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.