On June 10, 2016, Bill 12, which amends the Employment Standards Act (“ESA”) to regulate payment of tips and gratuities to employees, is set to come into effect. This bill was introduced for the purpose of protecting employees’ entitlements to tips and gratuities from their employers. Although Bill 12 allows an employer to withhold tips or gratuities for the purpose of redistributing them to some or all of its employees, it prohibits the employer from sharing in that redistribution.
What is a “Tip or Other Gratuity?”
Under the amended ESA, a “tip or other gratuity” will be broadly defined to include:
- A voluntary payment to an employee by a customer which would reasonably be inferred would be kept by the employee or shared with other employees;
- A voluntary payment to an employer by a customer which would reasonably be inferred would be redistributed to an employee or employees;
- A service charge or similar charge which would reasonably be inferred would be redistributed to an employee or employees, and
- Other payments that may be prescribed by regulation.
What is Excluded from a “Tip or Other Gratuity?”
A “tip or other gratuity” does not include:
- such payments as may be prescribed by Regulation; or
- such charges as may be prescribed relating to the method of payment used, or a prescribed portion of those charges.
Accordingly, without additional regulations prescribing such an exemption, if a customer pays by credit card and the employer incurs a transaction fee associated with the use of that credit card, the employer will not be entitled to deduct such a fee from the tip or gratuity collected. For example, where a customer tips 20% on a bill and there is a 2% credit card transaction fee, the employer must redistribute the entirety of the 20% back to its employees.
However, this may be changed by the Ministry of Labour’s recently proposed regulation under the ESA that would allow employers to deduct the cost of a credit card processing fee from the calculation of tips and gratuities.
Prohibited from Withholding Tips or Gratuities from Employees Unless Authorized by the ESA
Bill 12 prohibits employers from withholding, deducting from an employee’s pay, or causing the employee to return tips or gratuities unless authorized to do so under the ESA. That said, the ESA sets out three exceptions which allow an employer to withhold, deduct or cause an employee to return tips or gratuities. Specifically:
- if it is required by statute or court order;
- if the employer collects and redistributes tips or gratuities to some or all of its employees; or
- if a collective agreement in effect on June 10, 2016 conflicts with Bill 12, the provision of the collective agreement will prevail until a renewal collective agreement comes into effect, at which point, Bill 12 will prevail.
As such, the exemption most pertinent to employers relates to collecting tips or gratuities to redistribute to some or all of its employees.
It should be noted that although tips and gratuities are specifically excluded from the definition of “wages” under the ESA, Bill 12 treats any amounts wrongfully deducted, withheld, returned or given as a debt as if it were wages owing to the employee. This means that an employee can file a complaint with the Ministry of Labour or a grievance under their applicable collective agreement if a dispute arises in connection with tips or gratuities.
Who Cannot Share in the Pool?
Bill 12 specifically prohibits the following persons from sharing in the redistribution of tips or gratuities:
- an employer;
- a director;
- a shareholder; or
- other employees that may be prescribed by regulation
That said, a sole proprietor, a partner in a partnership, a director or a shareholder may share in the amounts redistributed if he or she regularly performs to a substantial degree the same work performed by:
- some or all of the employees who share in the redistribution; or
- employees of other employers in the same industry who commonly receive or share tips or gratuities.
Key Takeaways and Best Practices
- Ensure the distribution formula is in writing, clear and based on factors correlated to job performance;
- Inform all employees of the distribution formula;
- Pay redistributed tips and gratuities to employees in a timely manner;
- Ensure only those prescribed by the ESA share in the redistribution (i.e. not employers, directors or shareholders unless they regularly perform to a substantial degree the same work performed by some or all of the employees who share in the redistribution or employees of other employers in the same industry who commonly receive or share tips or gratuities); and
- Do not deduct credit card transaction fees from the pool of tips or gratuities.