Is the new Ontario Tip Law a good thing? Maybe not.

There’s been buzz again about the bill to ban employers from taking a share of tips. While Michael Prue was defeated, the bill has been revived by the Liberal MPP who beat him. There appears to be broad support as it heads off to committee for discussion. The basic premise is the “employers” cannot take a share of tips from staff who earns them.

Is there a problem?

Tip pooling is ubiquitous in the restaurant industry. Tipping has created significant wage inequity within restaurants and many managers create a pool from which non-tipped employees are topped up. The vast majority of the pooled tips go to hosts, bussers and kitchen staff. There are instances in which managers are also given a share of tips and even fewer instances in which ownership takes a share. While the original bill did not explicitly talk about tip pooling and tip outs for other staff. The current iteration does allow for tip outs but precludes employers from taking a share.

It isn’t clear in the legislation what constitutes an “employer.” It makes sense that managers get a share of tips if they are active in service and help create value. There are also instances in which an owner is active in service and may merit a share. Its worth noting that most of the servers we’ve surveyed don’t begrudge their managers getting a share and some even think its ok for ownership. It is likely specific to the situation. Who can and can’t get a share needs to be very clear.

Other reasons for the house to get a share are more contentious. Some restaurants take a share to cover dine and dashes. Others for breakage. From my perspective that’s a stretch but it gets to the core question of who “owns” the tip. Conventional wisdom would say the server but if the owner can require a tip out as a condition of employment that’s no longer clear. Another reason given is to cover credit card fees. I am really sympathetic to this one. Restaurants have to have significant quantities of cash on hand to pay out tips. The vast majority (over 90%) of restaurant transactions are on credit card. Restaurant credit card fees vary but are often between 2% and 4%. If a server makes $100 a night in tips (not an unrealistic number) it costs the restaurant $2-$4 just to collect and payout the tip (that the server says they own). Over 200 shifts (a full time job) that is up to $800 and ten staff that’s $8,000 per year out of pocket (along with having to withdraw cash and keep it on site) to give them their money.

There are situations in which employers are skimming tips from servers just because they can. I’ve been told, for example, of a number of all you can eat sushi places (just an example and this is anecdotal) at which management keeps most or all of the tips – often exploiting new immigrants who don’t know the rules. We’ve also heard horror stories about spas in which ownership takes the entire tip from employees. It is my expectation that it is these cases that the legislation is targeting.

Will it work?

Tips are a management nightmare. There are abuses. There is a movement to stop the practice and have higher prices or service charges that allow managers to pay more equitably and reduce other operational issues that arise from tipping. Tip pools and tip outs are an attempt to do this without getting away from tipping. This legislation may actually complicate that process. I’m not sure that’s a good thing. It is likely an inadvertent side effect but unhelpful.

It’s not clear to me how they will enforce this. If governments will require more detailed accounting and receipts to ensure that owners aren’t getting a share of tips. That seems to be inviting detailed records which are perfect for the CRA (who I am surprised have never gone after tips more aggressively) to start asking for withholding. In California the taxman requires restaurants to report all credit card tips to ensure they are reported by the server.

Might some owners say that they are not willing to pay credit card fees so will no longer accept tips on credit card? It is unlikely (it is after all still about the customer experience) but it’s possible. Research suggests that cash tips are lower than credit card tips so this wouldn’t help servers.

The owners who are looking to screw servers will find ways to do it. If they can’t take tips they will find ways to collect fees. In a worst case scenario they will exploit the current no tipping trend and, for reasons different from most, either institute a service charge or a price increase. They can announce that tipping is no longer required because hospitality is included. They have the legal right to do this and the cover of significant media attention to do it. It might be for the wrong reasons (and actually hurt the no-tipping momentum) but it would be a way to control all the tips and circumvent the new law.

It’s worth thinking this through carefully. I’m not convinced that the intention will be met by the execution.

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