Pandemic Spotlights Inequity in New York’s Tipping Regulations

February 19, 2021Articles New York Law Journal

The pandemic amplified inequities in our society and the workplace. It devastated New York’s hospitality industry, which leaned heavily on dedicated staff—especially, kitchen and delivery workers to continue operations and stay afloat. Unfortunately, many of these employees could not share in the generous tips left by grateful New Yorkers. Indeed, New York’s draconian wage and hour laws limiting tip pooling and sharing to only “food service workers” creates pay disparity and erects barriers between back-of-house, kitchen workers and front-of-house, service employees.

Background. Traditionally, a restaurant divides its employees into two groups. First, there are “back-of-house” employees—cooks, dishwashers, porters, and other employees who the public often does not see. These employees ensure that the food eaten in the restaurant (or at home through delivery and take-out) satisfies the customers and meets the culinary standards set by management.

The second group is the service team—servers, bartenders, and bussers. Known as “front-of-house” employees, these employees interact with the customers and ensure quality service.

With respect to payment, back-of-house employees are paid an hourly rate—at least minimum wage—for all hours worked, but they do not earn or receive gratuities. Front-of-house employees are also paid at least the minimum wage for all hours worked. However, under limited conditions, employers can take a “tip credit” towards its minimum wage obligation to front-of-house employees. In such circumstances, the employer pays front-of-house employees a cash wage and supplements that wage with the gratuities earned to reach the minimum wage for all hours worked. If the employee’s tips are insufficient to cover the delta between the cash wage paid and the minimum wage, the employer pays the difference.

When handling gratuities, restaurants use one of three methods. First, there is the “eat what you kill” system, where servers retain all of the gratuities they receive directly; they do not share or pool their tips. The second method is tip sharing where employees who directly receive tips (usually servers) are required to pay a percentage of their tips to front-of-house employees who assisted with service (e.g., bussers and bartenders). The third system is tip pooling where all tips are aggregated, and the monies are distributed to all eligible front-of-house employees based on a pre-determined formula. Regardless of the system used, traditionally, back-of-house employees cannot participate in the tip-share or tip pool arrangement.

Historically Only Traditional Tip Pooling Is Permitted Under Federal and State Law.Historically, both federal and state law restricted employers’ ability to require employees to pool or share their tips. Section 3(m)(2)(A) of the Fair Labor Standards Act (FLSA) limits an employer’s right to mandate tip pooling or sharing only between employees who “customarily and regularly” receive tips, known as “traditional” tip pools. If an employer took a tip credit, the courts universally held that back-of-house employees could not participate in a tip pool or tip-share arrangement. See, e.g., Shahriar v. Smith & Wollensky Rest. Grp., 659 F.3d 234, 240 (2d Cir. 2011) (noting that it is a violation of the FLSA for servers to be required to share tips with non-customer facing employees, i.e., “expediters,” “dishwashers,” and “silver polishers.”). If the employer did not take a tip credit, courts were split on whether back-of-house employees could participate in a tip pool. The Tenth Circuit permitted tip pooling or sharing with back-of-house employees if no tip credit was taken, while the Ninth Circuit reached a different conclusion. Compare Marlow v. New Food Guy, 861 F.3d 1157 (10th Cir. 2017) (holding where no tip credit is taken, tip-sharing between tipped and non-tipped employees under the FLSA is permitted) with Oregon Rest. & Lodging Ass’n v. Perez, 816 F.3d 1080, 1082 (9th Cir. 2016) (holding where no tip credit is taken, tip-sharing between tipped and non-tipped employees under the FLSA is not permitted).

New York law also provides for only “traditional” tip pools in that a server can only be required to share their tips with “a busboy or similar employee.” N.Y. Lab. L. §196-d (McKinney 2020). In addition, employees are only eligible to receive shared tips or tip pool distributions if they are “service employees,” who “perform, or assist in performing, personal service to patrons at a level that is a principal and regular part of their duties and is not merely occasional or incidental.” 12 N.Y.C.R.R §146-2.14 (2021). Accordingly, directly tipped employees in New York restaurants cannot share tips with cooks, dishwashers, or similar employees irrespective of whether an employer takes a tip credit.

New Federal Regulations Permit Non-Traditional Tip Pooling. Effective March 23, 2018, Congress passed the Consolidated Appropriations Act, which amended the FLSA to permit front-of-house share or pool their tips with back-of-house employees provided (1) no tip credit is taken; and (2) no supervisory or managerial employees participate in the arrangement. See 29 U.S.C. §203(m). Recently, the U.S. Department of Labor (DOL) promulgated final regulations implementing these amendments. See Final Rule: Tip Regulations under the FLSA, 85 Fed. Reg. 86756 (Dec. 30, 2020) (to be codified at 29 C.F.R. §531.54 (effective March 1, 2021)).

This is crucial because all restaurant workers, not merely those who are customer facing, contribute to guest experience. The new regulations will encourage employers not to take a tip credit and to require tip pooling among all staff. This promotes equity, provides additional income for back-of-house employees, and allows employees to coordinate to provide a fantastic guest experience. Unfortunately, New York employers cannot take advantage of these new DOL regulations and their employees will suffer.

New York Must Do More To Encourage Equality Through Tip Pooling. If New York were to amend its regulations to mirror the new federal regulations, it would be a step in the right direction, but it would not be a panacea. Unfortunately for New York restaurants, Labor Law §196-d is not the only issue and repealing (or amending) that statute would not solve the tip sharing and tip pooling problem. Under the Hospitality Wage Order, which is a series of regulations promulgated by the New York Department of Labor, food service workers can only share their tips with other food service workers (not with kitchen workers or any other employee).

The Hospitality Wage Order defines “food service worker” as any employee, other than a delivery worker, “who is primarily engaged in the serving of food or beverages to guests, patrons or customers in the hospitality industry.” 12 N.Y.C.R.R. §146-3.4. Tip credit or not, this prohibits employers from requiring employees to share (or pool) tips with positions that are not customer facing.

Another complication is the “80/20” Rule. An employee is not a food service worker “on any day in such week in which she or he has been assigned to work in an occupation in which tips are not customarily received for 2 hours or more or for more than 20% of her or his shift, whichever is less.” Id. Thus, even employees who are typically customer facing may not be able to participate in the tip pool if during their shift they worked in the kitchen, helped with cleaning, or participated in a training for 2 hours.

The 80/20 Rule stymies the income of all employees who occasionally perform duties other than direct service because such individuals cannot participate in the tip pool. Consequently, it discourages food service workers from enhancing their skills through training because training will make them tip ineligible and limit the number of hours they can work.

During the pandemic, with fewer customer facing employees the problem with these inflexible rules became unmasked. It is unfair for the government to restrict how tips are distributed among non-managerial employees, especially when no tip credit is taken. When restaurants were slow, even when no tip credit was taken, tipped employees could not assist with the additional cleaning and sanitizing requirements imposed by the government and employees saddled with those additional tasks could not receive tips. Essentially, performing the work required to keep restaurants safe during the pandemic meant you could not receive legally a portion of the tips from customers.

New York law has created a system that disadvantages certain employees and discourages teamwork. An employer should be able to ensure that all employees who contribute to the product delivered to the customer are eligible to receive supplemental compensation from a satisfied customer.

New York Should Consider Re-Vamping Its Tip Restrictions.The New York restaurant industry is in serious peril. Thousands of restaurants have closed across the State, many (if not most) will never reopen and many jobs have been lost. The state could revamp its tip rules to allow restaurants to operate more efficiently and cohesively, which could catalyze new restaurants to open faster and help the industry return to its pre-pandemic luster. It should amend Labor Law §196-d and the Hospitality Wage Order to allow all non-supervisor employees to share tips when no tip credit is taken. New York should also amend the 80/20 Rule to avoid penalizing employees who perform additional work or participate in training. It is time for New York to prioritize reinvigorating the restaurant industry and improve wages for many workers.

Reprinted with permission from the February 19 issue of The New York Law Journal. (c) 2021 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.