Tips and other gratuities
A “tip or other gratuity” is:
- a payment voluntarily made or left by a customer to an employee
- a payment voluntarily made by a customer to the employer for employees
- a payment of a service or similar charge imposed by the employer
Where a reasonable person would believe that the payment would be kept by an employee or shared among employees.
Whether a payment or service charge is a tip or other gratuity will depend on the circumstances.
Examples of tips and other gratuities include:
- money left on a table for a server
- a tip added to a credit card or debit card payment for an employee
- gratuity or service charges imposed by banquet halls or other establishments
Employers can decide if tipping is allowed in their businesses. If tipping is not accepted, the employer should make it clear to the customers that tips and other gratuities will not be accepted by employees or the employer.
There is no requirement under the Employment Standards Act, 2000 (ESA) for employers to establish a regular period for distributing tips and other gratuities to employees. However, the failure of an employer to distribute tips and other gratuities within a reasonable time frame may constitute the withholding of those tips and other gratuities. Whether a delay in the distribution of tips and other gratuities to employees is reasonable will depend on the circumstances.
Employers must distribute tips and other gratuities to employees in cash, cheque or direct deposit (which includes Interac e-Transfer). The distribution of tips by pre-paid credit cards is not permitted.
Tips and other gratuities are not considered wages for the purposes of the ESA. They are not included when calculating minimum wage, termination pay, severance pay, vacation pay, public holiday pay or the regular rate used for calculating overtime pay.
The right to keep tips and other gratuities
Before June 10, 2016, the ESA did not cover tips and other gratuities. This means that employers were not prohibited from withholding, making deductions from, or making an employee return their tips to the employer if the tips were earned and received before June 10, 2016.
As of June 10, 2016, an employer generally cannot withhold, make deductions from, or make an employee return their tips and other gratuities except as permitted by the ESA.
An employer is also prohibited from making deductions, etc., from their employees’ tips and other gratuities for such things as spillage, breakage, losses or damage.
If an employer is found to have violated the prohibition against taking an employee’s tips and other gratuities, the amount wrongfully kept will be considered a debt owing by the employer to the employee and is enforceable under the ESA as if it were wages owing to an employee.
An employee’s ability under the ESA to keep tips and other gratuities, except in limited circumstances, is an employment standard. An employee cannot contract out of or waive this employment standard, even if the employee agrees to do so in writing or verbally.
For example, an employee cannot agree to:
- give the employer all of their tips and other gratuities in exchange for a higher rate of pay
- waive the right to minimum wage in exchange for keeping all or a higher percentage of their tips
- give the employer a certain percentage of their tips other than for a tip pool (e.g. tipping out to “the house” to cover things like spillage, breakage, losses or damage, etc. is not allowed.)
Deductions from tips and other gratuities
Only three kinds of deductions can be made from an employee’s tips and other gratuities:
1. Statutory deductions
Certain statutes may require an employer to withhold or make deductions from an employee’s tips or other gratuities. The most frequently encountered deductions authorized by statute include income taxes, employment insurance premiums and Canada Pension Plan contributions.
An employer is not permitted to deduct more than the applicable statute allows and cannot make deductions if the money is not remitted to the proper authority (e.g., Canada Revenue Agency).
2. Court orders
A court order may indicate that an employee owes money to the employer or to someone else, and that the employer may make a deduction from the employee’s tips and other gratuities to pay what is owed.
If an employee owes money to someone other than the employer, a court order may direct an employer to make a deduction from an employee’s tips and other gratuities and send the money to the court clerk or other official, to be paid in turn to a third party. The employer is not allowed to make this deduction if the money is not sent to the court clerk or other official specified in the order.
3. Pooling of tips and other gratuities
An employer may withhold or make deductions from an employee’s tips or other gratuities if the amount collected will be redistributed among some, or all, of the employees at the workplace. This practice is commonly known as tip pooling.
A tip pool is a collection of employees’ tips that is redistributed by the employer to some or all employees. Tip outs are payments from one employee to another employee, generally by way of contributions to a tip pool and usually according to a formula established by the employer. Examples would be an employer requiring a server to "tip out" a busser or kitchen staff, one per cent of tips the server received or requiring a server to contribute the equivalent of two per cent of sales to a tip pool. That money is then distributed among several staff members.
In a tip pooling scenario, an employer has three servers and their tip pool arrangement requires servers to contribute five per cent of their sales into a tip pool to be distributed among bussers, bartenders and hostesses. Server 1 has $1,000 in sales during their shift and makes $150 in tips, their contribution to the tip pool (tip out) would be $50. Server 2 has $100 in sales on their shift and makes $20 in tips. Server 2’s contribution to the tip pool (tip out) would be $5. Server 3 has $500 in sales during their shift but receives $0 in tips. Server 3’s contribution to the tip pool (tip out) would be $0 because tip pooling amounts cannot come from any source other than tips. In this scenario, the tip pool amount that can be distributed among the bussers and hostesses would be $55.
Employers can decide if there will be a tip pooling terms in the workplace, including who will participate, and how it will be distributed. For example, the employer can determine:
- How much each employee is entitled to, e.g., whether the amount received is based on number of hours worked or the employee’s position;
- When and how the tip pool shares will be distributed to employees, e.g., weekly or daily, in cash, cheque or direct deposit (which includes Interac e-Transfer).
- How and when tip pooling terms should be changed or varied, e.g., adding or removing employees to and from the tip pool, changing the percentage received by employees, or cancelling the tip pool, etc.
Tip pool terms may be written or oral. Under the ESA, employers do not need the employees’ agreement to make deductions from their tips and other gratuities if the amount will be redistributed as part of a tip pool. Participating in a tip pool could be a condition of employment.
It is important to note that the terms of a tip pool cannot be enforced under the ESA. Only an employee whose tips or other gratuities were withheld or deducted can have an order issued on their behalf under the ESA. Other employees who did not have tips taken or deducted by the employer but would have normally received a percentage of the tip pool cannot have an order issued for those amounts.
Managers’ and employers’ participation in tip pooling arrangements
Managers are allowed to keep the tips and gratuities they receive themselves, and generally may participate in tip pooling arrangements if their employers’ policy permits them to do so.
Employers are allowed to keep the tips and other gratuities that they receive themselves.
An employer cannot share in a tip pool unless:
- They are a sole proprietor, partner, director or shareholder in the business;
- They regularly perform to a substantial degree the same work as:
- some or all of the employees who share in the redistribution,
- employees of other employers in the same industry who commonly receive or share tips and other gratuities.
- some or all of the employees who share in the redistribution,
If a collective agreement that came into force before June 10, 2016, contains a provision that addresses the treatment of tips and other gratuities, the provision of the collective agreement prevails, even if it conflicts with the ESA. If a collective agreement expires but the provision that addresses the treatment of tips and other gratuities remains in effect, it continues to prevail until the collective agreement is renewed or a new agreement is ratified.
Collective agreements that come into effect or are renewed after June 10, 2016, must comply with the tips and other gratuities provisions in the ESA.