Tip Credits and Tip Pooling in NYC

In New York, waiters, bartenders, maids, bellhops, and other hospitality industry workers rely on tips for their livelihood. This is due in part to the fact that employers are permitted to use a portion of an employee’s tips to reach its minimum wage obligations. Moreover, restaurant and hotel workers are often required to pay part of their tips into a pool to be shared with other employees.

Unfortunately, employers often take inappropriate tip credits, fail to notify employees of tip pooling policies or fail to redistribute shared tips as required by law, all of which constitute wage theft. If your employer has withheld tips, gratuities or other wages from you, it is critically important to understand your rights.

The New York employment law attorneys at Lipsky Lowe are dedicated to protecting the rights of restaurant and hospitality workers. We are keenly aware that wage theft is pervasive in the hospitality sector and will work tirelessly to help you obtain the compensation that is owed to you.

What is considered a tip?

Generally, a tip is money given by a customer to a restaurant or hospitality employee for outstanding service. If the customer pays in cash, any amount above the charge for the goods or services, including sales tax, is considered a tip. If the employer imposes a mandatory service charge, however, — customary for bills for large tables of diners, private parties, and catered events — the service charge is not considered a tip.

Moreover, if the customer pays by credit card, employers can legally deduct processing fees from tips. If the credit card company charges a 3 percent fee, for example, the employer could legally reduce the employee’s tip by 3% as well.

In any event, restaurant and hospitality employees cannot be required to give all or a portion of their tips to the employer, unless there is a valid tip credit or tip pooling policy in place.

What is a tip credit?

Under applicable federal and state law — the Fair Labor Standards Act and Section 196-d of the New York Labor Law, respectively — employers are allowed to pay tipped employees less than the minimum wage, provided that the employees reach the minimum wage threshold. This is referred to as a tip credit, or the amount the employer is not required to pay.

The amount of the tip credit is based on a number of factors, such as:

  • The employer’s industry
  • The size of the industry
  • The employees’ duties

This means that the tip credit for servers in a restaurant differs from the tip credit for other hospitality employees. The tipped wage for wait staff and permissible tip credits are set forth in the Labor Department’s Hospitality Industry Wage Order Summary, which is scheduled to be adjusted until 12/31/21, when the minimum wage for all employees will be elevated to $15 per hour.

The tip credit is permissible as long as employers meet a number of legal requirements. This includes notifying employees of the tip credit policy. Once the tip credit is applied, employers cannot take any amount that remains. An employer that takes a tip credit without providing the required notice or complying with other conditions can be held liable. Employees may be able to recover both the underpaid wages and liquidated damages — an equal amount to the unpaid wages (often referred to as “double wages”).

What is tip pooling?

Employers in the restaurant and hospitality industry typically require employees who serve customers to participate in a shared tip pool. This generally involves collecting all or a portion of the tips collected from tipped workers, putting the tips into a pool, and sharing the pool with all the tipped workers. Tip pooling and tip sharing is permissible provided that employees are informed of the policy as a condition of being hired.

While employers can determine how the pooled tips are divided, only tip eligible employees — those who serve customers — can receive a share of the collected tips. In a restaurant, for example, tip eligible employees generally include servers, bus persons, bartenders, and runners. Since kitchen staff do not provide direct customer service, they are not eligible to participate in the pool, and tipped employees cannot be forced to share their tips with those workers. Similarly, managers are not permitted to participate in the pool since they generally do not directly serve customers.

An employer that fails to notify employees of the tip pooling policy or that requires or allows ineligible workers (e.g. cooks, dishwashers, managers) to participate in the tip pool, forfeits the right to take the tip credit. This means the employer must pay the full minimum wage to all employees, including tipped workers like servers and bartenders. Ultimately, the employer can be held liable for any wage underpayments as well as liquidated damages.

Contact Our New York City Wage & Hour Attorney

The rules governing tipped wages in New York are very complicated, and lawmakers are considering a controversial proposal to eliminate the two-tier wage system. This means that restaurant employees would be required to be paid the same minimum wage ($15/hour in New York City as of 12/31/2018), as other workers.

While proponents of the “One Fair Wage” initiative believe such a measure will eliminate wage theft in the hospitality industry, tipped employees may actually see a reduction of their gross wages. Whether the initiative will become law remains to be seen. In the meantime, hospitality workers have powerful legal remedies for wage theft under state and federal law.

When you become a client of Lipsky Lowe, we will explore all of your options for obtaining the wages owed to you, including filing a class action lawsuit. Our wage and hour team has a proven track record of obtaining compensation for victims of wage and tip theft. When you consult us, you will have strength in your corner. Contact us today!

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