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The Peculiar Legal Treatment of Tips in Employment Standards Law

There’s  a story in the Star today about a grievance filed by unionized employees of the Four Seasons, who have been terminated upon closing of the hotel.  They are mad because they feel the employer is ripping them off in light of their many years of service.  One 70 year old, 33 year service employee will receive $21,000 in ‘severance’, reports the article.  The employer argues that “in legal terms” it is being generous, by which it means it is giving the workers more than the minimum required by the ESA.

An interesting issue in this story is the fact that the employer based its calculation on the employee’s base wage, excluding any estimate for tips.  Tips amount to a large portion of earnings in the hotel and restaurant industry.  For example, the story reports that one worker earned $80,000 last year, though his base wage was only $19000 of that amount.   If accurate, this means his income is 3/4 tips, 1/4 base wage.  The employer’s position appears to be (based only on what I read in the story) that only base wage counts in assessing the amount of severance pay required (the $19,000) and not tips.

Is that true?

I can’t say that I have ever had to consider this issue before. Let’s work through it together, and please anyone correct me if I’m wrong about this.

1.  Begin by looking at what ‘severance’ pay means. Section 64 says that an employee who is severed must be paid ‘severance’ pay.  Four Seasons will have a payroll of greater $2.5 million or more, so any employee with greater than 5 years service would be entitled to severance pay.  Section 65(1) says that the amount of ‘severance pay’ is calculated by “multiplying the employee’s regular wages for a regular work week” by the number of years served, or parts thereof, to a maximum of 26 weeks (s. 65(5)).

2.  Now ask what “regular wages” means.  Section 1 gives us a definition:

“regular wages” means wages other than overtime pay, public holiday pay, premium pay, vacation pay, termination pay and severance pay and entitlements under a provision of an employee’s contract of employment that under subsection 5 (2) prevail over Part VIII, Part X, Part XI or Part XV;

3.   On we go.  What are ‘wages’?  We also have a definition for that in Section 1.

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,

4.   The exclusion of tips from the definition of wages in section seems to seal the deal, doesn’t it? In fact, the way the definition of wages is written, even if the employment contract expressly said that tips form part of an employees wages, for the purposes of the ESA, they would not, since the parties cannot contract out of the ESA’s very clear direction that tips are not to be included in the calculation of wages under the ESA, even if they are treated as wages under the contract.  Is that how you read this?  That is peculiar public policy, isn’t it?

If my quick reading of this is correct, and tips are not to be included for the purposes of counting wages under the ESA, then the next question is why?

What public policy is advanced by basing all entitlements to wages under the ESA on base wage, when everyone knows that tips form the majority of hospitality employees wages?

The one benefit the current rules have in their favour is simplicity.  It is easy to calculate a person’s wage rate, but may be more tricky to assess how much  a person’s weekly tips are.  Is that a justification for the model in your view?  In the Four Seasons’ case, according to the article, the tips were often included directly in bills and were distributed as a matter of course to the employees, and were included directly on their pay stubs.  So there isn’t much issue about calculating the tips.  They appear to have been just a regular part of their earnings.

Consider the following. The ESA itself recognizes that some employees’ earnings are principally based on tips.  This appears in the definition of ‘minimum wage”. Look at Section 5(1) of Regulation 285/01.  It says that the minimum wage for most employees is $10.25 per hour, but  ”For an employee who, as a regular part of his or her employment, serves liquor directly to customers, guests, members or patrons in premises for which a licence or permit has been issued under the Liquor Licence Act, $8.25 an hour.”   Why do liquor servers get a lower wage?  Answer:  Because the government knows that most of their earnings come from tips, not base wages.

Moreover, tips are considered part of employee income for the purposes of employment insurance legislation, since under Section 35(2) of the Employment Insurance Act, tips are treated as income’arising out of employment’.  If an employee or employer doesn’t know the exact amount of the tips received, a reasonable amount will be assessed.  (See discussion here).  Tips are also considered taxable income under the Income Tax Act (see discussion here).  So in general Canadian law treats tips as part of employees income for most purposes, except when it comes time to calculate severance pay under the ESA.

Do you find that curious?  The state carves out a special category of low wage worker in minimum wage laws because their income is mostly in the form of tips, requires employees to pay taxes on tips as if they are part of their regular earnings, but then suddenly ignores those earnings altogether when it comes time to calculate the amount of severance pay to which the employee is entitled?

Is that a reasonable and fair system to the hospitality workers?  If so, why?  If not, what alternative model would you suggest that is fairer?



4 Responses to The Peculiar Legal Treatment of Tips in Employment Standards Law

  1. 2much Reply

    May 31, 2012 at 4:05 pm

    it depends on what the definition of “tips” is

  2. Dennis Buchanan Reply

    May 31, 2012 at 9:58 pm

    It strikes me that it was open to the union to bargain for better termination entitlements. At common law, there’s little doubt that compensation for lost tips could be claimed throughout the reasonable notice period.

    But that doesn’t address your criticism that the ESA treats servers unfairly.

    The CRA only wishes that it were merely ‘tricky’ to calculate servers’ weekly tips. In many cases, it would be next to impossible for the employer to do. Cash tips remain common enough, and in restaurants where there is no tip sharing, the cash goes straight from the table into the server’s pocket, without any need to account to the employer. Often the servers themselves have a hard time putting a number on it.

    Perhaps if we required employers (and servers) to keep track of tips, it might become workable to remove that exclusion. Many servers would resist that because of the tax implications, though. (Well, tax *evasion* implications.) And it makes it pretty costly for employers when they have to compensate an $8.90 an hour employee ($8.25 was 2009-2010) at 4x (give or take) their usual wage rate.

    Interesting side effect: If tips were ‘wages’ within the meaning of the ESA, then tips alone could satisfy the minimum wage requirements for most servers without any contribution by the employer.

  3. 2much Reply

    June 1, 2012 at 6:00 pm

    doesnt the esa state that it does not prevent one from claiming civil damages; which would most likely include tips?

  4. Andrea Reply

    May 9, 2013 at 8:20 pm

    Thinking this through, it may be because even if gratuities are collected by the employer and delivered to employees through a pay cheque, the money is from customers, not the employer, and therefore not wages. The next question is, if payroll taxes are calculated on tips, why should the employer’s payroll taxes increase due to money the employee received from a customer? I can see the employer withholding tax from the employee’s earnings for CPP, EI, income tax. But why would the company remit on this money, including EHT?

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