Bargaining Away Tips

You may have read about the new restaurant in Parksville, BC (for those of you living east of the Rockies, that is a small town on Vancouver Island, home to the Tigh-Na-Mara resort and the annual Quality Food Canadian Open Sand Sculpting Competition) opening up at the Pacific Shores Resort. That, in and of itself, is not that newsworthy, but what is is that the restaurant, called Smoke and Water, will not allow tips. Instead, its wait staff will be paid “a living wage.” That wage is reported to be between $20-$24 an hour for servers and $16-$18 an hour for cooks.

You might be interested to know that the minimum wage in BC is currently $10.25 an hour, or $9.00 an hour for liquor servers. So cooks would normally earn $10.25 an hour and servers $9.00 in an environment that allows tips. This means that Smoke and Water is willing to pay a premium of about $7 an hour for cooks and $11-15 and hour for servers in order to attract servers to this non-tipping environment.

Is this a good deal? That depends on how much servers normally earn in tips. According to a CRA audit of server income, tips normally amount to between 100 to 200 percent of wage income (and as high as 400%). This means that in a tip environment you can expect to earn $9 an hour in wage income plus between $9-$18 an hour in tip income. But wait, you can’t just compare this amount to the wage premium being paid by Smoke and Water. This is because the wage premium being paid does not account for payroll taxes and withholding taxes.

Let’s take an example. Assume we have a server that makes $24 (the upper amount) an hour at Smoke and Water and works 35 hours a week. That is a weekly income of $840 gross. Assuming standard deductions, this employee’s net pay is $670.20.

Let’s compare that to the server who earns tip income. Assume that server makes minimum wage of $9 an hour and works 35 hours a week. That is a weekly income of gross income of $315, or a net amount of $287.68. However, this employee also earns tips. If we assume that the tips amount to 200% of income, that is an additional $630. Now here is the kicker. We know from a CRA audit, as well as common sense, tip income is rarely reported for tax purposes. This means that this employee nets $917.68, nearly $250 more a week than the server at Smoke and Water. In fact under these assumptions, in order for a server to make more at Smoke and Water, under the assumptions stated here, that server earning tip income would have to earn less than 133% of their income in tips.

These calculations show that while the hourly wage being advertised by the Smoke and Water restaurant may appear generous, they may not be high enough to offset the loss of tip income by their staff.

There are, though, benefits to the employees at Smoke and Water. Their full salary is being used to calculate their CPP payments and RRSP contribution room (HT sksimon), and hence, benefits later on in life. While many teenagers and 20 somethings may not be appreciative of these things now, they will be later on in life. In addition, their full salary will be used to calculate their EI benefits, should they find that they need to claim EI. For the server making tips, they are only afforded the same treatment if (1) they chose to report their tips for tax purposes and (2) chose to have CPP and EI withheld on that amount.

The above also makes it clear that taxpayers should be advocating for all bars and restaurants, heck all service industries where tips are common place, to move to this business model of not allowing tips and instead paying a “living wage”. It means that these types of employees (those that earn tips) will pay the appropriate amount of taxes AND benefit premiums, putting them on a level playing field as all other employees and leading to at least an additional $1-2billion in tax revenues per year. That $1-2billion could be used to fund health care, schools, affordable housing, or child benefits. The opportunity cost of that lost revenue is, for many, substantial.

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11 thoughts on “Bargaining Away Tips

  1. Also reported income generates RRSP room.

    • Yes, will update. I did not mean to overlook that.

      • I wholeheartedly agree with your statement, “It means that these types of employees (those that earn tips) will pay the appropriate amount of taxes AND benefit premiums, putting them on a level playing field as all other employees and leading to at least an additional $1-2billion in tax revenues per year. That $1-2billion could be used to fund health care, schools, affordable housing, or child benefits. The opportunity cost of that lost revenue is, for many, substantial.”

        Four Billion are spent annually across Canada on tips, the potential revenue could be a huge gain for many underfunded programs in our beautiful Country.

        David Jones, owner/operator of Smoke ‘N Water (correct spelling).

      • Thanks David. Lots of eyes are on you. I truly hope it works out for you and the staff. We will be up there to check it out!

  2. Probably would have been good to base your direct comparison on $15/hour in tips (166% of minimum wage), since this is both closer to the middle of the “normal” range, rather than the high end, and would have made the difference between the two payment methods entirely attributable to tax differences.

    I’ll be interested to see how this plays out, and hope that the model spreads far and wide. I read an article about a year ago about a tipless restaurant in San Diego, and it was an interesting read about the impacts that the culture of tipping has on restaurant workers. I’m not sure tax implications came up, though, and if they did it would have been from the business owner’s perspective.

    http://jayporter.com/dispatches/observations-from-a-tipless-restaurant-part-1-overview/

    • Since I was comparing it to a worker making the maximum server wage at the tipless restaurant, I obviously assumed a highly skilled server. Also the rant for tips is 100-400%, so 200% is the median. Tipless restaurants are the norm in Japan, Aus, NZ, and much of Europe and I am a big fan of it. Get much better service in the countries than I have in CDA or US.

  3. Good move, David!! Looking forward to the opening.
    I don’t imagine that the downside observed in Oz and NZ (especially NZ!!!!) will be a drop in service levels. There’s an appalling lack of service in the non-tipping service sector in NZ too – compared with here, that is. Good service is much more part of the culture here
    (Full disclosure – my wife and I are fractional owners at Pacific Shores. Lived in both Oz and NZ or decades, and still visit there regularly.)

  4. Hi Lindsay,

    I haven’t commented on any other sites on social media – I like what you are saying and just wanted to let you know that your quote, “In a blog post Monday, University of Victoria professor Lindsay Tedds estimated that undeclared income in the form of tips is costing the government between $1 billion and $2 billion in annual revenue.

    “That could be used to fund health care, schools, affordable housing, or child benefits. The opportunity cost of that lost revenue is, for many, substantial,” she wrote.

    Although she calculated that servers at Smoke and Water may still take home less money than their counterparts at other restaurants, Tedds pointed out that higher declared salaries can translate into better Canadian Pension Plan contributions and employment insurance payouts.

    “While many teenagers and 20-somethings may not be appreciative of these things now, they will be later on in life,” she said.

    Appeared in an a story by By Luke Simcoe in the “Metro”

    Failure is not an option for us at “Smoke ‘N Water.

    Have a great day,
    David Jones

    • Thanks for sharing that. Glad to see you are getting quality applications. I wonder if there is something in this about risk aversion. The stability of a steady income vs the ebb and flows from relying on tips. I’ll have to noodle that.

  5. Bravo, great move! I think this tip thing has grown out of control and those involved need to start paying their share of the tax burden. I will be visiting and will support this visionary move. Very best of lick.

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