Laws Required to Swat Employers' Hands from Employees' Tip Jar

BY ANA KRALJEVIC, LAWYER, WISE LAW OFFICE

In many workplaces in the service sector, tips are pooled together and, at the end of a shift, divided up among the workers on duty during that shift.  It is common practice for the employer to take a portion of the tip money in a practice known as “tipping-out,” wherein the employees are forced to pay a fixed portion of their tips to the managers and owners. The oft-cited justification is usually to recoup the losses that should be absorbed by the employer anyway such as the cost of broken dishes or worn-out equipment.

But can employers legally do this?  And is there a justification for doing so?  The answer to the first question is yes, they can, in Ontario at least.  Employment rights advocates would answer with a resounding no to the second question, and for strong policy-based reasons.

Tips form a mainstay of the income for employees in the hospitality and service industry.  Indeed, it is the reason why minimum wage standards in these sectors are lower than in most other industries.  Employers know that these workers rely on tips for their livelihood, and the law does to – to some extent.  However, Ontario’s employment laws are checkered and inconsistent and there is no protection afforded to the treatment of tips for these employees.  Given that many of these workers earn a living wage that places them below or very close to the poverty line - the lack of legal protection with respect to this employment issue places them in financial peril.

It is clear that Ontario law is in need of reform.  Currently it is lagging behind many other provinces that have already implemented legal protections in this area.  Quebec specifies that tips belong to the employee as of right and must not be intermingled with wages otherwise due to the employee.   Other provinces, including New Brunswick, Newfoundland and Labrador, and Prince Edward Island have legislation that prohibits employers from seizing an employee’s tips and gratuities.

A look at the statutory provisions and regulations of the Employment Standards Act itself, and how it compares with companion legislation reveals many inconsistencies.  According to s. 11(1) an employer “shall pay all wages earned during each pay period,” and s. 13(1) further adds, unless otherwise provided for in the ESA, “shall not make a deduction from an employee’s wages or cause the employee to return his or her wages.”  Sounds good so far, but then s. 1(1) specifically excludes “tips and other gratuities” from the definition of wages” leaving this vital source of income free for the taking by the employer.

“wages” means,

(a) monetary remuneration payable by an employer to an employee under the terms of an employment contract, oral or written, express or implied,

(b) any payment required to be made by an employer to an employee under this Act, and

(c) any allowances for room or board under an employment contract or prescribed allowances,

but does not include,

(d) tips and other gratuities,

If tips and gratuities are excluded from the definition of wages, then how are they to be characterized in terms of income for the purposes of the ESA? It would seem that the drafters barely turned their minds to it except to the extent that they decided to exclude it from the definition of wages altogether.  However, this apparent intent to exempt tips and gratuities from the definition of wages is difficult to reconcile with the regulation under the ESA that sets the minimum wage for employees serving liquor below the legislated standard minimum wage (O. Reg 285/01).  This regulation specifically sets the minimum wage for employees who serve liquor in the course of their employment at $8.90 an hour, as opposed to the $10.25 legal minimum which applies to most other employees.  

Thus, although the ESA remains silent on how to formally characterize tips, it has implicitly recognized that a bartender’s wage must be supplemented with some other income source so as not to render this provision legally void.  To add even more fuel to the fire, the Income Tax Act recognizes tips and gratuities as taxable income.  Tips that are given to the employee from a customer must be declared on line 104 as “direct tips.” 

The Policy Rationale for the Legislative Protection of Tips and Gratuities

In response to challenges made against the practice of “tipping-out”, restaurant managers have tried to argue that it is necessary for paying dishwashers and other staff who do not receive tips in the course of employment.  However, the outcry against “tipping-out” was never about paying staff, it was always about the employer taking what rightfully belongs to the employee. 

No matter how the employer may try to spin it, most customers pay a gratuity in the expectation that it will go to the employee, not the employer.  A tremendous power imbalance exists in the employer-employee relationship and the retention of gratuities by the employer constitutes a mishandling of this bargaining power.

It is the employer who stands to profit the most from the success of the business while employee salaries stay more or less the same, regardless of performance.  The only exception being when the employee does a particularly good job in the hospitality/service industry and a patron rewards that performance with a tip.  As a matter of sound business practice, it makes little sense for the employer to take the tips earned by minimum-wage employees, which usually constitutes a nominal percentage of the overall profits, and remove the only economic incentive for employees to do good work.  Good workers drum up good business, which drums up more profit for the employer.

The legislation needs to be amended and should encompass workers across a wide spectrum -including hairdressers, valets, and hotel workers – who all rely on tips and gratuities as a significant portion of their incomes.  

Michael Prue, NDP MPP for Beaches East-York, has been lobbying for the passage of a law that would amend the ESA to prevent business owners and management from skimming off tips.  Prue’s Bill 49, the latest of a series of permutations that the bill has undergone since it was initially introduced, passed second reading in May 2013.  Despite its popularity, the bill has died on the order paper before it could receive Royal Assent and become legally enforceable.  On his website, Michael Prue has demanded that the government stop stalling and take action - “the time is now…will this bill be called for third reading by this government?”

The time for the provincial government to recognize the plight of minimum wage workers and formally address their concerns is long overdue.

- Ana Kraljevic, Toronto

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