As you may recall from my previous post, the Ontario Legislature in December 2015 passed the Protecting Employees’ Tips Act, 2015 (“Bill 12”), and it has recently come into force. Bill 12 has the primary effect of preventing employers from withholding, making deductions from, or collecting tips or other gratuities from employees unless otherwise authorized to do so. It was expected that the government would pass subsequent regulations in order to clarify certain uncertainties regarding the application of Bill 12.

On May 6, 2016, the Legislature did pass one such regulation and in so doing clarified one significant issue. Ontario Regulation 125/16 prescribes a general exemption to the effects of Bill 12 for credit card transactions. This new Regulation will be a source of relief for many employers in the food and drink service industry.

The new Regulation provides that the definition of “tips and gratuities” for the purposes of the Employment Standards Act, 2000:

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 [s.1]

Mandatory service charges from credit card companies represented one of the biggest concerns for employers regarding Bill 12. These service charges generally range from 1.5% to 3% per transaction. Many employers have typically removed this amount when paying out employees’ tips. Based on a flat reading of Bill 12, it appeared that employers would be unable to continue this practice going forward and would have to begin providing the entirety of the tip to the employee, resulting in significant additional expense for many employers.

With the passing of Regulation 125/16, employers will largely be able to continue existing practices, so long as they do so within the formula prescribed by the Regulation. Employers can calculate the exempt portion of each tip or gratuity by multiplying the total tip or gratuity amount by either the percentage charged by the credit card company for processing the payment, or by 1.5%, whichever is greater. Many employers will therefore not have to change existing processes with respect to how they manage credit card transactions and the tips stemming from them.

Employers should take note of two key issues which may still require the adjustment of existing policies:

  1. Regulation 125/16 specifically provides an exemption only for charges from a credit card transaction. If an employer is subject to charges for other transactions (such as debit card transactions), it does not appear that these will be subject to the exemption and employers will not be able to remove the amount of the charge from any tip amounts provided to employees; and
  2. Employers can remove from employee tips only the amount prescribed as exempt by the Regulation. Many employers have a policy of removing a blanket amount (3%, for example) from tips on any credit card transaction, regardless of the type of card. In many situations, however, different credit card companies charge different amounts to the employer. Employers will want to be careful that they are removing from tips only the amount actually being charged to them by the specific credit card company. This will unfortunately require a little more calculation on the part of the employer but will ensure that the employer does not run afoul of the new legislation and risk potential penalties.

The new Regulation came into force along with the rest of the Bill 12 amendments on June 10, 2016.