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New York State Hospitality Industry Wage Order Increases the Wages to Be Paid to Tipped Employees and Authorizes Tip Pooling and Tip Sharing

December 23, 2010

The New York State Department of Labor ("NYSDOL") has provided a holiday gift to employees in the hospitality industry by issuing a new Wage Order, effective January 1, 2011.  This Hospitality Industry Wage Order increases the portion of the $7.25 per hour New York State minimum wage that must be paid to tipped employees.  The NYSDOL has also clarified New York law regarding tip sharing and tip pooling.  These provisions cover tipped restaurant and hotel employees employed in New York State.  The tip credit requirements applicable to tipped employees working in other industries in New York State are covered by the Minimum Wage Order for Miscellaneous Industries and Occupations. 

The new Wage Order increases the amount that employers must pay their service employees or food service workers over and above the tip credit.  The tip credit allows employers to take a credit towards the statutory minimum wage paid to service employees or food service workers who receive sufficient tips and are properly notified. Under the Hospitality Industry Wage Order, the maximum tip credit will be $2.25 per hour for food service workers, $1.60 per hour for service employees, and $2.35 per hour for service employees for resort hotels if the weekly average of tips is at least $4.10 per hour. As a result, tipped food service workers must be paid at least $5.00 per hour, increased from $4.65; tipped service employees must be paid at least $5.65 per hour, increased from $4.90; and tipped service employees for resort hotels must be paid at least $4.90 per hour, increased from $4.35. Overtime payments for tipped employees must continue to be "the employee's regular rate of pay before subtracting any tip credit, multiplied by 1½, minus the tip credit." Employers may not subtract the tip credit first then multiply the reduced rate by one and one half. Specifically, the minimum overtime pay rate under New York law for hours worked in excess of forty in the workweek paid to employees who receive a sufficient amount of tips will be, as of January 1, 2011, no less than $8.625 per hour for food service workers, $9.275 per hour for service employees, and $8.525 per hour for service employees for resort hotels.

The federal maximum tip credit, $2.13 per hour, applies to employers covered by the Fair Labor Standards Act of 1938, as amended ("FLSA"). Therefore, under the FLSA, employers must pay tipped employees at least $5.12 per hour and, for hours in excess of forty hours in the workweek, $8.745 per hour. New York hospitality industry employers that are covered by the FLSA must pay tipped employees based on the lowest applicable tip credit, and the highest applicable direct pay requirement, under either federal or New York State law.

Employers in New York will have until February 28, 2011 to change their payroll systems to accommodate these changes. If the employer's payroll system is updated after the new year, it must retroactively increase wage payments back to January 1, 2011.

The Hospitality Industry Wage Order expressly authorizes tip sharing and tip pooling. Tip sharing is the practice by which directly tipped employees voluntarily give a portion of their tips to other service employees or food service workers who participated in providing service to customers and keep the balance. Employers may require directly tipped food service workers to participate in tip sharing, but "employees must handle the transactions themselves." Tip pooling is the practice by which directly tipped employees may voluntarily agree to pool their tips and redistribute them among both directly and indirectly tipped employees who participated in providing the service. Employers may require food service workers to participate in a tip pool, and may set the percentage to be distributed to each participating occupation from the tip pool. Only food service workers may receive distributions from such a tip pool. Employers that operate a tip sharing or tip pooling system must maintain, for at least six years, certain records, including a daily log of tips collected by each employee on each shift, a list of occupations deemed eligible to participate, the share of tips that each occupation is scheduled to receive, and the amount in tips that each employee receives from the system, by date. When tips are charged on credit cards, employers are not required to pay employees the pro-rated share of the service charge taken by the credit card company for the processing of the tip.

Employers may not, under existing New York law, demand, accept, or retain, directly or indirectly, any part of an employee's gratuity or any charge purporting to be a gratuity. Such gratuities or charges must be distributed in full to the service employees or food service workers who provided the service. Service charges will be considered gratuities, unless there is clear notification that such charges are not gratuities. Charges for the administration of a banquet, special function or package deal must be clearly identified as such, and customers must receive adequate notification that such charge is not a gratuity or tip. Such adequate notification must include a statement in the customer contract, and on any menu and bill listing prices, that the administrative charge is for administration of the banquet, special function, or package deal, is not purported to be a gratuity, and will not be distributed as gratuities to the employees who provide service to the guests. The statements must utilize ordinary language readily understood. They must also appear in a font size similar to surrounding text, but no smaller than a 12-point font. Combination charges, covering both administrative charges and gratuities, must be broken down into specific percentages or portions, in writing to the customer, in accordance with these standards.

The Hospitality Industry Wage Order also imposes requirements on restaurants and all-year hotels where the spread of hours, defined as the length of the interval between the beginning and end of an employee's workday, including working time, split-shift time, time off for meals, and other off-duty time, is greater than ten hours. Where the spread of hours in the workday of any non-exempt employees employed by restaurants and all-year hotels, including but not limited to service employees and food service workers, irrespective of the employee's regular pay rate, exceeds ten hours, the employees must receive one additional hour of pay at the basic statutory minimum hourly rate. This additional payment, which is not offset by tip credits, meal credits or lodging credits, is not considered pay for time worked. Therefore, it need not be included in the regular rate of pay for overtime calculation purposes.

For more information, please contact the attorneys listed below or your regular Crowell & Moring contact.

For more information, please contact the professional(s) listed below, or your regular Crowell & Moring contact.

Ira M. Saxe
Partner – New York
Phone: +1.212.895.4230