If you run a restaurant or bar, in addition to their hourly wage, chances are your staff will receive tips from customers. There are two types of tips:
The term controlled tips refers to tips that an employer controls or possesses and then must pay to the employee. The following are some examples of controlled tips:
- the employer adds a mandatory service charge to a client’s bill to cover tips;
- the employer adds a percentage to a client’s bill to cover tips;
- tips that are allocated to employees using a tip-sharing formula determined by the employer;
- tips that an employer includes in his business income, then expenses and redistributes to employees in the form of pay;
- tips that the employees turn over to their employer who then distributes them to the employees;
- cash tips that are deposited into the employer’s bank account and become, or are even commingled with, the property of the employer and then paid out to the employees.
Since these tips are controlled by the employer, the employer is considered to have paid these amounts to the employee. This means that CPP contributions and EI premiums must be deducted at source, if the employee is employed in pensionable or insurable employment or both.
Direct tips are paid directly by the customer to the employee. The employer has no control over the tip amount or its distribution. The employer is merely a conduit for the tip from the customer to the employee. The following are some examples of direct tips:
- a customer leaves money on the table at the end of the meal and the server keeps the whole amount;
- a guest gives a tip directly to a bellhop, door person, car attendant, porter, etc.;
- the employees and not the employer decide how the tips are pooled or shared among employees;
- a customer includes an amount for a tip when paying the bill by credit or debit card and the employer returns the tip amount in cash to the employee at the end of the shift. In exceptional situations the cash tips could be paid out the day after, for example, if there was not enough available cash on hand.
Direct tips are not subject to CPP contributions or EI premiums.
Click here for more tipping examples and more information on employer requirements.