A Guide to Tronc Systems for Hospitality Sector Employers

Understanding the nuances of staff remuneration and the correct management of service charges and gratuities is fundamental for success for hospitality employers. One term that frequently arises in the industry is ‘tronc’. This article provides a clear definition and a comprehensive explanation of what a tronc is, how this payment scheme operates, and the significant legal and tax compliance considerations involved for employers in this sector.

What is a tronc system?

A tronc is a special pay arrangement used to manage the distribution of tips, gratuities and service charges to employees. So, what is a tronc system? It is a formalised method for pooling customer gratuity payments and ensuring a fair allocation among staff. The term itself, ‘tronc’, might appear on an employee’s payslip, signifying their share of these pooled funds, and providing evidence of how their hard work is being rewarded by customers.

How a tronc works and who it benefits

So, how does a tronc system work in practice? When a customer leaves a tip, or pays service charges, or other gratuities, this money goes into a central fund. The allocation and subsequent distribution of this money are then managed by a designated individual known as a ‘troncmaster’. A fundamental aspect of a legitimate tronc scheme is its independence from the employer’s direct control over the money. It is up to the business to respect and ensure this separation.

The troncmaster therefore holds a pivotal role within a tronc scheme, being responsible for ensuring the fair and impartial distribution of the collected tips among all the eligible employees. To ensure compliance with the tax benefits of a tronc, the troncmaster must manage the tronc money independently of the employer. This means a director or senior management figure responsible for the business cannot be a troncmaster. Consequently, a responsible employee, such as a restaurant or branch manager, will take on the role, or the business might otherwise engage an external service.

The tronc goes on to benefit a wide range of employees within the hospitality business, not just front-of-house staff who directly receive the tip from customers. This fair distribution ensures kitchen staff and other support staff who contribute to the overall customer service also receive their share of the gratuities.

Legal requirements and compliance

The management of a tronc system comes with specific legal guidelines that employers must follow to ensure compliance. The new Employment (Allocation of Tips) Act 2023 is a key piece of legislation that mandates that employers must pass on 100% of tips to their staff without any deductions being made.

Businesses must have a clear and transparent policy for their tronc scheme, to ensure it is well-managed and complies with this new legislation. The tronc policy should clearly detail the allocation process, and be communicated to all employees eligible to receive payments. It is also essential for the employer to keep detailed records of all the tronc payments made. Failure to adhere to these legal requirements and ensure compliance can lead to employment tribunals and significant penalties. This is where robust payroll software can certainly help businesses maintain accurate records and deal with payroll complexities such as tronc payments, as well as overtime, backdated pay, parental leave, and more.

Tax implications for employees and employers

One of the most significant advantages of a correctly implemented tronc scheme lies in its tax efficiency. So, how do taxes apply to funds paid through a tronc?

When gratuities are distributed through a compliant tronc, the payments are subject to PAYE (Pay As You Earn) Income Tax, which the troncmaster will process through payroll. However, these tronc payments are exempt from National Insurance Contributions (NICs) for both the employee and the employer. This is a considerable benefit. For employers, it reduces payroll costs associated with National Insurance. For the employee, it means they receive more of their hard-earned money.

This is a major difference from tips paid directly by the employer through payroll, which would attract both Income Tax and National Insurance Contributions. Understanding these HM Revenues and Customs (HMRC) rules is critical for correct tax compliance.

Tronc vs. other tipping methods

How is a tronc different from direct tipping? With direct tipping, a customer gives cash directly to an employee. While this seems simple, it can create inequalities and resentment between front-of-house and back-of-house staff.

A tronc system promotes a more collaborative environment by ensuring a fair distribution of all tips, service charges and gratuities amongst all contributing team members. It is a more structured and fair way to manage customer money intended for all of the employees who provide the services.

Can a tronc system affect employee morale or income?

A well-managed and transparent tronc scheme can significantly boost employee morale. When staff understand that all tips are being distributed fairly by the troncmaster, it fosters a greater sense of teamwork and appreciation. This, in turn, can lead to better customer service from the entire team, which, in turn, can generate more gratuities. Conversely, a poorly managed or opaque system for payments, or a mistrusted troncmaster, can breed animosity among employees.

The income of employees is also positively impacted by a tronc system. The exemption from National Insurance Contributions on tronc payments means more actual money in the pay packets of your staff. This makes it a powerful tool for recruitment and retention in the competitive hospitality industry, in addition to other employee benefits that can enhance your appeal as an employer.

In conclusion, a tronc system, when implemented correctly, offers a fair, transparent and tax-efficient method for the fair distribution of tips. For growing businesses in the UK hospitality sector, understanding what tronc payments are and how to ensure the compliance of a tronc scheme isn’t just about following legislation, it’s about leveraging a strategic advantage in fostering a motivated and rewarded workforce.