NY Considers Eliminating Tip Credit

A new proposal served up by New York Governor Andrew Cuomo has restaurant owners asking for the check.

Earlier this year, the governor announced that he would begin holding public hearings on the merits of eliminating the tip credit, a controversial part of U.S. tipping rules. Predictably, the news garnered strong reactions from those in the restaurant and hospitality industries.

Why the uproar? To understand that, we need to first delve into what the tip credit is and how it currently functions in industries where tipping is commonplace.

Tip Credit 101

Simply put, the tip credit allows workers to be paid below the federal and state minimum wage if the tips they earn cover the difference between the minimum wage and the lower hourly amount. If that threshold isn’t crossed, then the employer must pay the difference.

The Fair Labor Standards Act (FLSA) sets a number of federal-level ground rules when it comes to the tip credit:

  • Employees must make at least $5.12 in tips per hour, averaged over the work week.

  • Employers need to clarify tip credit rules to employees.

  • Employees must be allowed to keep all their earned tips. Tip pooling is allowed.

  • Credit card tips must be furnished by the next payday. Credit card fees can be deducted.

  • Employers cannot use the tip credit for overtime hours. The regular wage must increase for time worked over 40 hours per week.

Tipped employees receive their tips on top of regular wages. A tipped employee must earn at least $30 per month in tips. The employer then only needs to pay them $2.13 per hour (federal rules), but the employee must average at least $5.12 per hour in tips ($2.13 + $5.12 = $7.25, the federal minimum wage). That $5.12 figure is the tip credit. Keep in mind that certain states and cities have higher minimum wages and thus differing tip credit rules.

Note that tip credit rules don’t apply to salaried employees.  Employers cannot count a salaried, exempt employee’s tips toward the federal minimum salary, which is currently $455 per week. Basically, a tip credit is only applied against an hourly employee’s minimum wage. In simpler terms, tips are the property of the employee and not considered compensation paid by the employer.

So what’s the real benefit of the tip credit if employers need to cover the difference regardless? Well, $5.12 is a small threshold to cross in an hour of work cutting hair or waiting tables. Most tipped employees make this amount (and more) averaged over their shift. While tipped employees receive more than the minimum wage through tips, the true benefit of the tip credit is that it helps businesses reduce their direct labor costs.

New York and the Tip Credit

Governor Cuomo’s hearings could determine tip credit rules for the entire state, not just New York City. That said, the city provides us with a useful case study. Plus, we all know how the city loves its restaurants.

The current minimum wage in New York City for restaurant workers is $13.00. The minimum wage for tipped workers is $8.65. Using our math from before, the tip credit amount for a New York City tipped employee is $4.35 per hour in tips ($13.00 – $8.65 = $4.35). Should an employee fail to make $4.35 in tips per hour during their shift, the employer is responsible to pay them that amount.

As an example, let’s think about a restaurant with 20 tipped employees who work a standard week in New York City. The annual labor costs for the waitstaff could be budgeted to $359,840. We arrived at that figure through the following:

$8.65 per hour x 40 hours x 52 weeks x 20 employees = $359,840

Now, if Cuomo removes the tip credit ($4.35 per hour in the city), that would mean businesses need to now account for the full minimum wage per employee. The restaurant's new annual labor budget would look something like this:

$13.00 per hour x 40 hours x 52 weeks x 20 employees = $540,800 ($180,960 difference)

That’s a much different budget to plan for with the removal of the tip credit. Depending on the industry or current profit margin, this could drastically change how businesses operate or how they price their products.

That more than explains restaurant owners' bellyaching over the potential change—and it's safe to assume they aren't the only ones waiting on Governor Cuomo's final decision.

If you're in charge of running HR or payroll in the Empire State, you’re in a class of your own. New York is known for some of the most challenging labor laws in the country. From a robust paid family leave mandate to annual minimum wage increases, the state has a habit of pushing the envelope when it comes to HR compliance.

Feeling overwhelmed? Don't go it alone. Whether you have employees in Albany or Yonkers, New York Labor Laws 2018 includes everything you need to know to get the job done. Read the guide by clicking below. 

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