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?
