunerated at a rate at least equal to the NMW, he can serve an 'enforcement notice' on an employer requiring him to remunerate the worker for pay reference periods ending on or after the date of the notice at a rate equal to the NMW; and the notice may also require the payment of any shortfall in the NMW due to the worker under section 17. By subsections (4) and (5), a person upon whom a notice is served may appeal against it to an employment tribunal within four weeks of its service. By subsection (6), the appeal must be dismissed unless one or other of various specified matters is established. Subsections (7) and (8) explain the circumstances in which, when the appeal is allowed, the employment tribunal must either rescind or rectify the notice.

The National Minimum Wage Regulations 1999

9. Pursuant to section 2 of the Act, the Secretary of State made the Regulations, which came into force on 1 April 1999. Regulation 2(1) defines 'the total of remuneration' as the total of money payments determined in accordance with regulation 30; and 'the total of reductions' as the total of reductions determined in accordance with regulations 31 to 37. Regulation 8 provides that references in the Regulations to 'payments paid by the employer to the worker' are to payments paid by the employer to the worker in his capacity as a worker before any deductions are made (excluding certain defined types of payment not presently relevant). Regulation 10 provides that the 'pay reference period' (section 1 of the Act) is a month or, in the case of a worker paid wages by reference to a shorter period, that period. Regulation 11 prescribes the 'single hourly rate of the national minimum wage', originally £3.60 but since regularly increased. Regulation 14 explains how the 'hourly rate' paid to a worker in a pay reference period is calculated. Put simply, it is 'the total of remuneration' less 'the total of reductions' for the 'pay reference period' divided by the number of hours worked.
10. Regulation 30 (in Part IV, headed 'Remuneration Counting Towards the National Minimum Wage') is the provision upon which the appeal turns and provides, so far as material:

'30. Payments to the worker to be taken into account

The total of remuneration in a pay reference period shall be calculated by adding together –

(a) all money payments paid by the employer to the worker in the pay reference period; ….'

The question is whether the money payments transmitted to the workers via the troncmaster were 'money payments paid by the employer to the worker …' and so aggregable with the workers' basic wage in determining whether the employers paid the NMW. It is not now in issue, but in the tribunals below a question also arose under Regulation 31, headed 'Reductions from payments to be taken into account.' One such reduction, by Regulation 31(1)(e), is:

'any money payment paid 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;'

Its significance was that if, as the employers claim, the relevant payments were 'money payments paid by the employer' within Regulation 30(a), it would avail them nothing if they were not 'paid through the payroll': they would in that event fall out of the NMW calculation.

The facts

11. On 29 March 2006 HMRC, acting in their capacity as the enforcement authority under section 19 of the Act, served enforcement notices on each of the employers. The notices required each to pay specified sums in respect of arrears of NMW to former and current workers: (i) Annabel's, £49,862.45; (ii) George, £48,901.97, and (iii) Harry's Bar, £28,738.47. On 4 April 2006 each employer appealed to the employment tribunal against the notice served on it. The appeals were heard by the employment judge, Mr Edge, on 4 September 2007. Two questions were before him: (i) were the moneys received by the employees from the troncmasters 'payments paid by the employer' within the meaning of Regulation 30(a); (ii) if so, were they paid 'through the payroll' within the meaning of Regulation 31(1)(e)? The appellants required a 'yes' in answer to both questions. The judge issued his reserved judgment on 20 September 2007 by which he gave such answers, allowed the appeals and rescinded the enforcement notices.
12. The parties had produced a statement of agreed facts and the employment judge made further findings. The facts agreed and found were as follows. The employers are private members' clubs and restaurants in Mayfair. Each employer operated two separate troncs for the distribution of tips, gratuities and service charges amongst its workers. One related to waiting staff, the other to bar staff. Managers also participated in the tronc schemes, although certain employees were not invited to participate, including kitchen staff and officers of the employers. The only company documents that made any reference to the ability to participate in them were the standard offer of employment letters.
13. The source of the tronc money was the 15% voluntary service charge added to the employers' bills. Most payments of such charges were by credit card or cheque. The payments were credited to the employers' bank accounts. Each employer calculated what element of such credits represented tips, service charges and gratuities and then paid that sum to the troncmasters' dedicated bank accounts. That was done on a weekly basis.
14. Each employer appointed two troncmasters for its establishment. They were its two senior managers in the establishment and were employees of the employer. One would be the officially designated troncmaster. The operation of the tronc was part of their duties. The troncmasters allocated the tronc moneys to the participating workers in accordance with a points-based system depending on length of service. They also operated a payroll for the purpose of the distribution of the tronc moneys and the deduction of income tax on a PAYE basis and they deducted and accounted for any income tax due. They distributed the tronc moneys in cash (a) to the waiting staff on a weekly basis, and (b) to the bar staff on a monthly basis. The payments were accompanied by wage slips which they prepared and issued. The troncmasters would consult with members of the tronc about any changes in entitlement. If any issue as to the sharing arrangements arose, it would be referred to the employers' financial controller or to their human resources manager. No reference had ever been made.
15. Each employer made a separate payment of 'basic wages' to its workers; and each operated a payroll for the payment of such wages and the deduction of income tax and National Insurance Contributions ('NICs') on a PAYE basis. The wages were paid by BACS transfer or cheque on a monthly basis. Each worker received a payslip, prepared and issued by the employer, in respect of the 'basic wage' for each pay reference period. The payslips were separate from those issued by the troncmasters. In the case of each worker, the 'basic wage' was lower than the NMW.

The decision of the Employment Tribunal

16. As to whether the money received by the worker from the troncmaster was 'paid by the employer' for the purposes of Regulation 30(a), the employment judge recorded that it was not disputed that the service charges etc were the employer's money from the outset. His view was that, when it was paid to the troncmasters, it did not become their money. They merely held it for the purposes of distribution. They held it as the employer's employees, as they were contractually bound to do; and they were also contractually bound, as part of their duties, to distribute it in accordance with the tronc rules. They were simply the employer's conduit for its payment. He held that 'The employer effectively controlled the tronc and the money in it. Any complaints about the tronc would have gone to the employer'.
17. As to whether the payments via the tronc were 'paid through the payroll' for the purposes of Regulation 31(1)(e), the employment judge held that 'the payroll' could consist of two parts, one for basic wages and one for the tronc; and that the tronc moneys were therefore 'paid through the payroll'.

The decision of the Employment Appeal Tribunal - BAILII: [2008] UKEAT 0562_07_1306

18. Wilkie J said that the service charges became the employer's money when credited to its bank account, the first step in the process. The issue was whether the further step represented by the onward payment of the money to the troncmaster for distribution in accordance with the tronc arrangement meant that the ultimate payment to the employee could not be regarded as 'paid by the employer'. HMRC's argument was that, once the money reached the troncmaster's bank account, the employer could not call for its return or dictate the manner of its distribution, nor did the troncmaster hold it as the employer's agent for its distribution. The position was that the troncmaster obtained the legal title to the money and held it on trust to distribute amongst the employees in accordance with the rules from time to time, being rules which the employer had no power to dictate. It followed that the payments to the employees were paid by the troncmaster, not the employer.
19. The employers advocated what was said to be a more realistic analysis. The process starts with the receipt by the employer of money which then passes through two bank accounts and ends up with the employees as a reward for work. In administering the tronc, the troncmaster is performing his duties as employee. The mechanism by which the employees are so rewarded is essentially incidental and cannot be regarded as definitive of the answer to the question whether the payments are 'payments paid by the employer'. A realistic appreciation of the process required the conclusion that the tronc payment to each employee was no less remuneration for his work than his basic wage. The mechanism by which the tronc element was paid to the worker should not be allowed to trump the commercial substance of the position, which was that the totality of the worker's remuneration, including the tronc payment, originated from the employer. It followed that the tronc payments were also payments 'paid by the employer'.
20. Wilkie J preferred HMRC's arguments and upheld the appeal. His reasons were these:

'32. … 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 troncmaster'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 the sums paid from the tronc were paid "by the employer" so as to count for the purposes of calculating the national minimum wage.'

21. Given that conclusion, Wilkie J did not need to decide whether, if the payments were 'payments paid by the employer', they were paid otherwise than 'through the payroll'. He did, however, give short reasons as to why, if wrong on the first question, he would have upheld the tribunal's decision on the payroll question. The payroll question has not been re-opened before us. We are concerned only with the employers' appeal on the first question.

The financial background

22. Both parties made reference to this, and it is as follows. First, as regards Value Added Tax, a discretionary service charge added to a bill does not attract VAT. VAT is chargeable on the supply of goods and services and, where the supply is for a money consideration, VAT is calculated by reference to that consideration, which will not include a discretionary payment.
23. Second, as regards income tax, an employee must pay income tax on his tips and share of service charges, whoever pays them to him. They form part of his earnings from his employment. If they are paid by the employer directly to the employee, PAYE is deductible by the employer. If (as in this case) the employer passes the money to a troncmaster for distribution to the employee, the troncmaster must operate the PAYE system in relation to such payments and make the appropriate deductions. If he defaults, HMRC may direct that the employer operates it instead. If cash tips are paid to an employer directly by a customer, and not via the employer or a troncmaster, the employee must declare them in his tax return.
24. As they played a part in Mr Tolley's argument for HMRC, I will set out the provisions under which the troncmasters were required to deduct and account for income tax on the payments they made to the employees. They are in regulation 100 ('Tips: special arrangements') of the Income Tax (Pay As You Earn) Regulations 2003 (SI 2003/2682) and, so far as material, provide:

'(1) This regulation applies if an organised arrangement exists for tips to be shared among employees by a person ("T") who is not the principal employer.

(2) On becoming aware of the existence of an arrangement, the principal employer must notify the Inland Revenue about the arrangement giving T's name, if known.

(3) For the purposes of these Regulations –

(a) every payment made to an employee by way of an employee's share of tips by T (including the retention by T of T's own share if T is also an employee) is regarded as a relevant payment by T; and

(b) to the extent of any such payment, T is regarded as the employer.

(4) But if in any case the Inland Revenue are satisfied that T has failed to comply with any of the requirements of these Regulations and they so direct, then –

(a) any tips paid to T through the principal employer for sharing among the employees are to be dealt with in accordance with paragraph (5), …

(5) If this paragraph applies –

(a) the principal employer is treated as the employer for the purposes of these Regulations in relation to the tips;

(b) T must, before the principal employer pays any tips to T, give the principal employer such particulars of every payment by way of the sharing of tips to be made to an employee as may be necessary to enable the principal employer to comply with these Regulations;

(c) the principal employer must, on making any payment of tips to T, deduct or repay tax in accordance with these Regulations in respect of the amount of such tips to be paid to each employee, and notify T of each amount so deducted or repaid….

(7) In this regulation –

"the principal employer" means the person under whose general control and management the employees work;

"tips" means gratuities and service charges.'

25. Third, as regards NICs the position is as follows. Gratuities (including shares of service charges) paid to employees are not subject to Class 1 NICs provided that, even if they are paid by the employer or derive from payments previously paid to the employer, the employer does not directly or indirectly allocate the payment to the employee. Regulation 25 of the Social Security (Contributions) Regulations 2001, by reference to Schedule 3, specifies payments which are to be disregarded for NICs purposes and this exception is in Part X, paragraph 5, of that Schedule. The allocation can – without prejudicing this position - be made by an employee (such as a troncmaster) acting in the course of his employment (see HMRC's leaflet E24 (2008) Tips, Gratuities, Service Charges and Troncs, in particular, paragraph 8). Accordingly, in a case such as this where the employer collects service charges from the customers and passes it to a troncmaster who then, independently of the employer, allocates it to the employees (i) the employer saves Class 1 secondary NICs on what he pays to the troncmaster; and (ii) the employee does not suffer the deduction of Class 1 primary NICs from what he receives from the troncmaster. The exception in paragraph 5 aforesaid ('Gratuities and offerings') provides:

'(1) A payment of, or in respect of, a gratuity or offering which satisfies either of the conditions in this paragraph.

(2) The first condition is that the payment –

(a) is not made, directly or indirectly, by the secondary contributor; and

(b) does not comprise or represent sums previously paid to the secondary contributor.

(3) The alternative condition is that the secondary contributor does not allocate the payment, directly or indirectly, to the earner.'

The authorities

26. We were referred to two authorities that provide a helpful starting point for the consideration of the issues. The first is Wrottesley v. Regent Street Florida Restaurant [1951] 2 KB 277. There the waiters at an unlicensed restaurant (with their employer's agreement) put all tips into a box whose key was held by the head waiter; and at the end of each week the contents were distributed between the waiters in accordance with their agreed entitlements. The weekly wage paid to each waiter by the employer fell below the minimum prescribed by the Wages Regulations (Unlicensed Place of Refreshment) Order 1949. If, however, each waiter's share of the boxed gratuities were added to the wage so paid, the total exceeded the prescribed minimum. The restaurant proprietors were prosecuted for failing to pay the minimum wage. Their obligation, under section 9(2) of the Order, was to 'pay' to the employee the statutory minimum remuneration. The magistrate dismissed the informations and the prosecutor appealed by way of case stated.
27. The judgment of the Divisional Court of the Queen's Bench Division allowing the appeal was delivered by Lord Goddard CJ. The reasoning was that the locked box – or tronc – contained money that the customers had given to the waiters, not to the employer. It thus became the waiters' property, and not the employer's, and so when it was shared out the waiters were dividing up their own money. It followed that it could not be taken into account in computing the amounts that the employer paid them by way of remuneration. It was not paid by their employers. As Lord Goddard said, at 282:

'The amount of a man's earnings in an employment and the amount of remuneration which his employer pays to him are not necessarily the same thing.'

28. The other authority is this court's decision in Nerva and Others v. R. L. & G. Ltd [1997] ICR 11. The issue there was whether the defendant employers had paid the plaintiff employees (also waiters) the prescribed minimum 'remuneration [required to be] paid to the worker by his employer' by (inter alia) section 16(1) of the Wages Act 1986. Each waiter's take comprised (i) his share of the cash tips collected in a tronc, (ii) a basic wage paid by the employer, and (iii) also paid by the employer (subject to deductions for tax and NICs), a share of the gratuities paid by cheque or credit card. It was accepted that item (i) did not qualify as remuneration paid by the employer (Wrottesley) and there was no dispute that item (ii) did. The question was whether the item (iii) gratuities also formed part of it since only if they did would the employers have met their section 16 obligations. Mance J (as he then was) held that they did and this court (by a majority) agreed. The reasoning was that the gratuities became the employer's property so that when they paid the waiters their share of them, they were doing so with their (the employer's) own money and such payments therefore counted towards the remuneration they paid. That case is the source of the acceptance in this one that, at the first stage of the process, the gratuities paid by the customers became the employer's property.

The submissions on the appeal

29. Having outlined the tax and NICs consequences of the troncmaster schemes, Mr Brennan QC, for the appellant employers, submitted that these considerations do not assist in answering the question raised by the appeal. The NMW legislation was not drafted with any express reference to such background; in particular, it does not deal with issues raised by troncmaster schemes. The only question is whether the payments made to the employees by the troncmaster were 'money payments paid by the employer …' within Regulation 30(a). That question, said Mr Brennan, must be answered by adopting a purposive interpretation of the regulation and considering whether it covers the transaction in this case. For that purpose, the transaction must be viewed realistically. As support for that approach, Mr Brennan referred us to the decision of the House of Lords in Barclays Mercantile Business Finance Ltd v. Mawson (Inspector of Taxes) [2005] 1 AC 684, paragraph 36, per Lord Nicholls of Birkenhead (delivering the opinion of the Committee):

'Cases such as these gave rise to a view that, in the application of any taxing statute, transactions or elements of transactions which had no commercial purpose were to be disregarded. But that is going too far. It elides the two steps which are necessary in the application of any statutory provision: first, to decide, on a purposive construction, exactly what transaction will answer to the statutory description and secondly, to decide whether the transaction in question does so. As Ribeiro PJ said in Collector of Stamp Revenue v. Arrowtown Assets Ltd [2003] HKCFA 46, para 35:

"the driving principle in the Ramsay line of cases continues to involve a general rule of statutory construction and an unblinkered approach to the analysis of the facts. The ultimate question is whether the relevant statutory provisions, construed purposively, were intended to apply to the transaction, viewed realistically."'

30. Mr Brennan's submission was that the purpose of the NMW legislation, and of Regulation 30(a) in particular, was to ensure that employees are remunerated by the employer, with the employer's money, at the rate of the NMW. It contemplates money leaving the employer's legal and beneficial ownership and ending up in the legal and beneficial ownership of the employee. That is what happened here. Nerva shows that the money paid to the employees started out as the employer's money. The fact that it was paid to the employees via the interposition of a troncmaster does not mean that it was not so 'paid by the employer'. It may be that the troncmaster can be regarded as having paid it to the employees, but it does not follow that it was not also 'paid by the employer' within the meaning of Regulation 30(a): by analogy, the engagement of a payroll agency to pay wages may justify a conclusion that the agency 'paid' the employee but that will not mean that the employer will not also be regarded as having done so. It is inappropriate, as the appeal tribunal did, to dissect the transaction and treat what happened as a payment by the employer to the troncmaster followed by a separate payment by the troncmaster to the employee. That ignored the facts that the troncmaster is an employee of the employer acting in connection with the distribution of the money in accordance with his duties as such an employee.
31. Mr Brennan developed the argument by submitting that, under the troncmaster arrangement, the money paid to the troncmaster remained the employer's property until such time as it was actually paid by the troncmaster to the employees. This followed from the fact that the troncmaster was the employer's employee holding and distributing the money as part of his duties as such. Alternatively, he said, the troncmaster held the money as an agent for the employer, under an agency arising outside his employment but one requiring him to deal with the money on behalf of his principal by paying it to the employees in the appropriate shares. The submission was that, under either alternative, the employer remained entitled to demand the return of the money until it was actually paid to the employees so that, when it was so paid, it could properly be regarded as paid by the employer. A further alternative advanced by Mr Brennan was that the money was held by the troncmaster under a primary trust to pay it to the employees in the prescribed shares, but failing an ability to do so, upon a secondary trust for the employer (Barclays Bank Ltd v. Quistclose Investments Ltd [1970] AC 567). Even if any of these alternatives meant that the beneficial ownership of the money passed from the employer before the onward payment to the employees (and the third probably did), that did not matter given that the transaction must be viewed realistically in the light of the purposive sense of Regulation 30(a).
32. This analysis of the transaction was said by Mr Brennan not just to reflect the correct purposive interpretation of regulation 30(a), it was also a realistic one. He described the transaction as a 'complex' one, meaning no more than that it had more than one stage to it. But it was overall a simple one: the scheme was one under which the employer paid money to the troncmaster under an arrangement - enforceable by employer and employees – by which the money was to be paid to the employees in accordance with their pre-determined entitlement. When the money was paid to the troncmaster, it was either held by him as agent for the employer or else the beneficial title to it immediately vested in the employees in shares already ascertained by the tronc rules. The employer's purpose behind the transaction was to pay money to the employees and that is what was achieved. Why, therefore, was the money paid to the employees not 'paid by the employer'? The term 'payment' has no narrow, settled meaning but takes its colour from the context, a proposition for which Mr Brennan referred us to several authorities, although none, I consider, could be said to be directly in point for the purposes of the present case.
33. Mr Tolley, for HMRC, said that Wilkie J's decision was correct for the reasons he gave. Wrottesley and Nerva show that the answer to the question whether the relevant payments were 'paid by the employer to the worker' turns on whose money was paid to them. Whilst the service charge payments became the employer's money, the money was then paid to the troncmaster's bank account on terms that it was to be held and distributed by the troncmaster between the employees in accordance with the terms of the tronc scheme in force from time to time. The employer had no voice in the formulation of its terms. There is no rational basis on which the employer's payment to the troncmaster in such circumstances can be characterised as a payment of money to be held by the troncmaster as agent for, or otherwise on behalf of, the employer. The correct analysis is that the money paid to the troncmaster became held by him upon trust for the employees, a trust requiring him to distribute it between them in accordance with the tronc scheme. Accordingly, the legal and beneficial interest in the money left the employer when it was paid to the troncmaster, who thereupon held it for the employees beneficially. So long as the money remained in the hands of the troncmaster, no payment was made to the employees. Until then they had at most a collective beneficial interest in the money entitling them to have the trust executed. The money was only paid to them when the troncmaster did just that. The money paid was not the employer's money; and so the payments were not 'paid by the employer'.

Discussion

34. It is an irresistible inference that the employers' purpose behind the establishment of the troncmaster arrangements was (at least in part) to take advantage of the exemption from NICs in respect of gratuities. To achieve that exemption it was essential that the allocation of the gratuities between the employees should be decided upon by someone other than the employer; and in their skeleton argument to the employment tribunal, the employers emphasised that the troncmasters had been 'given full responsibility, free from interference, to determine a fair system of distribution and to apply it.' It has not been suggested that the arrangements were not legitimate, proper and genuine or that they did not work as intended. The troncmasters' function was not merely to determine and implement the scheme of distribution of the gratuity payments, but also to deduct and account for income tax from the payments so made, as they did. Under the PAYE regulations, such obligation arises in respect of 'every payment made to an employee by way of the employee's share of tips' by the troncmaster. There is no doubt that the troncmaster's transmission to the employee of his share of the tronc moneys is a payment; and it is made by him as 'the relevant employer'.
35. That does not dispose of the appeal because the employers recognise that the troncmaster's payments are true payments. Their case, however, is that it does not follow that they are not also 'payments paid by the employer to the worker' within the meaning of Regulation 30(a). They say that a purposive interpretation of Regulation 30(a) applied to a realistic analysis of the complex transaction under which money flows from employer to troncmaster to employee justifies the conclusion that the ultimate payment to the employee is a payment 'paid by the employer'.
36. I find the argument unpersuasive. It appears to me to depend on applying an improbable interpretation of some straightforward legislation to an unrealistic analysis of a straightforward arrangement. As for the arrangement, its basis is one under which the employer delegates exclusively to the troncmaster (i) the determination of the scheme for the distribution of the gratuities, and (ii) the distribution of the money to the employees in accordance with that scheme. Mr Brennan's submission depended in part on the premise that the employees' respective entitlements to the tronc moneys were ascertained in advance of the payment to the troncmaster. I would not, however, regard that as a legitimate interpretation of the facts. It may be that they usually will be so ascertained, because I presume that changes to the tronc arrangements occur relatively rarely. But the theory and practice are that the allocation of the money is nevertheless always a matter for the troncmaster, and him alone, although he would consult with the employees about any changes in entitlement. The employer has no voice in this; and the troncmaster does not take on the allocation task on behalf of the employer since that would defeat the availability of the NICs exemption. He acts independently of the employer.
37. It follows in my view that a 'realistic' analysis of the first part of the 'complex' transaction is different from that advocated by Mr Brennan. When the employer pays the equivalent of the service charge money to the troncmaster's bank account, he is not saying: 'Please pay this money to the employees in accordance with the shares to which I understand they are currently entitled.' The more correct interpretation is that he is to be taken as saying: 'Here is the service charge money. Please decide how it is to be distributed between the employees and distribute it accordingly.'
38. Viewing the arrangement as so characterised, I cannot accept that, when the employer pays the money to the troncmaster's bank account, it becomes held by the troncmaster as agent for, or otherwise on behalf of, the employer. There is no rational basis for regarding the money paid to the troncmaster as so held. Why should it be so regarded? The only people who, at the point of payment, have an interest in it are the troncmaster and the employees. The employer, at that point, parts with all interest in it. Mr Brennan's proposition that, until such time as it is paid out to the employees, the employer can call for its return appears to me to be unrealistic. If the troncmaster pays it out in stages (because some of the employees are on leave), can the employer call for the return of the unpaid part? I would regard the answer as an obvious 'no'. A realistic analysis of the arrangement requires the attribution to it of a proper degree of business common sense. The notion that the money remains, until paid out, held for the employer has none; it is nothing more than a theory aimed at providing a basis for the employer's bid to bring itself within Regulation 30(a). No employer intending to retain an interest in a fund of money would pay it to an employee's bank account with an instruction to the account holder to distribute at his discretion amongst the employees.
39. Mr Brennan's alternative argument was that, at the point of payment, the money becomes held by the troncmaster on a primary trust for the employees, and (if that trust cannot be performed) upon a secondary trust for the employer. I agree that, upon payment to the troncmaster, the money becomes held by him upon trust for the employees, because that is to attribute a legal interpretation to the arrangement that reflects a realistic business analysis of it; although I regard it as artificial to add the suggested secondary trust since I can envisage no circumstances in which the money so paid would not be enforceably distributable between the employees. If, however, any remote circumstances were to arise in which there could be no such distribution, there would no doubt then be a resulting trust in favour of the employer. But that remote possibility does not mean that, at the point of payment to the troncmaster, the employer retains any relevant beneficial interest in the money. At that point the money becomes instead held by the troncmaster upon a discretionary trust for the employees; and each of the latter could, in default of the due execution of the trust, sue for such execution. The beneficial entitlement to the money is, pending distribution, in the employees; but until the money is actually paid to them by the troncmaster, none can claim to have been paid. Mr Brennan's submission that the payment of the money to the troncmaster by itself amounts to a payment to the employees is, with respect, wrong. The employees would not agree with him; and they would be right to disagree. It follows that I agree with Mr Tolley's submissions for HMRC.
40. The short question on this appeal is whether what was indisputably a payment by the troncmaster to the employee was also a payment 'paid by the employer' to the employee. In my judgment it was not because, at the point of payment, what was paid to the employee was money forming part of a fund constituting in equity the employees' commonly owned property. The position was thus, in substance, no different from that in Wrottesley. The employer cannot claim that it paid the relevant money to the employee because it was not its money that was so paid. The employer may regard this as hard because the money so paid did admittedly derive from money that was once its own. The result, however, flows from a legitimate and genuine arrangement under which the administration and distribution of service charge money was to be handled exclusively and independently by the troncmaster; and which was established with an eye focused on the saving of NICs for employer and employee. The latter was a significant benefit but the manner by which it was achieved cost the employer the right to claim that the relevant payments fell within Regulation 30(a): and, said Horace, nihil est ab omni parte beatum. Many will see no injustice in this: they would wonder why employers should be entitled to use discretionary tips – probably intended by most customers to go direct to the staff - to satisfy their obligations to pay such staff the NMW.

Disposition

41. Wilkie J was, in my judgment, correct to hold that the payments to the employees of their respective shares of the tronc moneys were not 'payments paid by the employer to the worker' for the purposes of Regulation 30(a). I would dismiss the appeal.

Lord Justice Sullivan :

42. I agree with both judgments and have nothing to add.

Lord Justice Mummery :

43. I agree that the employers' appeal should be dismissed. As explained by Rimer LJ in his judgment, with which I completely concur, the employment judge erred in his interpretation of the National Minimum Wage legislation and wrongly allowed the employers' appeal against the enforcement notices issued by HMRC. The Employment Appeal Tribunal rightly allowed HMRC's appeal.
44. The core question centres on the money payments paid to employees out of a tronc established by their employers for the allocation of accumulated tips and gratuities. Did those payments count towards the employees' total pay for the purposes of the national minimum wage? If they did, there was no basis for the issue of enforcement notices by HMRC. If they did not, the employers were in breach of the legislation and the enforcement notices were valid.
45. The strength of the employers' case was that all the money in the tronc bank account had been paid into it by them out of their own money. Customers at the employers' establishments had paid discretionary tips and gratuities to the employers by way of cheque, or by credit or debit card. The employers then paid that money into the tronc account, out of which money payments were paid to their employees.
46. The strength of HMRC's case was that the tronc established for the allocation of the tips and gratuities to employees was administered by a troncmaster in accordance with a scheme of distribution. It was he, not the employers, who determined what money payments should be paid out of the tronc to the employees. For PAYE purposes he was required to make deductions before payment and to account to HMRC. For National Insurance purposes, he was treated as independent of the employers and there was an exemption from NIC. On the ordinary and natural meaning of Regulation 30(a) of the 1999 Regulations the money payments then paid out of the tronc were not "paid by the employer to the worker in the pay reference period." They were paid by the troncmaster out of the tronc account operated solely by him.
47. The employers deployed a variety of opposing arguments. They asserted that it is legally possible for payments to be made by more than one person, in this case both the employers and the troncmaster. Further, if the arrangements were viewed as a whole, it was clear, they said, that the relevant money payments were paid by the employers. They appeared to be paid by the troncmaster only if you looked at the last of the series of steps in a complex transaction. The effect of the transaction understood as a whole was that the money payments were paid to employees out of the employers' own money. In that context, the role of the troncmaster was properly regarded as that of an agent or trustee for the distribution of the employers' money to their employees to remunerate them for services rendered. The end result was that the employees were paid more than the national minimum wage for their services.
48. With respect to Mr Brennan, who skilfully developed the employers' case, and to the employment judge, who found for the employers, I have reached the conclusion that the application of the ordinary and natural meaning of Regulation 30(a) to the agreed and found facts of this case leads to the opposite conclusion.
49. Three main aspects of the payments are worth considering. First, what monies were used to make the payments? Secondly, whose monies were paid? Thirdly, who actually made the money payments?
50. On the first aspect, the monies used to make the money payments were accumulated discretionary tips and gratuities paid by the employers' customers to the employers in relation to services performed by the employees. The monies passed by way of cheque, or card payment, from the customers to the employers; from the employers into the tronc bank account operated by the troncmaster; and from that account to employees. It cannot be disputed that the common intention of all concerned must have been that the tips and gratuities initially paid by the customers to the employers would ultimately be used for paying money payments to the employees.
51. On the second aspect, the employers initially owned the tips and gratuities paid to them by cheque, or by card. However, they did not retain ownership down to the point when money payments were paid to their employees. The employers ceased to have any legal or beneficial title to or control of the monies once they had paid them into the tronc bank account. The employers were not legally entitled to operate that account or to require the monies in the account to be paid back to them. The troncmaster alone was entitled to operate the account. He was bound to do so for the benefit of the employees in accordance with the tronc scheme in force. The monies in the tronc account then fell to be distributed by the troncmaster not as the employers' money or as his own money, but as a fund subject to a trust scheme governing the distribution of the monies to the employees.
52. On the third aspect, the troncmaster determined what money payments should be made under the tronc scheme, made the required income tax deductions for which he had to account to HMRC and then actually paid the relevant money payments to the relevant participating employees. Neither the employers nor their customers were entitled to play any part at all in that exercise.
53. In my judgment, the cumulative effect of all three aspects of the money payments is that they were not paid by the employers and they do not count as part of the employees' pay for the purposes of the national minimum wage.