Do you earn tips? Plenty of employees in New York do, including those who wait tables, serve and mix drinks, open doors, carry luggage, clean hotel rooms, or provide other services, from moving furniture to delivering newspapers. In fact, some employees earn more in tips from satisfied customers than in straight wages paid by their employers.
When you receive tips as part of your compensation, your legal rights under wage and hour laws become a bit more complicated. The rules about what counts as a tip, how much your employer must pay you, and whether you have to contribute to a tip pool (among other things) all depend on the laws of your state. Although federal law also covers these issues, employers must follow whichever law – federal, state, or even local – is the most generous to employees.
Here's what you need to know about federal and New York legal protections for employees who receive tips. You can find out more about New York minimum wage, tip rules, overtime standards, and other wage and hour issues at the New York Department of Labor.
The basic rule of tips, under federal law and state law, is that they belong to the employee, not the employer. Employers may not require employees to hand over their tips unless one of these exceptions applies:
- State law allows the employer to take a tip credit. Some states allow the employer to count all or part of an employee’s tips towards its minimum wage obligations. Although the employer doesn’t technically “take” the employee’s tips, the employer gets to count some tips as if the employer had paid them directly to the employee. New York allows employers to take a tip credit.
- The employee is part of a valid tip pool. Under federal law and in most states, employees can be required to pay part of their tips into a tip pool to be shared with other employees.
Minimum wage laws protect all employees, whether or not they receive tips. Employees are entitled to earn the full minimum wage per hour as set by federal or state law. Currently, the federal minimum wage is $7.25 an hour. The minimum wage in New York is:
- $8 from December 31 2013 until December 31, 2014
- $8.75 from December 31, 2014 until December 31, 2015, and
- $9 from December 31, 2015 on.
Because the state’s minimum wage is higher than the federal minimum wage, employees are entitled to that higher wage.
State laws differ as to whether the employer must pay the full minimum wage itself or may count an employee’s tips toward its minimum wage obligation. Under federal law and in most states, employers may pay tipped employees less than the minimum wage, as long as employees earn enough in tips to make up the difference. This is called a "tip credit." The credit is the amount the employer doesn't have to pay, so the applicable minimum wage (federal or state) less the tip credit is the least the employer can pay tipped employees per hour. If an employee doesn’t make enough in tips during a given shift to earn at least the applicable minimum wage, the employer has to pay the difference.
New York allows employers to take a tip credit. The amount of the tip credit depends on the employer’s industry and the employee’s job duties. For example, the tip credit for wait staff is different from the tip credit for housekeepers or tipped employees who work at resort hotels. You can find the minimum hourly wage employers can pay employees in the hospitality industry (which includes restaurants, hotels, and resorts) through the end of 2015 at Summary of Wage Orders and Credits for the Hospitality Industry. Employees must be informed of the tip credit in writing.
Some employees have dual jobs, in which they spend some of their shift doing non-tipped work. Under New York law, if an employee spends at least two hours or more than 20% of the shift (whichever is less) doing non-tipped work, the employer may not claim a tip credit for that entire work day. In other words, the employee must be paid the full state minimum wage, not the lesser rate for tipped employee, even for hours during which the employee earned tips.
Many states, including New York, allow employers to require tip pooling or “tipping out.” All employees subject to the pool have to chip in a portion of their tips, which are then divided among a group of employees. An employee must be able to keep at least the full minimum wage. (In other words, if the employer takes a tip credit, the employer can count only the tips the employee gets to take home against its minimum wage obligation.)
New York law allows employers to require tip sharing and tip pooling. Only employees who perform, or assist in performing, personal service to patrons as a regular and principal part of their job may participate in the pool. Employers may not require employees to contribute more to the tip pool than is reasonable or customary. Employers aren’t liable to employees for amounts they did not receive because another employee improperly withheld tips from the pool.
The employer may not keep any part of the pool or tip sharing arrangement; it all must be distributed to employees. Employees who have limited supervisory duties may participate in the pool if providing personal service to patrons is a regular or principal part of their duties. However, an employee who has meaningful authority or control over subordinates may not take part in the pool.
What Counts as a Tip?
It's not as easy as you might think to figure out exactly how much of what a customer pays is a "tip." If the customer pays in cash and tipping is voluntary, whatever amount the customer leaves over and above the charge for products or services (plus tax) is a tip. However, if the employer imposes a mandatory service charge, or the customer pays by credit card, the rules might be different.
Mandatory Service Charges
Some restaurants tack a “mandatory service charge” on to bills for large tables of diners, private parties, or catered events. Under federal law and in most states, this isn't considered a tip. Even if the customer thinks that money is going to you and doesn't leave anything extra on the table, your employer can keep any money designated as a "service charge." The law generally considers this part of the contract between the patron and the establishment, not a voluntary acknowledgment of good service by an employee. Many employers give at least part of these service charges to employees, but that's the employer's choice: Employees have no legal right to that money.
A couple of states have different rules, intended to make sure that customers know whether their money is going to the employer or the server. New York is one of them: In New York, there is a rebuttable presumption that any charge in addition to charges for food, beverages, lodging, and so on, is a gratuity, which must be distributed to employees. This includes charges for “service.”
If a New York employer imposes an administrative charge for a banquet, special function, or package deal, it must notify the customer that the charge is not a tip. If the employer distributes part of the administrative charge to employees and keeps the rest, it must inform customers of that fact and the specific amounts or proportions used for each purpose.
A recent rule change by the Internal Revenue Service has created a significant incentive for employers to stop imposing mandatory service charges, if the employer hands any of that money over to employees. Starting in 2014, the I.R.S. will begin enforcing a rule that changes the tax treatment of mandatory service charges. Any portion of such a charge the employer pays out to employees must be treated as wages, not tips. This means the employer must withhold and pay Social Security and Medicare (FICA) tax on these amounts, may not claim a credit against its tax obligations for these amounts (as it can for tips), and must include them as part of the employee’s hourly wage when determining overtime payments, among other things.
To the extent employees do not fully report their tip income, employees who receive all or part of a service charge won’t be happy with this change, either.
The rule applies only to mandatory service charges. For the amount to count as a tip rather than a service charge, all of the following must be true:
- The payment must be entirely voluntary
- The customer must have the unrestricted right to determine the amount
- The amount cannot be set by employer policy or subject to negotiation with the employer.
- The customer must have the right to determine who receives the payment.
Credit Card Charges
State rules differ as to whether employees are entitled to the full amount of a tip left by credit card. If the employer has to pay the credit card company a processing fee, some states allow the employer to subtract a proportionate amount of the tip to cover the employee’s “share” of the fee. For example, if the credit card company charges a 3% fee, the employer could legally reduce the employee’s tip by 3% as well.
New York law expressly allows employers to deduct the employee’s share of the credit card processing fee from the employee’s tips.