Restaurants provide many jobs to people just starting out in their careers. 22% of Canadians say they got their start in a restaurant or food service industry. Margins in the food industry are slim, so wages are typically low; however, thanks to tipping, many people who work as a server or bartender say the tips more than makeup for it.
There are as many types of tipping policies and agreements as there are restaurants, but there are some laws that all must follow. Major news is the law that is coming into effect June 2016 which applies to tip collection and distribution by employers. The other pertains to payroll tax obligations that employers must comply to when collecting and distributing tips.
Restaurant owners will no longer be able to take a portion of employee tips
As of June 2016, the ruling under the Protecting Employees’ Tips Act, says that it is unlawful for restaurant employers to take a percentage or hold back any of their employee tips. However, an employer can deduct the expense amount of the credit card charge from the tip owing to the employee if that tip was collected on a credit card purchase. Restaurants that have a tip pool agreement, employers can still manage and distribute the money, but cannot receive a share of it; however, when an employer contributes to the tip pool by doing the same work as others, he/she may share in the pool.
The law says that if there is a collective agreement that states otherwise, this legislation does not apply.
Employers are required to deduct CPP and EI premiums for Controlled Tips
The Canada Revenue Agency (CRA) requires all restaurant owners to deduct and remit all CPP contributions and EI premiums, along with their portion, on collected employee service tips.
However, not all tips employees receive are subject to deductions. The law applies to only the service tips collected in a controlled way and then distributed to the employee. These are considered pensionable or insurable earnings and referred to as controlled tips.
Employers are not obligated to deduct any payroll taxes on tips employees receive directly from the patron. Examples of Direct Tips include cash tips left on a restaurant table or bar, optional tips received from patrons on a credit card payment for a dinner bill, bellhop tips, or other similar service industry tips where the employer has no control over the amount collected.
What are Controlled Tips?
Tips are applied as a mandatory service charge on a customer’s bill
An automatic service charge is added as a percentage of a customer’s bill to cover tips.
Employers give employees tips based on a tip sharing formula
Employers will offer a portion of business income to employees as a tip; collecting the money, and then expensing it at a later date in the form of pay.
Cash tips are received as part of a tip sharing pool; deposited into the business bank account, and then later paid out to employees.
Our team of payroll experts have extensive experience in the restaurant industry and available to help you understand more about how the new tipping law and other payroll deductions apply to your business.