New York Governor Orders Elimination of the Tip Credit for Employers Subject to the Minimum Wage Order for Miscellaneous Industries and Occupations

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For over a year, New York State employers harbored concerns that New York State would enact rules that would eliminate their ability to apply a tip credit towards the wages of employees who earn tips. The reason for this concern was that Governor Andrew M. Cuomo, as part of his 2018 State of the State address, directed the New York State Labor Commissioner to examine the impact of minimum wage tip credits. While it took over a year, the New York State Department of Labor (NYDOL) finally issued its long-awaited report over the New Years’ break and concluded that the tip credit should be eliminated for all employers subject to the provisions of the Minimum Wage Order for Miscellaneous Industries and Occupations.

Governor Cuomo has already announced that he would implement these recommendations and that employers subject to the Minimum Wage Order for Miscellaneous Industries and Occupations will be forced to phase out the tip credit over the course of 2020. Notably, the NYDOL did not recommend the elimination of the tip credit by employers that are subject to the Minimum Wage Order for the Hospitality Industry. Accordingly, restaurants, hotels, bars, and lounges may continue applying a tip credit towards their employees’ wages, provided the employer satisfies all technical requirements necessary for claiming a tip credit.1

Background

New York State law currently requires employers across the state to pay employees a minimum wage that differs based on geographic location of the work performed, and in some cases, the size of employer. The current minimum wage schedule is as follows:

Category of Employer2

Basic Minimum Wage Rate

(December 31, 2019)

Basic Minimum Wage Rate

(December 31, 2020)

Basic Minimum Wage Rate

(December 31, 2021)

New York City large employer (11 employees or more)

$15.00

$15.00

$15.00

New York City small employer (10 employees or less)

$15.00

$15.00

$15.00

Long Island and Westchester

$13.00

$14.00

$15.00

Remainder of New York State

$11.80

$12.50

TBD

Employers in the hospitality industry (restaurants, hotels, bars, and lounges) are permitted to apply a tip credit towards employees’ wages at the following rates:

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Category of Employer3

Tip Credit

(December 31, 2019)

Direct Wage

(December 31, 2019)

Tip Credit

(December 31, 2020)

Direct Wage

(December 31, 2020)

Tip Credit

(December 31, 2021)

Direct Wage

(December 31, 2021)

New York City large employer (11 employees or more)

$5.00

$10.00

$5.00

$10.00

$5.00

$10.00

New York City small employer (10 employees or less)

$5.00

$10.00

$5.00

$10.00

$5.00

$10.00

Long Island and Westchester

$4.35

$8.65

$4.65

$9.35

$5.00

$10.00

Remainder of New York State

$3.95

$7.85

$4.15

$8.35

TBD

TBD

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While Governor Cuomo’s announcement does not affect these tip credit rates, the announcement does affect employers subject to the Minimum Wage Order for Miscellaneous Industries and Occupations. Virtually all businesses, except for hospitality employers, agricultural employers, not-for-profit employers that have exempted themselves from coverage under the wage order, and building services employers, fall under this category. Businesses that are subject to the Minimum Wage Order for Miscellaneous Industries and Occupations that typically apply tip credits include, but are not limited to, nail salons, hairdressers/barber shops, aestheticians, car washes, parking lots, and moving companies.

Prior to Governor Cuomo’s announcement, employers subject to the Minimum Wage Order for Miscellaneous Industries and Occupations were entitled to apply a tip credit. However, determining the amount of the tip credit was subject to a fairly complex scheme, which required employers to ascertain the average amount of tips the employee received per week. The low scale is:

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Category of Employer

Low Tip Credit

(December 31, 2019)

Direct Wage

(December 31, 2019)

Low Tip Credit

(December 31, 2020)

Direct Wage

(December 31, 2020)

Low Tip Credit

(December 31, 2021)

Direct Wage

(December 31, 2021)

New York City

$2.25

$12.75

$2.25

$12.75

$2.25

$12.75

Long Island and Westchester

$1.95

$11.05

$2.10

$11.90

$2.25

$12.75

Remainder of New York State

$1.75

$10.05

$1.90

$10.60

TBD

TBD

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The high scale is:

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Category of Employer

High Tip Credit

(December 1, 2019)

Direct Wage

(December 1, 2019)

High Tip Credit

(December 1, 2020)

Direct Wage

(December 1, 2020)

High Tip Credit

(December 1, 2021)

Direct Wage

(December 1, 2021)

New York City

$3.65

$11.35

$3.65

11.35

$3.65

$11.35

Long Island and Westchester

$3.20

$9.80

$3.40

$10.60

$3.65

11.35

Remainder of New York State

$2.90

$8.90

$3.05

$9.45

TBD

TBD

--> Scroll to see full table data

If a tipped employee’s average weekly tip earnings fall below the tip credit on the low scale, then the employer will not be eligible to apply a tip credit towards that employee’s wages. If the tipped employee’s average weekly tip earnings fall between the tip credit of the “low” scale and “high” scale, then the employer will be eligible to apply the “low” scale tip credit. Finally, if the tipped employee’s average weekly tip earnings exceed the tip credit of the “high” scale, then the employer will be eligible to apply the “high” scale tip credit.

NYDOL Report

In accordance with Governor Cuomo’s directive in his State of the State speech, the NYDOL held seven hearings across the state, which lasted approximately 40 hours, included more than 700 speakers and were attended by an estimated 3,100 individuals. The NYDOL solicited testimony from many stakeholders during these hearings and both employers and employees testified. In addition, the NYDOL received written comments from more than 3,000 individuals through emails, letters and postcards and petitions. The NYDOL disclosed that car wash attendants and nail salon workers provided the “overwhelming majority of comments for the miscellaneous industries.”

Based on all of the information received in connection with these hearings, the NYDOL recognized that employers were concerned that elimination of the tip credit would increase costs and further reduce profit margins in businesses that are already dealing with increasing minimum wage, rent, insurance, utility costs, property taxes and other regulations. Nevertheless, the NYDOL concluded, “[e]liminating the tip credit system would provide a more predictable wage floor for tipped workers and would help offset known wage fluctuations due to customer preference, weather, the economy and seasonality.” The NYDOL also explained that it was persuaded that the complex tip credit regulations found in the Minimum Wage Order for Miscellaneous Industries and Occupations made it difficult for employees to understand how they were getting paid. The NYDOL explained that eliminating this complexity was another driving force in reaching the conclusion that the tip credit regulations in the Minimum Wage Order for Miscellaneous Industries and Occupations should be eliminated. Finally, the NYDOL also explained that the “risk of underpayment” and “wage theft”—both intentional and due to the complexity of the tip credit regulations—is another reason why it recommended the elimination of the tip credit for employers subject to the Minimum Wage Order for Miscellaneous Industries and Occupations.

Going Forward

In accordance with Governor Cuomo’s recent announcement, the tip credit for employers subject to the Minimum Wage Order for Miscellaneous Industries and Occupations will be phased out. On June 30, 2020, the eligible tip credit will be halved. Accordingly, the new scale is as follows:

Category of Employer

Low Tip Credit

(June 30, 2019)

Direct Wage Low Tip Credit

(June 30, 2019)

High Tip Credit

(June 30, 2020)

Direct Wage High Tip Credit

(December 1, 2020)

New York City

$1.15

$13.85

$1.85

$13.15

Long Island and Westchester

$1.00

$12.00

$1.60

$11.40

Remainder of New York State

$0.90

$10.90

$1.45

$10.35

On December 31, 2020, the tip credit will be eliminated altogether.

Takeaways

One big question remains: is the tip credit safe for New York State hospitality employers? The answer, for now at least, is yes. This is due to the large turnout of the employer community in response to the NYDOL hearings. The NYDOL, in its report, acknowledged the cost pressures facing hospitality employers, and it may very well be that the sheer volume of constituents who expressed these concerns saved the tip credit for hospitality employers in New York State.

One final note: this issue will certainly arise again in 2021 when the current minimum wage rates will be debated once more. The employer community should heed the lesson that Albany hears its voice when it makes its concerns heard.

Footnotes

1 There are highly technical requirements that hospitality employers need to meet in order to be eligible to apply a tip credit. For example, employers must notify employees about the intent to apply the tip credit, and the notice must comply with the terms of the Fair Labor Standards Act and the New York State regulations. Further discussion of these requirements is outside the scope of this article.

2 There is a separate set of minimum wage rules that cover fast food employers in New York State. The minimum wage for all fast food employees in New York City is $15.00 per hour; in the rest of New York State the fast food minimum wage is $13.75 per hour; on December 31, 2020, it will increase to $14.50 per hour, and on December 31, 2021, it will increase to $15.00 per hour.

3 Fast food employers are not permitted to apply tip credits toward fast food employees’ wages.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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