Updates to the Minimum Wage Rate and Tip-Credit Regulations: For The New York Restaurant and Hospitality Industry

Minimum Wage

According to the most recent statistical data available from the U.S. Courts, approximately 14,000 Fair Labor Standards Act (FLSA) cases were commenced during the two-year period ending September 30, 2020, averaging 19 new cases per day.  These cases are especially prevalent in the U.S. District Courts encompassing New York City and Long Island (the S.D.N.Y. and E.D.N.Y.), where 13% of all private cases commenced over the same period were labor suits. (See here.)

For employers in the New York restaurant and hospitality industry, compliance with wage and hour provisions of the FLSA and New York Labor Law (NYLL) can be particularly complicated.  This is because certain employees in these industries receive tips, and employers can pay a reduced minimum wage to tipped employees by taking a “tip-credit”; however, this requires compliance with several statutory conditions, and failure to achieve full compliance has led to many FLSA/NYLL lawsuits for unpaid wages.  Technical violations, even if unintentional, can lead to costly litigation and liability.

As outlined below, hospitality employers should be cognizant of recent updates to the minimum wage laws under the NYLL and proposed changes to tip-credit regulations under the FLSA, as these updates can affect an employer’s compliance with wage and hour requirements and the ability to take the tip-credit.

Updates to the Minimum Wage in New York

In 2016, the State of New York enacted a statewide $15 minimum wage plan.  The law provided for annual increases to the minimum wage based on region and industry.  In New York City, the minimum wage has already reached $15 per hour for all employees.  On January 1, 2021, the minimum wage rate increased to $14 per hour in Nassau, Suffolk and Westchester counties, and to $12.50 per hour in the remainder of the state.  Future increases to the minimum wage will be published by the New York Department of Labor later this year.

In the restaurant and hospitality industry, employers are permitted to pay certain employees a reduced minimum wage rate in conjunction with the tips received by the employee, called a “tip credit.” As with the general minimum wage, the tip credit in New York has been subject to annual increases since 2017, and varies depending on, among other things, whether the tipped employee is a “food service worker” or a “service employee.”

A “food service worker” is an employee who is primarily engaged in serving food or beverages, and includes wait staff, bartenders, captains and bussing personnel.  As of January 1, 2021, the minimum cash wage and tip credit for food service workers in New York State is as follows:

Location Cash Wage Tip Credit Total
New York City $10.00 $5.00 $15.00
Nassau, Suffolk and Westchester counties $10.00 $5.00 $15.00
Remainder of state (outside of New York City, Nassau, Suffolk and Westchester counties) $8.35 $4.15 $12.50

A “service employee” is an employee at a hotel or restaurant other than a food service worker who receives tips at or above the “tip threshold” rate.  As of January 1, 2021, the minimum wage, tip credit and tip threshold rate for service employees (except for employees in resort hotels) in New York State is as follows:

Location Cash Wage Tip Credit Tip Threshold
New York City $12.50 $2.50 $3.25
Nassau, Suffolk and Westchester counties $11.65 $2.35 $3.05
Remainder of state (outside of New York City, Nassau, Suffolk and Westchester counties) $10.40 $2.10 $2.70

The FLSA also contains a minimum wage and tip-credit regulations which certain New York employers must comply with as well, but these requirements are generally encompassed by the NYLL.

Proposed Updates to Tip Credit Regulations Under the FLSA

As noted, both the FLSA and NYLL allow employers to satisfy the minimum wage by combining a cash wage with a credit for tips that employees receive from customers.  However, certain requirements must be met for the employer to qualify to take the tip credit, including but not limited to the following:

  • Tips cannot be shared with managers or supervisors;
  • Tips cannot be shared with non-food service workers such as cooks or dishwashers;
  • If an employee’s tips and wages combined fall below the minimum wage, the employer must pay the difference;
  • The tip-credit cannot apply to unrelated, non-tipped work; and
  • The employer must give notice to the employee that it is taking the tip credit.

In December 2020, the Department of Labor (DOL) announced a Final Rule addressing tip-credit regulations under the FLSA.  (See here.)  Among other things, the Final Rule prohibits employers from sharing tips with managers or supervisors in all circumstances, regardless of whether the employer takes a tip credit, and codifies the definition of manager or supervisor for this purpose as any employee: (1) whose primary duty is managing the enterprise or a customarily recognized department; (2) who customarily and regularly directs the work of at least two or more other full-time employees; and (3) who has the authority to hire or fire other employees, or whose suggestions and recommendations as to the hiring or firing are given particular weight.  The definition also includes as managers or supervisors any individuals who own at least a 20 percent equity interest in the enterprise in which they are employed and who are actively engaged in its management.

In addition, the Final Rule removed certain tip-pooling restrictions if an employer does not take a tip credit.  Specifically, it codifies that if an employer does not take a tip credit (and pays its tipped employees the full minimum wage), the employer may implement a wider tip-pooling arrangement that includes service employees such as cooks and dishwashers (but not supervisors and managers) in the tip pool.

The Final Rule was scheduled to take effect on March 1, 2021.  At the new presidential administration’s request, the DOL has postponed implementation of the Final Rule for 60 days, until April 30, 2021, and provided for a public comment period. (See here.)

This is an evolving area of the law with significant exposure for unwary restaurant and hospitality employers, but with the advice of counsel, consistent practices, and proper notice, employers can avoid potential pitfalls.  For more information, please contact your Labor & Employment law counsel at Smith, Gambrell, & Russell, LLP.

Daniel S. Goldstein, Esq. is an attorney in Smith, Gambrell, & Russell, LLP’s New York City office, and a member of the firm’s Labor & Employment Group and Hospitality Services Group.

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