Tips and Gratuities explained for employers

Employees in various industries rely on receiving tips from customers. For many, it’s one of the major benefits of working in these industries. Service based jobs such as servers, waitstaff, taxi/rideshare drivers, baristas, and valets all commonly receive tips on top of their basic wages.

It’s crucial for employers and managers to understand the different types of tips and how to manage them to ensure your staff receive them fairly. Failure to pay your staff correctly could result in a breach of the applicable employment standards legislation.

In this guide, we’ll discuss what tips and gratuities are, when you’re allowed to withhold them, and what the different provincial legislations say regarding tips in Canada.

How do tips and gratuities work in a business?

Tips and gratuities are voluntary payments left by customers to your employees. They’re a form of gratuity, typically left as a ‘thank-you’ after an outstanding service has been provided, for example, a server in a restaurant.

However, as an employer, you need to be aware of the rules and guidelines that surround distributing and handling tips and gratuities; they’re often regulated by provincial legislation, and as per the Canada Revenue Agency (CRA), tips and gratuities received by employees are classed as income.

What are the different types of tips and gratuities?

There are two types of tips that you need to be aware of:

Controlled Tips

These are tips and gratuities that are managed by the employer before reaching employees. Examples of these are:

• Automatic service charges that are part of the customer’s total bill.

• An employer collecting all workers tips, putting them together and distributing the tips equally to employees. This is known as tip pooling.

• Tips applied to credit or debit cards that are given electronically to employees.

Deductions must be made on controlled tips for Canada Pension Plan, Employment Insurance, and income tax. These deductions must be documented and included on the employee’s T4 form.

Direct Tips

Direct tips are paid directly to the employee, and the employee is responsible for reporting these to the CRA. Examples of these are:

• A cash tip that is given to the employee directly by the customer.

• Tip pools where employees handle the distribution themselves.

• Tips charged to credit or debit cards that are routed straight to the employee, not handled by the employer.

Employers do not need to make CPP, EI or income tax deductions on direct tips.

Is It Illegal to Take Tips from Employees?

Across Canada, the rules on withholding tips vary by province. In many jurisdictions, failing to pay staff their tips correctly can expose you to legal claims—and even where it isn’t prohibited by law, unfair handling of tips can damage employee morale and retention.

There is different provincial legislation that outlines the laws surrounding tips and gratuities. Make sure you’re aware of the legislation for the area in which you’re based:

Ontario Tips and Gratuities

Tips in Ontario are regulated by the Employment Standards Act, which has received amendments through various acts across several years.

Protecting Employees’ Tips Act, 2015

This act states that employers cannot withhold, make deductions from, or make their employees return any tips they receive. Employers can only withhold tips if they will be later redistributed in a tip pool.

Working for Workers Four Act, 2024

A recent amendment to the ESA was made through Bill 149, regarding how tips can be paid out to employees, and mandates that if a tipping policy exists, that it must be posted in at least one conspicuous place for employees to see.

Alberta Tips and Gratuities

Unlike in Ontario, tips and gratuities in Alberta aren’t considered wages under the Employment Standards Code (ESC), so they are not subject to the same provincial rules.

Employees must still report tips as income to the Canada Revenue Agency, and because tips can be an important part of someone’s income, having a clear, fair tipping policy is key to avoiding disputes and supporting staff retention.

Potential future changes to AB legislation

In the past, proposals such as Bill 210 aimed to amend the ESC’s tipping rules but did not pass. Employers could reasonably expect further proposals in the future. Following a clear and fair tipping policy now will make it easier to comply if the ESC changes.

British Columbia Tips and Gratuities

Under British Columbia’s Employment Standards Act, employers in British Columbia are prohibited from withholding tips and gratuities, unless required by law (such as a court order to garnish wages).

You can only hold employees’ tips if they’ll be redistributed as part of a tip pool—but they must still be paid out.

Employers may not take a share of the tips unless they do similar work to the employees who are receiving them.

Implementing a tipping policy in your business

To remain compliant, you may decide that implementing a tipping policy is the next logical step for you and your business, here’s where to start.

When to implement a tipping policy

It’s a good idea to put a tipping policy in place whenever you hire staff in roles that receive tips or introduce new ways for customers to tip, such as electronic payments. Having a clear policy from the start ensures fairness, transparency, and compliance with provincial rules and tax obligations.

Best practices for a tipping policy in your business

Here’s what you should keep in mind when creating the tipping policy for your business:

• Know your provincial rules: Understand how tips are regulated in your province and follow the applicable legislation.

• Clarify tip handling: Distinguish between tips you control, and tips paid directly to employees; apply deductions only where required.

• Be transparent and fair: Clearly document how tips are pooled and distributed, and ensure only eligible employees receive tips.

• Value employees’ income: Recognize that tips can be an important part of earnings; fair practices build trust, morale, and retention.

• Stay tax-compliant: Remember all tips are taxable income, and controlled tips processed through payroll require proper deductions.

• Make your policy accessible: This would ensure compliance if your business operates in Ontario, while also being a high standard in other provinces. This will reduce confusion for your employees.

Need help with your tips and gratuities?

Running a business and managing policies, employee relations and everything in-between is difficult; from processing correct tip amounts, ensuring compliant payouts to employees in a timely manner, and handling any disputes that may arise, but BrightHR is here to help.

We help you manage tipping in your business in line with your provincial employment standards. BrightBase, our library of compliant document, checklist and policy templates are drafted by experts with decades of experience and readily available for you to use.

If you have a question on how to handle challenges with tipping in your business or would like to speak to a qualified professional about a people management issue, lean on BrightAdvice, our 24/7 expert HR advice line.

Book a free demo online today, and find out how BrightHR can help your business with all of your HR efforts.