Are employers allowed to collect, deduct and distribute tips?
Subject to certain protections for workers, yes, employers are permitted to collect, deduct and distribute tips. Ontario’s Employment Standards Act gives employers the right to pool tips or distribute them among other staff and make other withholdings and deductions.
Nevertheless, subject to a few caveats discussed below, Part V.1 of Ontario’s Employment Standards Act ensures that workers must receive the tips and gratuities that are given to them or intended to be given to them. In short, workers in Ontario have a right to keep the tips they earn (subject to tip pool percentages) no matter if they receive them directly from a customer (i.e. waiters and bartenders etc.) or if their tips get pooled with other staff (i.e. busboys, barbacks, dishwashers, etc.).
When can an employer collect, deduct and distribute tips?
Part V.1 of the Employment Standards Act does provide for very limited circumstances in which an employer may:
- withhold tips and gratuities from workers, or
- make a deduction from tips and gratuities, or
- make their workers give their tips and gratuities to away.
A tip pool is a collection of tips collected from employees and redistributed to other employees. A tip pool is permitted in Ontario.
Tip pools include tip outs. For instance, employers may require a waiter to tip out a certain percentage of their tips or sales to the bartender who prepared drinks for them. This is lawful in Ontario.
Employers have the discretion to determine whether there is a tip pool in the workplace, who will participate in a tip pool, how the tip pool will be distributed, how much a percentage is tipped out and how and when to vary or change the tip pool. Tip pool arrangements need not be in writing.
What about managers?
Managers can generally participate in tip pools. In order to participate, managers are not necessarily required to do the same work as those who participate in a tip pool arrangement. The employer has much discretion in regard to managers and tip pools.
What about employers?
Generally, employers (especially large companies) are not allowed to participate in tip pools, but employers or directors or shareholders are entitled to keep the tips and other gratuities that they earn themselves. For instance, if the owner of a restaurant waits tables one night, then she gets to keep those tips she earns waiting tables that night.
Likewise, an employer who is a sole proprietor or a partner in a partnership or a director or a shareholder may share in tip pools 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 tip pool.
Employers are permitted to deduct tips to withhold for income tax, Canada Pension Plan (CPP) contributions and employment insurance (EI) premiums. After all, tips and gratuities are “income” for which normal payroll deductions apply.
In addition, employers are permitted to withhold tips if a court order authorizes it (for example a garnishment order or child support etc.).
Are employees allowed to deduct tips for any other reason?
No, an employer cannot collect or withhold tips for any other reason other than the above-noted points. Other deductions from employees’ tips or other gratuities (other than those noted above) are illegal even if the employee provides a written authorization or consent. For instance, employers are not allowed to make deductions from employees’ tips and gratuities for things like breakage, spillage, losses or damage.
When do employers have to distribute tips?
There is no law that says when employers must distribute tips and gratuities to employees. However, if an employer does not distribute tips and gratuities in a reasonable time frame than that may be considered an illegal withholding of tips and gratuities under the Employment Standards Act.
How to complain about unpaid tips?
Contact the Ministry of Labour to make a complaint about unpaid or wrongly deducted tips. Consider contacting a lawyer if your employer owes a large amount in unpaid or wrongfully deducted tips.
Do employees have to pay taxes on tips?
All tips and gratuities are considered “income” and therefore employees must declare all tip and gratuity income on their tax return and pay the applicable tax.
In addition, tips are subject to CPP and EI deductions.
If an employee does not pay taxes on their tips, and the CRA finds out, then they will owe interest on all back taxes.
Moreover, underreporting income will mean a worker qualifies for fewer benefits in the future such as significantly reduced CPP payments and EI entitlements. Furthermore, failing to pay taxes on tips and gratuities can lower your “official” income such that you may not be eligible for future fringe programs such as, for example, the CERB which was a welfare benefit during the coronavirus time.
The CRA has a Voluntary Disclosures Program that gives you a second chance to correct past tax returns if you didn’t properly declare your tips and gratuities before. In some cases, you may be eligible for relief from penalties that you would otherwise have to pay. For more information about this program, go to this website: Voluntary Disclosures Program – Introduction.
Jeff is a lawyer in Toronto who works for a technology startup. Jeff is a frequent lecturer on employment law and is the author of an employment law textbook and various trade journal articles. Jeff is interested in Canadian business, technology and law, and this blog is his platform to share his views and tips in those areas.