Tips & Gratuities
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Every organization that accepts gratuities/tips from patrons, whether it is in cash or through credit and debit cards, unwillingly becomes subject to audit by various government organizations and potential liability from those audits.
This guide was created to help you understand whether you, as an employer, have liability under the EIA and the CPP by discussing:
The distinction between CRA’s policy of direct tips versus controlled tips; and
Thoughts and suggestions for setting up:
Employee tip committee;
Establishing a tip pool;
Establishing governance rules for the employee tip committee; and
Transferring electronic tips to the employee tip committee.
For more information, contact James at email@example.com
Author: James Rhodes, Taxation Lawyers
The Ontario government passed Bill 12, An Act to Amend the Employment Standards Act, 2000 With Respect to Tips and Other Gratuities (“Bill 12”). Bill 12, which subsequently received Royal Assent on December 10, 2015, came into force on June 10, 2016. It will prohibit employers from withholding, making deductions from, or collecting tips or other gratuities from employees unless authorized under the Employment Standards Act, 2000 (“ESA”).
The legislation provides protection for the tips that employees receive and applies to all employees in occupations where tips and gratuities are given for example; catering firms, restaurants, bars, taxi drivers, food delivery drivers, and hair and nail salons.
Before June 10, 2016, the ESA did not cover tips and other gratuities. This means that employers were not prohibited from withholding, making deductions from, or making an employee return their tips to the employer if the tips were earned and received before June 10, 2016.
As of June 10, 2016, an employer generally cannot withhold, make deductions from, or make an employee return their tips and other gratuities except as permitted by the ESA. An employer is also prohibited from making deductions, etc., from their employees’ tips and other gratuities for such things as spillage, breakage, losses or damage.
If an employer is found to have violated the prohibition against taking an employee’s tips and other gratuities, the amount wrongfully kept will be considered a debt owing by the employer to the employee and is enforceable under the ESA as if it were wages owing to an employee.
An employee’s ability under the ESA to keep tips and other gratuities, except in limited circumstances, is an employment standard. An employee cannot contract out of or waive this employment standard, even if the employee agrees to do so in writing or verbally.
For example, an employee cannot agree to:
give the employer all of their tips and other gratuities in exchange for a higher rate of pay
waive the right to minimum wage in exchange for keeping all or a higher percentage of their tips
give the employer a certain percentage of their tips other than for a tip pool (e.g. tipping out to “the house” to cover things like spillage, breakage, losses or damage, etc. is not allowed.)
What are considered tips and gratuities?
Tips and gratuities include money voluntarily given by a customer for customer service. It could be given to the employee directly, like money left on a table or bar for a server. Or it could be given to the employee indirectly, like a tip paid using electronic payment like debit or credit, or in a tip jar.
Tips and gratuities can also include any service charges imposed by an employer on a customer that the customer intends or assumes would be given to employees (e.g., banquet hall service fees, catering service fees, group table service charges).
What is prohibited?
Employers will be prohibited from withholding, making deductions from or causing the employee to return tips and other gratuities. There are two situations in which this prohibition does not apply:
If the employer collects and redistributes the money among its employees, a practice often referred to as “tip pooling.”
If a statute or a court order authorizes it.
Employers can’t make deductions from tips for things like faulty work, cash shortages, or lost or stolen goods. Employers will generally be prohibited from sharing in a tip pool. The exception is if the employer owns all or part of the business, and he or she regularly performs the same work to a large degree of:
Some or all of the employees who share in the tip pool, or
Those in the same industry who would normally receive tips.
For example, this exception would apply if a restaurant owner spent a substantial amount of his or her time serving food or in the kitchen doing the same work as staff members who receive a portion of a tip pool. The same standard applies to directors and shareholders of corporations.
Credit Card Fees:
For the purposes of subsection 14.1 (2) of the Act, a tip or other gratuity does not include the portion of a service charge or similar charge imposed by a credit card company on an employer for processing a credit card payment made to the employer by a customer, as determined in accordance with the following:
Multiply the total amount of the tip or other gratuity by the greater of, the per cent charged by the credit card company for processing the payment, and 1.5 per cent.
As of June 10, 2016, an employer will be able to deduct or withhold a portion of the credit card processing fee from a tip or gratuity provided to the employee by credit card payment.
Employers will be able to deduct the greater of a flat rate of 1.5% of the tip or the pro-rated share of the processing fee associated with the tip on the specific credit card transaction.
Allowing employers to deduct the greater of 1.5% or the calculated prorated percentage from tips charged on credit cards is consistent with public commitments made by MasterCard and Visa to voluntarily limit the amount they charge retailers to process transactions, and set the floor at a reasonable rate.
We also understand that individual employers might pay higher fees, so deducting above 1.5% is also permitted under the regulation.