Bill 12: Protecting Employee s Tip Act

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1 Bill 12: Protecting Employee s Tip Act Ontario Hotel & Motel Association Suite 8-201, 2600 Skymark Ave l Mississauga, ON L4W 5B2 l The is the largest provincial hospitality association in Canada. With over 4,000 members, representing more than 11,000 establishments across the province, the ORHMA is uniquely positioned to represent the issues that most impact your business.

2 Bill 12 Protecting Employees Tips Act. The ORHMA has worked with Michael Prue author of Bill 49 in ensuring fairness is given when drafting up the bill s framework. We are pleased to see that Arthur Potts Bill 12 Protecting Employees Tips Act continues to include the following exemptions: Tip Pool sharing will be allowed including sharing with kitchen workersthis promotes a team spirit and supports the whole team s work. Managers and employers will be allowed to be part of the tip sharing mix - as long as they contribute to the service operation. Automatic Gratuity charge placed on bills mostly by Banquet and Hotels can be distributed to the house as long as it is called a facility charge. Note: We have been advised by legal experts that this term needs to be prescribed in the regulations. One exemption that needs to be included in Bill 12 is the ability for a restaurant operator to be able to keep the credit card processing fee charged on customer gratuity amounts by the credit card companies. This is not service earned but a processing fee the restaurant owner pays. The impact to the profitability is significant in a slim margin industry. In many cases it determines being sustainable. This is complicated and one needs to understand the past and current performance of Ontario s industry, the drivers of change, explanation of processing restaurant fees and the profit impact. Furthermore we do hope the reader of this paper gains an insight of the restaurant owner s decisions dismissing the notion the restaurant employers are stealing employee tips as it has been presumed when one is reading these Private Bills.. Stealing must not be tolerated and yes it occurs in every industry. There are punishable laws for this and should be enforced. practices with gratuity disbursement and charge fees are fair standards and far from pilfering. 1 P a g e

3 State of Ontario s Industry Recent years brought significant pressures to a foodservice operation. Increases to specific cost categories just happened to be the highest foodservice expenditures. Pressures on the Expense Lines Global and domestic events have skyrocketed food commodities and with this category making up an average of 35% of total expenses it s been a challenge. The cost from utilities continues to escalate hammering foodservice operators in an industry that ranks first in the highest energy intense category. Conservation programs do help but incentives applied to demand peak times are useless as the industry operates at full throttle during the Breakfast and Dinner periods. The credit card merchant processing fees with the proliferation use of loyalty points by Master Card and Visa has added a cost burden to a payment process used by 80% to 90% of consumers for settling their bills. The most significant expense hit during these times has been the minimum wage increase. This paper is not to raise the Minimum wage debate but to only illustrate the Foodservice Industry s financial climate. Graph - 1 Minimum Wage Panel Report, Statistics Canada Graph 1. Illustrates that the highest proportion of all minimum wage earners at 39% work in the hospitality industry. This has a huge impact to an operator s bottom line and to the entire operation. 2 P a g e

4 Graph -2 Minimum Wage vs CPI Ontario Up 15.36% Up 5.7% YEAR CPI % Change % Change in Minimum Wage % % % 4.0% % 9.4% % 8.6% % 7.9% % % 7.3% Up 50%% Up 7.3% Graph 2. Compares CPI increases to the recent Minimum Wage increases. A four year minimum wage increase at 50% during an impactful recession compare to a CPI increase of only 15.1%. Please make no mistake about it, the last recession being hit with the strain of minimum wage has changed this industry for a long, long time. We have been asked what the standard restaurant profit margin should be and to answer this question we analyzed the performance of other Canadian provinces to define the benchmark. Graph -3 Canada Total Foodservice Margins 12.0% 10.0% 9.6% 8.2% 8.0% 6.0% 4.0% 5.0% 5.2% 6.4% 6.6% 4.2% 4.2% 2.0% 0.0% ORHMA, CRFA, and Statistics Canada Graph 3 -The Canadian industry in 1990 performed at 9.6% profit margin and has dropped by 56% to 4.2 % by P a g e

5 Profit Margin Per Cent Graph 4 Ontario vs National Foodservice Margins ONT Canada Graph 4 Illustrates Ontario s Margins against the National Average. Every Province performs at a higher profit margin than Ontario. The graph also shows the variance between Ontario and the National average widens from only 0.4% in 2001 to 1.4% by P a g e

6 Unintended Consequences Youth Unemployment With the profit margins becoming slimmer restaurant operators have been eying every opportunity to stay sustainable. Scrutinizing every hour of work has become the norm in an industry that is noted to be savvy in cost controls. The unemployment rate of youth is a troubling indicator and it correlates to the foodservice sector s performance. In 2001 with the foodservice industry operating at 5.4% profit margin Ontario s unemployment rate was at 13.8% increasing by 2013 to 16.7% when foodservice industry s profit dropped to 2.8%. The hospitality industry along with the retail sector hires more youth workers than any other. Cutbacks in youth worker hiring and in part time employment has been a common practice since Recently we are starting to see gains but are far off in reaching potential success. Encouraging and even mandating Tip Sharing The approach of tip sharing is complicated and has been around for many years and in several global jurisdictions. The goal here is to encourage the team effort of service as all support the seating, preparation, delivery and cleaning up of a guest table. It is a tangible fact that by far most gratuity earn servers receive more compensation due to this than support staff, supervisors and managers. There are also numerous cases that the employer wearing many hats and performing many tasks is part of the service delivery. The mandated minimum wage increase against very low profit margins brought the wage gap closer with those earning more. This includes support service staff including supervisors, greeters, cooks and dishwashers. It leads the operator to encourage and even mandate tip sharing models to compensate. Employer Pays the Credit Card Processing Fee on the Gratuity Portion The introduction of higher credit card processing fees jumping from 0.3% -0.5% to an average 2.5% in tough times has been another burden for a restaurant owner resulting in operators paying higher fees on bill transactions. It is important to note that each time a customer enters a gratuity on a bill settled through a credit card payment the restaurant owner is charged the average of 2.5% processing fee on the gratuity portion. 5 P a g e

7 In our analysis with several Ontario restaurants we determined that this gratuity processing fee charged to the restaurant impacts profit by 0.3% to 0.4% in an industry operating with an average of 2.8% profit margin. Seeing these credit card processing fees rising over the years and understanding that the gratuity processing fees are not directly part of the service compensation but a charge to the operation by the credit card processors there has been a movement by operators to keep the processing amount by simply deducting it from the server gratuities. Conclusion Gratuities on restaurant bills settled through credit cards have a processing fee added. The pays this processing fee to the credit card processors. The owner should be allowed to keep this processing fee by deducting it from the gratuity amount earned. The graphs from restaurant samples that follow illustrate the impact of the gratuity amount to the restaurant s profit. Graph Credit Card processing Fees Paid on a $100.Bill Gratuity, $16.95 Taxes, $13.00 $0.42 Mark Fees $0.33 Mark Fees profit Impact (0.42%) Bill, $ $2.50 Mark Fees Total Processing Fees $3.25 (2.5%) 6 P a g e

8 Gratuities Processing Fee Samples Sample 1: Ottawa Credit Card Processing Fees at 2.3% (Supporting data, page 8) Ottawa Sample Sample 2: Burlington Credit Card Processing Fees at 2.5% (Supporting data, page 9) Burlington Sample 7 P a g e

9 Gratuities Processing Fee Samples (continued) Sample 3: Mississauga Credit Card Processing Fees at 2.5% (Supporting data, page 9) Mississauga Sample Supporting Data for Sample Analysis Ottawa Data Analysis Sample Page 7 Ottawa Sample 8 P a g e

10 Supporting Data for Sample Analysis (continued) Burlington Data Analysis Sample Page 7 Burlington Sample Mississauga Data Analysis Sample Page 8 Mississauga Sample 9 P a g e