Ontario Employer’s Guide to Tips and Gratuities: Everything You Need to Know

A guide to the legalities of tips and gratuities in Ontario, including how to distribute tips, how to avoid fines, and more.

Are you an Ontario business owner managing tipped employees? Deciphering the legal web of tips and gratuities can seem like a daunting task. Getting things wrong could not only land you in legal trouble – including with the CRA – but also lead to a very unhappy workforce.

This blog post aims to provide a comprehensive overview of the rules established by the Employment Standards Act, 2000 (ESA), helping you to navigate this complex issue and ensure compliance without upsetting your staff.

Defining Tips and Other Gratuities

Firstly, it’s crucial to understand what constitutes a “tip or other gratuity.” as far as the law is concerned. This term refers to any payment voluntarily made to an employee by a customer. It can also include service charges imposed by the employer, given that a reasonable person would expect the payment to benefit the employees. Examples range from cash left on a table for a server to gratuity charges added to banquet hall bills.

The Right to Keep Tips and Gratuities

The ESA prohibits employers from withholding, deducting, or demanding the return of tips or gratuities, except in certain circumstances. It’s important from both a legal and an accounting point of view to note that tips and gratuities are not considered wages under the ESA.

Therefore, they are cannot factored into calculations for minimum wage, termination pay, severance pay, vacation pay, public holiday pay, or overtime pay. Violations of these rules can lead to the amount wrongfully kept being considered a debt owed by the employer to the employee.

Distribution of Tips and Gratuities

While the ESA does not stipulate a regular period for distributing tips or gratuities, a reasonable time frame is expected. Delayed distribution could be seen as withholding tips, leading to a disgruntled staff (at the very least). The method used for distribution should not constitute a withholding of, or a deduction from, tips or gratuities in violation of the ESA.

Allowable Deductions from Tips and Gratuities

There are three main instances where deductions from an employee’s tips or gratuities are permitted:

• Statutory deductions: These are authorized deductions such as income taxes, employment insurance premiums, and Canada Pension Plan contributions.
• Court orders: If an employee owes money to the employer or a third party, a court order may authorize a deduction from their tips or gratuities.
• Pooling of tips or other gratuities: The employer may redistribute tips among employees, a practice known as tip pooling.

Understanding Tip Pooling

In Ontario, tip pooling is a common practice in industries where employees receive tips or gratuities, like restaurants and bars. Tip pooling involves collecting all or a portion of employees’ tips into a common pool, which is then redistributed among employees. The terms of tip pooling, such as who participates and how funds are distributed, are typically determined by the employer.

Employers can only make deductions from an employee’s tips for the purpose of tip pooling if the amount collected will be redistributed among employees. In a tip pooling scenario, it’s important to note that amounts can’t come from any source other than tips. In other words, if an employee doesn’t make any tips, they’re not required to contribute to the pool.

Regarding credit card tips, the process is generally the same. However, it’s important to consider that some credit card companies charge a processing fee for transactions. In Ontario, employers are not allowed to deduct this fee from the employees’ tips. The full tip amount must be given to the employee or included in the tip pool.

When it comes to financial responsibilities and reporting, employers must remember that tips are considered income for the employees who receive them. While tips are not considered wages under the ESA, they are considered taxable income and must be reported to the Canada Revenue Agency (CRA). Employees are responsible for reporting their tip income on their personal income tax returns.

Employers do not have to track or report their employees’ tips as part of their payroll unless the employer controls the tips (for example, if they are collected and redistributed through a tip pool). If the employer does control the tips, they should be included in the total income reported on the employee’s T4 slip.

Takeaways for Employers

Understanding and respecting the ESA’s rules around tips and gratuities is essential for maintaining a lawful and harmonious workplace. Employers should create clear policies around tipping and ensure all employees are familiar with them. Be transparent about how tips are distributed, and ensure you are meeting the legal requirements for any deductions. If you operate a tip pooling system, make sure the terms are fair and clearly communicated.

Remember, tips and gratuities are not considered wages under the ESA, so they cannot be counted towards meeting your obligations for minimum wage or other statutory payments. Also, never use tips to compensate for damages, losses, or other operational costs; such practices are strictly prohibited.

Let’s imagine a scenario where a restaurant owner, Jane, employs several servers who earn a significant portion of their income from tips. Jane decides to pay her servers less than the minimum wage, arguing that their tips make up for the shortfall. This is a clear violation of the ESA, as employers are required to pay at least the minimum wage, regardless of tips earned.

In another situation, a server at Jane’s restaurant accidentally drops a tray of dishes, causing substantial breakage. Jane decides to deduct the cost of the broken dishes from the server’s tips. This is again against the ESA provisions. Tips cannot be used to cover operational costs, including damages or losses, even if they are caused by employees. These examples underscore the importance of understanding the legalities around tips and gratuities to avoid costly mistakes and potential legal issues.

Finally, if you have a collective agreement, ensure it aligns with the ESA provisions on tips and gratuities if it was established or renewed after June 10, 2016.

By adhering to these guidelines, you can foster a fair and transparent work environment that respects the rights of your employees and complies with Ontario’s employment laws. If you are uncertain about any aspects of these regulations, consider consulting with a legal professional to avoid any potential pitfalls.

Remember, a business that respects and values its employees is one that is likely to inspire loyalty, productivity, and positive customer experiences. Understanding the legalities of tips and gratuities is a key part of this, ensuring your employees feel valued and treated fairly.