NY Wage Recommendations Could Increase Hospitality Costs

March 9, 2015Articles Law360

Reprinted with permission from Law360. (c) 2014 Portfolio Media. Further duplication without permission is prohibited. All rights reserved.

On Feb. 24, 2015, New York Acting Commissioner of Labor Mario J. Musolino accepted most of the New York Hospitality Wage Board’s recommendations, which had been issued on Feb. 2. The accepted recommendations, which will become effective on Dec. 31, will have a significant impact on New York employers in the hospitality industry. They severely curtail the tip credit that hospitality employers can take toward their minimum wage obligations to their tipped workforce, thereby increasing by 50 percent the cash wage that must be paid to such employees. The accepted recommendations also signal that the tip credit in New York may be eliminated in the near future.

As background, under New York law, there are various wage orders that have been promulgated for various industries. These wage orders supplement the New York Minimum Wage Act and provide additional wage-and-hour mandates, including minimum wages and maximum credits that may be taken by employers within the covered industry. In 2013, when New York amended it minimum wage law to increase the minimum wage for all private sector employees within the state, it added a provision requiring the commissioner of labor to establish a wage board to review the wage order governing the hospitality industry. In August 2014, the commission of labor established the required wage board to review the Hospitality Wage Order, but limited the scope of the board’s review to only the controversial “tip credit” and several lesser issues. The wage board convenes throughout the state, taking testimony and ultimately submits recommendations to the commissioner.

In its Feb. 2, 2015, report and recommendation to the commissioner of labor, the Hospitality Wage Board made the following recommendations:

  • The tip credits and minimum cash wages for all tipped workers in the hospitality industry be uniform so that the same rates will apply to food service workers and other service employees; currently, there are different tip credits and minimum cash wages that can be paid to food service workers, nonfood service workers and service workers at resort hotels.
  • Effective Dec. 31, 2015, the minimum cash wage that must be paid to tipped employees be increased to $7.50 per hour for all service employees in the hospitality industry from the current amounts of $5.00 for food service workers, $5.65 for nonfood service workers and $4.90 for service employees of resort hotels.
  • In the event New York City enacts a higher minimum wage for employees, the minimum cash wage that must be paid to tipped employees should be increased by $1.00 to $8.50 per hour effective on the date that such separate minimum wage rate for New York City takes effect.
  • A review be conducted addressing whether the tip credit should be eliminated in its entirety in the future.
  • The minimum cash wage be reduced by $1.00 to $6.50 per hour (from the recommended amount of $7.50) when the weekly average of cash wages and tips received by an employee equals or exceeds the applicable hourly minimum wage rate by 150 percent in New York City or 120 percent in the rest of the state.

Under New York law, the commissioner of labor (or in this case the acting commissioner of labor) can accept, reject or modify any recommendation made by the wage board. Most industry insiders expected the acting commissioner to accept the board's recommendations with only the fifth recommendation — the creation of a two-tiered tip credit system within the state — in doubt. Yet, many employers in the hospitality industry hoped that the fifth recommendation, which would only impact those tipped employees who earn a significant amount in gratuities, would be accepted in order to appease the business community and help offset the significant cost increases that the wage board’s recommendations would entail. However, in his Feb. 24 order, the acting commissioner accepted the first four recommendations and rejected the last recommendation, claiming that it is “inconsistent with recommendations [one and three], which provide for a single tip allowance for all tipped workers throughout the state.”

Accordingly, effective Dec. 31, 2015, all New York hospitality employers must pay all of their tipped employees at least $7.50 per hour regardless of whether the employees are food service workers (e.g., servers, bussers and runners), nonfood service workers (e.g., coat check personnel, valet and delivery persons) or service workers at resort hotels (e.g., bellhops and tipped housekeeping employees). Further, this cash wage will not be reduced when the tipped employee’s compensation (i.e., cash wages and gratuities) is significantly more than the minimum wage as has been discussed in the industry since the wage board issued its report and recommendations.

In addition, it should not be overlooked that the acting commissioner accepted the wage board’s recommendation that “a review of whether the system of cash wages and tip credits should be eliminated.” The organized labor representative to the wage board lobbied heavily to eliminate tip credits entirely. While this was not ultimately recommended by the wage board, the fact that the board recommended a review of whether tip credits should be eliminated coupled with the acting commissioner’s acceptance of that recommendation, clearly signal that tip credits face an uncertain future in New York.

As a result of the acting commissioner’s order, hospitality employers face a drastic increase in their labor costs. Indeed, New York hospitality employers currently can take a tip credit of between $3.10 and $3.85 toward their minimum wage obligations to their tipped employees depending on whether the tipped employee is a food service worker, nonfood service worker or service worker at a resort hotel. Starting on Dec. 31, 2015, they will only be permitted to take a $1.50 tip credit. Thus, with respect to tipped employees, hospitality employers face a 50 to 60 percent increase in their labor costs. Due to these drastic cost increases, effective Dec. 31, 2015, with respect to how tipped employees are compensated, hospitality employers will have four options all of which contain risk.

First, hospitality employers can elect to pay their employees a minimum cash wage of $7.50 and take a tip credit of $1.50 (on Dec. 31, 2015, New York’s minimum wage will increase to $9.00 per hour). However, in order to legally take a tip credit, the employer must comply with specific notice obligations required under the Fair Labor Standards Act and New York law. In addition, New York employers must ensure that those tipped employees for whom the employer takes a tip credit do not spend more than 20 percent of their time and no more than two hours in a day performing nontipped producing activities. Employers who require their employees to participate in tip pools and tip-sharing arrangements must also ensure that all the employees who participate in such tip pools or tip-sharing arrangements are employed in occupations that customarily and regularly receive tips and that the employees actually perform personal service to patrons and guests as part of their principal duties. As many hospitality employers know, in practice, these requirements inherently contain ambiguities that lead to costly lawsuits. Therefore, employers selecting this option must carefully weigh the savings they reap from taking a tip credit with the litigation risks the tip credit creates.

Second, effective Dec. 31, 2015, New York hospitality employers can pay all of their employees at least $9.00, including their service employees, and eliminate tipping in their establishments. Some hospitality employers have already eliminated tipping with moderate success. However, many employers believe that if employees do not have the incentive of tips, they will not serve patrons and guests in the manner expected by the business. Some employers also believe that if they eliminate tipping entirely, their tipped workforce will leave and join their competitors with tipped houses where employees believe they can earn more money. Whether these beliefs and assumptions are true remains to be seen, but it is still a significant risk for employers to undertake.

Third, New York hospitality employers can combine the first two options by paying all of their employees at least $9.00, including their service employees, but not eliminate tipping. If the employer selects this option, it must ensure that if it operates a tip pool or tip-sharing arrangement all the employees who participate in the pools or tip sharing are employed in occupations that customarily and regularly receive tips and actually perform personal service to patrons and guests as part of their principal duties. Furthermore, because the language of the Hospitality Wage Order prohibits food service workers from sharing tip with nonfood service workers, the employer cannot have food service workers and nonfood service workers participating in the same tip pool or tip sharing. Indeed, there have been a number of lawsuits within the past few years that directly challenge tip-pool participation under New York law irrespective of whether a tip credit was taken by the employer. Therefore, even if the employer is not taking a tip credit, there are still significant litigation risks with operating a tipped establishment.

The fourth and last option is for New York employers to pay their employees at least $9.00 per hours, eliminate tipping and charge an administrative fee or other assessment a portion of which is given to employees. Under New York labor law, if there are specific disclosures, an employer can charge customers an administrative fee and then use that fee to pay staff. However, this option is not a panacea. Any such fee, even if given to the service staff, is not considered a gratuity under federal law and therefore the amount given to employees must be added to the employee’s remuneration when calculating overtime. Further, there may be consumer affairs laws in certain municipalities and jurisdictions that prevent an employer from assessing administrative fees except in limited circumstances. For example, in New York City, such assessments, even if fully disclosed, appear to violate the regulations of the New York City Department of Consumer Affairs. Thus, as with the other three options, there are significant costs and risks associated with this fourth option.

The acting commissioner’s decision to accept the wage board’s recommendations that significantly increases costs for hospitality employers requires employers to make difficult decisions over the next 10 months. Do they continue to take a tip credit? Do they eliminate tipping? Do they assess an administrative fee? The answer to each question has its own costs and risks. Employers will have to individually evaluate those costs and risks in order to determine what is best for its business.

Reprinted with permission from Law360. (c) 2014 Portfolio Media. Further duplication without permission is prohibited. All rights reserved.