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That was one expensive Timbit.

A manager's decision to fire a Tim Hortons employee in London, Ont., after she gave a free Timbit to a toddler last week erupted into a public relations nightmare for the iconic coffee company.

It didn't have to be that way.

While most coffee shops, bars and restaurants across Canada have rules to prevent employees from giving their friends and family freebies, most allow – and even promote – occasional giveaways as a simple way to reap long-term benefits.

“We encourage all our staff to make sure the customer is happy first and foremost,” said Stephanie Davis, manager of Caffe Beano, a popular coffeehouse in Calgary. “If a drink has been made incorrectly or even if it takes too long, we encourage our staff to give it away.”

While most coffee shops, bars and restaurants across Canada have rules to prevent employees from giving their friends and family freebies, most allow – and even promote – occasional giveaways as a simple way to reap long-term benefits.

“We encourage all our staff to make sure the customer is happy first and foremost,” said Stephanie Davis, manager of Caffe Beano, a well-known coffeehouse in Calgary. “If a drink has been made incorrectly or even if it takes too long, we encourage our staff to give it away.”

Freebies can help cement relationships with customers, and it is common for grocery stores, fast-food outlets and coffee shops to regularly dole out free items, particularly when children are involved.

“Many stores do have the policy that if a child asks for a cookie … then one is produced for them,” said Brock Smith, marketing and entrepreneurship professor at the University of Victoria.

“That is part of [building] loyalty.”

Businesses are often prepared to swallow minor short-term costs of occasional handouts of free products in exchange for happy customers who are more likely to spend money there in the future, Mr. Smith said. “If you're giving away a small-value item like a Timbit, that's really just customer recognition,” Mr. Smith said. “Customers do want to be recognized.”

For Tim Hortons, the fallout from the Timbit incident makes any revenue lost from the giveaway of a bite-sized doughnut laughable by comparison. Costs associated with handling this type of problem would escalate “very, very quickly,” according to Penny Bonner, senior partner at Ogilvy Renault LLP. “It would certainly be in the tens of thousands,” said Ms. Bonner, chairwoman of the company's recall and crisis-management practice team. “Clearly you want to put procedures in place to ensure something like that doesn't happen again.”

When free goods are given away, they're usually inexpensive menu items that won't put a dent in the company's profits.

But customers don't seem to mind how small their freebie is, Ms. Davis said. “Giving away one coffee for a couple bucks might translate into hundreds of dollars of revenue if we maintain the loyalty of that customer,” Ms. Davis said.

“We do discourage giving out free coffee for matters that are unrelated to customer satisfaction … but we definitely do give away a lot of coffee and it's something that we encourage for sure,” Ms. Davis said. “I would never punish any of our staff for giving away coffee.”

At the Drake Hotel, a Toronto bar-lounge, employees are given $40 during their shifts to purchase on-the-house coffee or drinks for regulars or people from the neighbourhood. “We give them a budget amount and trust them to make the right call,” said general manager Bill Simpson. “We kind of empower them to promote hospitality.”

Some coffee chains, on the other hand, have explicit policies against giveaways.

Ms. Bonner said it's critical for companies to state rules clearly and ensure managers communicate such limits to employees. It's the best way to prevent potential problems from occurring, she said.

But that doesn't mean employees can't hand out the occasional free coffee, an inexpensive item, to regular customers who are likely to show their appreciation with repeat business.

“Our policy is that we don't give out free things,” said Daron Faulkner, manager of Bridgehead, an Ottawa-based coffee chain. “[But] if I saw [employees] giving somebody who I knew was a regular a free coffee, as long as it's not happening regularly, it's not something I would have a large concern about.”

On the opposite end of the spectrum is Starbucks, which has no formal policy regarding giveaways, and regularly distributes free goods to customers. “We like to surprise and delight customers by letting them try new coffees, beverages and food when they come into the stores,” spokeswoman Bridget Baker said in an e-mail.

Although it may seem counterintuitive to promote the giveaway of free products on an ongoing basis, such tactics can actually boost sales among grateful consumers, said Cynthia O'Neill, president of High Altitude Thinking Inc., a marketing and business development firm.

“Certainly the brand loyalty has to come from somewhere,” she said. “It's nice to get something for nothing. It shows that they care about you.”

Tim Hortons learned the hard way that making a fuss about employee giveaways can cause problems much bigger than the cost of the free goodie.

When news emerged that an employee had been fired after giving away a Timbit, the company's corporate headquarters surged into overdrive as officials scrambled to repair the damage. The franchise owner, along with head office, offered the woman apologies and promptly reinstated her in her job, at a different location.

At the same time, company officials were tied up in conference calls well into the night last Wednesday to be briefed on the issue and develop a strategy for handling the negative publicity.

The company publicly apologized for the manager's “poor judgment” in firing Nicole Lilliman, 27, a single mother of four, for breaking a policy to not give away food. The company will also reimburse the woman's wages from two days of missed work, according to spokeswoman Rachel Douglas.

Policies on freebies are generally set by Tim Hortons franchises, but the company does encourage customer recognition, Ms. Douglas said.

“A lot of our stores and our store owners, they have regular customers, they have people they see on a daily basis,” she said. “They understand the importance of being good to these customers. That could be with a smile [or] with your service.”