All About Tips and Gratuities Laws In Ontario

What is a Tip or Gratuity?

Tips and gratuities are common in Ontario and often expected in service-based establishments such as restaurants, hair salons, and nail salons. “Tip or other gratuity” is defined in the Employment Standards Act, 2000(ESA) as a payment left for an employee, made to an employer, or received from a customer by way of a charge in circumstances where a reasonable person would “be likely to infer that the customer intended or assumed that the payment would be kept by the employee or shared by the employee with other employees”.

Tips and other gratuities are not part of employees’ wages, as defined in section 1 of the ESA. This means that tips and gratuities are not included when calculating:

• Overtime pay
• Vacation pay
• Termination pay
• Severance pay
• Public holiday pay
• Minimum wage

Can Employers Withhold Tips or Gratuities From Employees?

Under section 14.2 of the ESA, employers are not allowed to withhold, make a deduction from, or cause employees to return their tips or gratuities except in limited circumstances. These limited circumstances include authorization by statute or court order (section 14.3 of the ESA) and withholding of tips as part of a tip pool (section 14.4 of the ESA).

How Do Tip Pools and Tip-Outs Work?

The rules surrounding tip pools are addressed in section 14.4 of the ESA. When operating a tip pool, employers may deduct, withhold, or collect employees’ tips and later distribute them to some or all of the employees of the establishment. An example of this would be if an establishment sets a rule where servers’ tips are collected and distributed among other members of the staff such as the cooks, dishwashers, and hosts. This also includes tip-outs, where employees who earn tips give a payment out of their tips, usually calculated as a percentage of that individual’s sales, to employees who do not earn tips.

Can Employers Participate in a Tip Pool?

Generally, employers cannot participate in a tip pool. This is also true of directors and shareholders of an organization. However, if an employer is a sole proprietor or partner in a partnership, and regularly performs, to a substantial degree, the same work as employees, then they are eligible to participate in the tip pool. This is also true of directors or shareholders of an organization.

In determining whether an employer, director, or shareholder regularly performs the same work as the employees, the amount of time spent doing that work and whether it is routinely performed will be looked at. The employer, director, or shareholder can also participate in the tip pool if they do not participate in the same work as tip-pool-sharing employees at their establishment but perform work that is typical of other employees in the industry. This may be the case if they are the only person working in a certain role in that establishment, but at other establishments, that role typically takes part in the tip pool.

Can Employers Deduct or Withhold Tips For Mistakes?

Employers are not allowed to withhold or deduct tips if an employee makes a mistake, breaks glassware, spills drinks, or otherwise causes losses. This is not a permitted purpose under section 14.2 of the ESA. Additionally, as tips are not considered wages and are subject to slightly different rules, section 14.2 of the ESA does not allow employees to authorize deductions from their tips. For example, employers and employees cannot make agreements that waive an employer’s other obligations under the ESA in exchange for a deduction from an employee’s tips.

How Should Tips Be Distributed?

The specific policies regarding tip pools, tip outs, and tip distribution at an establishment are up to the discretion of the employer. As long as their organization’s tip policy follows the rules of the ESA, employers are free to establish a policy as they see fit.

Employers can make decisions regarding which employees take part in a tip pool and what proportion of the tip pool goes to each employee, the method and timing of tip pool distribution, and the process for changes to the tip pool policy.

Future Developments

The Legislative Assembly of Ontario is currently considering Bill 149, Working for Workers Fourt Act, 2024. If passed, it would make minor changes to the tips and gratuities section of the ESA.

These changes include:

• Inclusion of method and place of payment provisions for employees’ tips
• Amendment of the provisions on employer, director, or shareholder inclusion in the tip pool to require a posted copy of the establishment’s policy
• Amendment to require retention of a copy of any previous tip pool policy for three years after the policy is no longer in effect

Read More: The Law of Tips in Ontario.