According to a recent Federal Court of Appeal decision, employers who receive electronic tips and gratuities from customers (e.g. from debit and credit transactions and gift cards) and pass them on to their employees may be required to pay CPP and EI premiums on those tips and gratuities. This could have far-reaching consequences for hair and nail salon, spa, pet grooming, restaurant, café owners and any other business owner who employs individuals who receive electronic tips from their customers.
In Ristorante a Mano Limited v The Minister of National Revenue (2022 FCA 151), the Court held that cash tips did not attract CPP and EI premiums; however, electronic tips (i.e. credit card, debit card, or gift card) that are collected and then disbursed to the employee do. The difference, the Court found, was that the electronic tips became the property of the employer, as they were deposited in the employer's bank account and commingled with their other funds. Once these tips became the property of the employer, the electronic tips qualified as "contributory salary and wages of the employee . paid by the employer" under s.9(1) of the Canada Pension Plan ("CPP") and "insurable earnings" under s 67 and s 68 of the Employment Insurance Act ("EIA").
This decision relies on the fact that both the CPP and EIA are concerned with amounts "paid by the employer"; the EIA explicitly requires that the amounts be paid "in respect of" the employment, and the CPP implicitly adopts the same stance. The Court affirmed that "in respect of" must be given a broad interpretation and found that electronic tips are received "in respect of employment". In other words, without their employment, the servers would not receive tips.
The employer tried to argue that the monies never became their property and that they merely transferred the tips to the employee. The Court disagreed and found that because the tips were deposited in the employer's bank account and commingled with its other funds, the tips became the property of the employer. Thus, it was the employer who was found to be paying the tips to the employee, rather than the customer, thereby qualifying the monies as insurable earnings for the purpose of the CPP and EIA.
Of note, this decision only applies to monies that are temporarily in the employer's possession. Where electronic tips are offset with cash received by the employee-as is typical of restaurants-employers are only required to pay premiums on the payment actually flowing from the employer to the employee. This can result in some unexpectedly complex calculations. For example, Alex works as a server at a restaurant. One night, they receive $130 in electronic tips, and one table pays $20 for their meal in cash, plus a $5 tip, directly to Alex. When Alex cashes out at the end of the night, the electronic tips ($130) are offset by the cash Alex owes to the restaurant for the patron's $20 meal, resulting in net payment owing to Alex of $110. The employer must pay CPP and EI premiums on the $110 payment, rather than on the full $130.
The Court clarified that this does not (yet) apply to cash tips, nor tips withheld for "tip-out" payments made to management, support staff, or kitchen staff. Nevertheless, this decision could carry significant consequences for employers who are not currently paying CPP and EI premiums on electronic tips and gratuities. It remains to be seen whether this decision will be appealed to the Supreme Court.
Special thanks to Jeremy Wright, Articling Student, for his assistance in researching and drafting this blog post.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
