Will furlough put paid to the tronc?

22 May 2020 by

With the coronavirus furlough scheme leaving some waiting staff out of pocket, is it time to scrap the tipping system and adopt the simple strategy of full pay? Neil Gerrard asks whether it's time to drop the tronc

The stress Fred Sirieix felt 20 years ago when, as a young restaurant manager, his first mortgage threatened to slip through his fingers, hardly seems relevant in the face of the huge coronavirus-shaped crisis the hospitality industry faces today. But he thinks it is.

"I was so upset that day and I will always remember it. Everything was OK and I was going to get the money. And then the bank called and said they couldn't give it to me," he recalls.

The reason? Because only part of his wages was guaranteed – his salary was topped up by service charge distributed through the restaurant's tronc. In the end, he got the mortgage, but the experience left him questioning the fairness of the way in which hospitality workers – particularly those front of house – are paid.

Fred Sirieix
Fred Sirieix

The situation facing many of the hospitality staff furloughed under the government's Coronavirus Job Retention Scheme is considerably more serious. HMRC has confirmed in updated guidance that employers cannot include payments made at the discretion of the employer or a client when calculating wages under the system – and that includes service charge and tips distributed through tronc, as well as discretionary bonuses and commission payments.

By and large, employers are grateful the furlough scheme exists at all. Jason Atherton, for one, was relieved. "Even the most successful restaurants would only have had a couple of months' cashflow inside them. When the coronavirus pandemic hit, we didn't think we would be able to pay anyone, so the furlough was sent by the gods," he says.

But some found themselves blindsided by the way in which the system works. "We thought there was absolutely no chance the government's position would exclude service charge because it is a part of regular income," says Des Gunewardena, chairman and chief executive of D&D London. "Our guys in the UK are going to end up getting roughly 50% of their normal earnings. It's not right and it is simply not fair."

Gunewardena highlights the difference between the way in which his UK staff will be compensated while furloughed compared with the more generous scheme available to workers at D&D London's restaurants in New York. "Our wait staff in New York will get 50% of their earnings, including tips, plus $600 (£485) a week, which basically means they will get about as much as they were earning before lockdown," he says.

Des Gunewardena
Des Gunewardena

In general, hospitality staff in the UK who are normally paid service charge through the tronc are expected to receive around 40%-60% of their usual wages while furloughed. The situation has given new impetus to an age-old debate – should service charge and the tronc be scrapped in favour of a different system under which workers' salaries are higher?

It's history

Sirieix, who founded National Waiters Day in 2012, has long been campaigning for just such a move. "A system that you cannot rely on when you need it the most, such as a time like this, means the system has to go," he argues. "For me, service charge is an outdated practice." He also predicts that workers who receive part of their wages through their tronc will find it harder to borrow from wary lenders in future.

He recognises that allowing a proportion of hospitality workers' earnings to be regarded as a gratuity offers certain tax and National Insurance benefits, but he contends that the discretionary nature of service charge also means that the profession is not given the respect it deserves.

"National Waiters' Day is about raising the bar and making sure that we can tell people about the industry as a career as opposed to just something done as a stopgap. We have very much a master and servant relationship in the industry. We need to change the mentality outside and inside the industry," he adds.

"Personally, I would scrap it tomorrow," agrees Simon Binder, who owns Luc's Brasserie in London's Leadenhall Market and is a partner in restaurant consultancy Main Course Associates (MCA). Only waiting staff are paid out of the tronc at Luc's Brasserie, and the business decided to subsidise their furlough earnings while it waited for clearer guidance from HMRC, because otherwise some staff would receive less than half their pay. Now that it seems clear tronc is not included, the business will continue to subsidise those workers as long as it can.

Binder recognises the tax benefits of service charge being optional, but adds that both customers and staff find it complicated to understand. "I think it is all confusing and wrong. The staff believe service charge is called that because it is theirs, and I am forever having conversations where I have to say: ‘Well look, legally, it's not really yours'."

But Binder sees a complication in doing away with service charge: "The problem is that we have to do it when everyone else does it, otherwise our prices would be out of line and staff would be paid differently. The government needs to make a decision like they did in France and say service is included and that is the end of it."

With the huge task the government faces in tackling coronavirus, Atherton doesn't see such a move coming any time soon. But he is clear that he wants to see the furlough scheme extended. "We used to have 77 employees looking after a 62-cover dining room in Pollen Street Social. If we have to take it down to 40 covers [to comply with social distancing measures] then logic tells you I can't employ 77 staff. So what do we do with that? It's like picking your favourite child. It is a horrendous position to be in, but these are the decisions we are going to have to make and, if we don't, there isn't going to be an industry to come back to."

He wants a more flexible system where people can be furloughed and asked to perhaps work two or three days a week until they can find another job or demand allows them to return full time.

Jason Atherton
Jason Atherton

Once the industry gets back to normality, Atherton can see an argument for service charge to be scrapped. "Why should a waiter worth £25,000 a year get £20,000 from the restaurant and £5,000 from the tronc? Why not just get £25,000 and no tronc? This is a skilled profession and people should be paid the same way other professions are paid, instead of making part of it optional. It is archaic but no one has got the guts – including me – to stand up and say it. Everyone is waiting for the government to step in and it is right at the bottom of the pile right now," he adds.

This is a skilled profession and people should be paid the same way other professions are paid, instead of making part of it optional

Morale and morality

For Gunewardena, the operational challenges the industry faces are so great that any ethical debate over service charge is far over the horizon. He finds himself more worried about how furloughed staff are coping during lockdown and immediately after it when social distancing is likely to result in many of them being unable to come back to work.

"I think it is right to open up the debate in the future, but there are a number of issues here," he says. "First, what are customers' expectations? I think they generally feel service charge should go to the staff and it should be part of their income.

"For us as a business, it would be a lot easier without all the admin. But then you also have to ask if it is good for staff. Maybe in the long term it would be, but some wouldn't want it."

Michael Lumsdon, former general manager of Anglo in London, argues that removing service charge may not prove as popular as some think. He says: "In order to pay the same rates, food prices would have to go up by around 20%, rather than a 12.5% service charge. Every- one benefits from a well-run tronc system. I don't think there needs to be any wholesale change as it generally means everyone – business, staff and customers – has more money in their pocket." But he adds: "I can see people demanding more transparency as to where the money goes when things get back to normal."

Lumsdon's maths chimes with calculations by Peter Davies, managing director of WMT Accountants, who estimates that removing a 12.5% service charge, keeping business costs neutral, and giving employees the same take-home pay as before would result in a 21.43% rise in prices because of the increased VAT, tax and National Insurance burden on pay that was no longer regarded as discretionary. The extra cost to the consumer, he says, would be 9% (the difference between 21.43% and 12.5%).

Peter Davies
Peter Davies

"When the industry is back up on its feet again, let's have a debate about scrapping service charge," he says. "But the main reason, in my view, why people weren't able to make this change beforehand and potentially won't be able to make that change after this is because of the question of who is going to pay for it. Yes, the tronc way of doing things has been severely tested by the pandemic, but a lot of other things have too. I do think there is a danger of coming to a knee-jerk conclusion."

For Christian Kaberg, group operations director at St Pancras Hotels Group, it's a debate that goes beyond numbers. "There is a bigger, ethical question to answer here. Why are team members paid the bare minimum as a modus operandi? The tronc system must be abolished, and team members paid a decent wage," he says.

Yes, the tronc way of doing things has been severely tested by the pandemic, but a lot of other things have too. I do think there is a danger of coming to a kneejerk conclusion

In reality, of course, major changes are not likely to come soon – there is too much else for the industry to worry about and the government is unlikely to step in and scrap service charge at such a challenging time. But the debate is likely to keep running and those who have lost a significant chunk of their earnings through the furlough scheme could well be joining it soon.

The legal fight continues

Despite the current HMRC guidance, the industry is still applying pressure to have tronc included in the furlough scheme, explains Jonathan Rennie, partner at law firm TLT: "The government's stance appears to be rather strict. I believe it has taken this approach to limit fraud risk, and because tronc payments are not normally contractual in nature.

"If businesses have been including troncs in their calculations, then this will need to be re-examined. If an employer submits a claim through HMRC's online portal, having calculated wages to include tronc payments, then they will be left out of pocket as there is currently no mechanism to amend a claim. HMRC is, however, looking at introducing this functionality.

"Many in the industry are urging the government to reconsider excluding troncs. The scheme and guidance have been updated a number of times and it is definitely an evolving picture, so it's not inconceivable that this apparent anomaly may be corrected in future editions."

‘There's going to be a shake-up'

John Abbey
John Abbey

John Abbey, co-owner of the Abbot's Elm restaurant with rooms in Cambridgeshire, has furloughed all 23 of his staff, both part-timers and full-timers.

The business doesn't levy a service charge but pays non-solicited tips left by customers through a tronc, which works out at about 8% of staff's earnings. Under the furlough scheme, it means that they will receive 80% of 92% of their wages.

"It's not easy for them, but if there have been any complaints, I have not heard them," says Abbey.

Nonetheless, he sees an opportunity to reshape the way in which hospitality staff are paid. "There's going to be a shake-up. If you believe your business is dependent on a 12.5% service charge to pay your staff, then firstly your business model is not correct and secondly you are not paying your staff correctly," he says.

"We have six senior staff who take home £30,000 a year. They are all on £27,000 and they all get at least £3,000 a year in tips. It's a fair system – they are well paid and we still make a very good profit."

Featured photo: Shutterstock

MPs from across political parties support calls for tronc to be included in furlough pay >>

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