For workers in the service sector, such as servers, cooks, bartenders, taxi drivers, bell staff and tour guides, gratuities are a substantial part of their income. While the topic of tips can be complex and confusing for a business owner or manager, understanding a few key principles will help keep your team engaged and ultimately save you time and money. It all starts with developing a Tip Policy, engaging your staff on the development of the policy, and ensuring that it’s clearly communicated to all staff and management.
When developing a Tip Policy, you need to take into account both the Employment Standards Act (ESA) and the Canada Revenue Agency (CRA) guidelines. Note that substantive amendments were made to the ESA in 2019 that affect how employers may handle gratuities.
Generally speaking, there are two approaches to handling tips: direct tips and controlled tips.
Simply put, direct tips are paid voluntarily by the customer to the employee in appreciation of good service. Management should not exercise any control over the tips and the tips must be flowed through directly to the employee. These tips can be paid by cash, credit or debit card. In the case of credit or debit card tips, the CRA recognizes that the employer must distribute these to staff. They are considered direct tips as long as they are paid out to the employee immediately, no later than their next shift.
Direct tips are not subject to payroll tax deductions. However, tip-earning employees are responsible for declaring tip income on their personal tax return.
When tips come under the “control” of the employer, they will be considered “controlled tips”. Controlled tips form part of the employee’s total compensation and the employer must deduct the appropriate income tax, Canada Pension Plan (CPP) and Employment Insurance (EI) at source. The employee must also pay their share of CPP and EI. The following are some common examples of controlled tips:
- An employer adds an automatic service charge to large parties, catered events or banquets. In this situation, the employer has pre-determined the tip amount and collection.
- An employer collects and deposits the tips into general revenue, and then pays out the tips with regular bi-weekly payroll.
- An employer collects a portion, or all, of the tips for re-distribution to other staff as part of a tip sharing program. Management can be involved in creating the tip sharing program; however, it is recommended that they should not be involved in the re-distribution of tips. Instead, consider selecting two or three trusted, senior staff members to lead the program to encourage engagement and build trust.
- An employer has created a unique system for tip sharing, whereby tips are collected by the employer and then re-distributed based upon length of service.
In all of these situations, the tips are considered to be controlled.
Frequently Asked Questions (FAQs) on Tipping
Can the employer collect for shortage or breakage?
No. Since changes to the Employment Standards Act were made in 2019, an employer is prohibited from withholding, deducting or requiring an employee to return or give their gratuities to the employer except in relation to redistributing tips amongst other employees. The Employment Standards Act also dictates that shortages (e.g. dine-and-dash), breakages and other business expenses are considered the costs of doing business. Attempting to recover these costs from tips is illegal and you may be subject to re-payment of these wages with penalties and interest.
Is there an industry standard for tip-sharing?
There is no industry standard for tip-sharing, however it is customary to show appreciation and fairly distribute the tips to employees who have contributed to earning the gratuity, including but not limited to kitchen staff, servers, bartenders and hosts. While the Employment Standards Act prohibits withholding, deducting or requiring an employee to give the employer gratuities earned, the Act allows employers to redistribute gratuities among some or all of their employees.
Can owners and management be part of tip-sharing?
No. Employers are specifically excluded by the Employment Standards Act from sharing in redistributed gratuities. However, a director or shareholder of an employer may share in redistributed gratuities if they perform “to a substantial degree” the same work as certain employees.
Do employees need to pay income taxes on their tips?
Yes. Regardless of how an employee receives their tips (either controlled or direct), they should be educated and reminded that they are responsible for declaring tip income on their personal taxes.
For more information on the CRA’s policy click here or call 1-800-959-5525.