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Ontario is banning employers from taking a cut of tips that are meant for servers and other hospitality staff.

The Protecting Employees' Tips Act passed third reading Monday, making it illegal to withhold their employees' tips, except temporarily if they are pooling all of the gratuities to redistribute them among all employees.

The idea was brought forward years ago by Michael Prue, an NDP MPP who lost in the 2014 election, and picked up by Arthur Potts, the Liberal MPP who defeated him.

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"Since I brought it (forward) I have heard many stories from employees where the employer typically will take 25, 50 per cent right off the top of a tip pooling and distribute it to themselves rather than their employees," Potts said Monday.

"It's not as widespread as I think people sometimes imagine but it is happening and this levels the playing field for everyone."

Though the bill passed with unanimous consent, the NDP accused Potts of watering down Prue's work by not banning employers from recovering credit card fees — often up to 2.5 per cent — from the tip when a customer pays by credit card.

"At the end of the day we're going to support this bill, only because it will provide some improvements for the workers in this province, but this loophole is really problematic," said New Democrat Cindy Forster.

"They're employees and they shouldn't have to be bearing the expenses of employers in any way."

Potts, who also co-owns a restaurant, said it doesn't amount to much money for the employees.

"When you think about 2.5-per-cent charge on a credit card fee (on) a 10 dollar tip, it's what, 25 cents?" he said. "It's not a lot of money to the employee, but in a large restaurant over the course of the year it is a lot of money. In a restaurant industry with razor-thin margins it's important we gave them that opportunity to do it."

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Forster disagreed, saying if an employee loses out on three dollars in tips because of that exemption each day, working five days a week, that would total nearly $800 per year.

Rules around credit card fees will be defined through regulations, Potts said.

Restaurants Canada said the average profit margin in the industry in Ontario is only 3.1 per cent. When restaurants pay 2.5 per cent to credit card companies to process the bills, they lose that money when paying employees their tips, said James Rilett, the Ontario vice-president for Restaurants Canada.

Only restaurants with very high volumes will likely take advantage of that, Rilett.

"I don't think a lot will do that, but it's good to have the option, I guess, if you're running a lot of tips in a night," he said.

It's only a slim minority of employers who take a portion of employees' tips, Rilett said, because establishments who treat workers poorly have trouble retaining staff anyway.

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"It's not a common practice in the industry, but if (the bill) will help a few people then that's a good thing," he said.

If an employer regularly does a "substantial degree" of the same work as the employees, for example a restaurant owner waiting tables in a small establishment, the law allows them to share in the tips.

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