Executive Summary: On February 24, 2015, the Commissioner of Labor accepted the recommendation of the New York State Department of Labor’s (NYSDOL) Wage Board (the “Wage Board”) for a 50 percent increase in the minimum hourly rate for tipped workers, from $5.00 to $7.50 an hour. As discussed in our February 4, 2015 Alert, The Diminishing Tip Credit: Another Reason it is becoming Harder to Comply with Wage & Hour Laws in New York, the increase takes effect December 31, 2015.

New York’s Acting Commissioner of Labor, Mario J. Musolino, accepted the Wage Board’s recommendation to increase the minimum hourly rate for tipped workers from $5.00 to $7.50 an hour. As a result, effective December 31, 2015, the maximum tip allowance an employer will be entitled to take against the minimum wage of its tipped workers in New York will be significantly decreased by $2.50 per hour: from $3.75 per hour to $1.25 per hour. This significant increase in operation overhead coupled with the aggressive enforcement pressure from government agencies such as the US Department of Labor (USDOL), NYSDOL and  the New York State Attorney General’s Office (NYSAG) on employers in tipped work industries (e.g. the hospitality industry) necessitates proactive, rather than reactive, compliance reviews of wage and hour practices.

The increase in tipped workers’ wages in conjunction with amendments to New York’s Wage Theft Protection Act (WPTA), including increased penalties, potential successor liability and personal liability for certain members of limited liability companies, means New York business operators and owners may face severe consequences for noncompliance with the state’s wage and hour laws. These consequences could include business closure, personal financial ruin, and possibly even jail time. Accordingly, we strongly recommend that hospitality employers review their record keeping policies and procedures, evaluate their pay practices, and consider implementing a periodic payroll audit protocol in order to ensure compliance with wage and hour laws. For more information on the WTPA amendments, please see our January 23, 2015 Legal Alert,Amendments to New York’s Wage Theft Prevention Act: A Double-Edged Sword for Employers.

In the interim, it is important that employers understand the impact of Commissioner Musolino’s actions:

  1. As of December 31, 2015, all tipped workers will be treated as one group: Tip amounts and criteria will be consolidated so that the same rates apply to food service workers, service employees, and service employees in the resort hotels. No distinction will be made; all tip amounts for all employees will be evaluated by the same criteria.
  2. As of December 31, 2015, the maximum tip allowance an employer is entitled to take against the minimum wage of tipped workers will decrease from $3.75 per hour to $1.25 per hour. For example, a restaurant owner currently permitted to take a tip credit of $3.75 for a server making $5.00 per hour (because the sum of the tip credit and hourly cash wage equals $8.75, the state minimum wage rate) will only be permitted to take a tip credit of $1.25, since the fast food worker’s hourly rate increases to $7.50 an hour (not to exceed the state minimum wage rate of $8.75). The bottom line: hospitality industry employers will experience additional wage overhead per each tipped employee working a 40 hour weekly shift of $100 per week, or $5,200 per year.
  3. A review is underway to determine whether the system of cash wages and tip credits should be eliminated altogether. Employers, including those in the hospitality industry, are cautioned to consider implementing a periodic payroll audit protocol to ensure compliance with ever-changing wage and hour laws and enforcement policies, and to prepare for potential changes such as the removal of the system of cash wages and tip credits altogether.
  4. If the legislature enacts a separate minimum wage rate for New York City, the cash wage for workers will be increased by one dollar. If this separate minimum wage rate is approved, it will mean even greater wage overhead for employers to grapple with. Additionally, the Commissioner rejected the Wage Board’s recommendation to give some employers a larger tip allowance, regardless of whether their cash wages and tips paid to employees comply with, or amount to more than, the minimum wage rate.

The Bottom Line: All hospitality employers must ensure their wage notices clearly set out the tip allowance reduction in accordance with the law. Employers are cautioned to calculate how the diminishing tip credit will affect their business, and strongly encouraged to review their record keeping policies and procedures, evaluate their pay practices, ensure all employees are paid by check or direct deposit (as opposed to cash wages) and consider implementing a periodic payroll audit protocol in order to ensure compliance with wage and hour laws.