Restaurant and hotel industry wage and hour alert

DECEMBER 20, 2010

Restaurant and hotel industry wage and hour alert

New York Department of Labor issues final Wage Order effective January 1, 2011,
setting new pay and notice requirements
By Joseph A. Carello and Tara Eyer Daub
The New York Department of Labor has completed its process, begun over a year ago, of
developing and issuing new wage and hour requirements applicable to employees working in the
hospitality industry. Released on December 15, 2010, and effective January 1, 2011, the new Wage
Order combines the wage orders for the restaurant industry and the hotel industry into a single wage
order. The new Wage Order brings significant changes for employers in these industries, with only a
short period to implement the necessary changes. This article provides an overview of the provisions
of the new Wage Order that contain the most significant changes from current law. A copy of the
new Wage Order can be obtained from the authors upon request and will be available on the New
York Department of Labor’s website.

Effective date
The effective date for all provisions of the final rule is January 1, 2011. Recognizing the short notice
being provided to employers, the Department has advised that it will “exercise discretion” regarding
enforcement of the new rules between January 1, 2011, and February 28, 2011, to allow employers
time to implement changes to their payroll systems. However, the Department has emphasized that,
as of March 1, 2011, or the next regularly scheduled payroll date, all employees covered by the rule
must be paid any additional wages owed as a result of the rule changes computed retroactively to
January 1, 2011.

Notice to employees
Prior to the start of employment, the employer must provide each employee with written notice of
the employee’s pay rate, tip credit, and pay day. With respect to the tip credit, the notice must state
that extra pay is required if tips are insufficient to bring the employee up to the basic minimum
hourly rate. In addition, during employment the employer must provide written notice of any change
to the employee’s pay rate. The employer must obtain an acknowledgement of the employee’s receipt
of notice and maintain the records for six years. The employer has the burden of proving compliance

with the notification provisions. The Department has provided a sample notice and
acknowledgement form in the Wage Order, which is sufficient to meet the employer’s burden.

The Department is also developing a notice to employees, which hospitality industry employers must
post in their establishments, regarding the new Wage Order and the right of employees to retroactive
pay during the implementation period between January 1, 2011, and February 28, 2011. The
Department plans to post the notice on its website prior to January 1, 2011.

Reduced allowable tip credit for food service workers
The new Wage Order reduces the tip credit for food service employees, defined to include those
employees who are primarily engaged in the serving of food and drinks, including wait staff,
bartenders, captains, and bussing personnel, who regularly receive tips. The current minimum wage
under federal and state law is $7.25 per hour. Under existing law, a tip credit of $2.60 per hour is
permitted, so food service workers must be paid at least $4.65 per hour. The new Wage Order
provides that the tip credit cannot exceed $2.25 per hour, so the food service worker must receive a
wage of at least $5.00 per hour. The total of tips received plus the base rate must equal or exceed
$7.25 per hour.

For other tipped service employees (i.e., non-food service employees who customarily receive tips of
at least $1.60 per hour), the employee must receive at least $5.65 per hour and the tip credit cannot
exceed $1.60 per hour. Special rates apply for service employees working in resort hotels. The total of
tips received plus the base rate must equal or exceed $7.25 per hour.

Special rules for employees working in tipped and non-tipped occupations
The new Wage Order provides that no tip credit can be applied on any day in which the lesser of two
(2) hours or 20% of the employee’s shift is spent working in a non-tipped occupation.

Credit cards fees applied to gratuities
Consistent with the Department’s existing opinion letters, the new Wage Order contains provisions
clarifying the rules with respect to application of credit card fees to gratuities. The new Wage Order
specifies that an employer is not required to pay the employee’s pro-rated share of the credit card
company’s processing fee for processing the amount charged for the tip. Rather, the employer is
required to pay the employee the amount of the tip charged to the credit card minus the pro-rated
portion of the fee charged by the credit card company. The Wage Order contains an example of this
calculation.

Hourly rates required
Under current law, a hospitality industry employer may pay a non-exempt employee a salary,
provided that the employee is paid at the overtime rate for all hours over 40 per week, based on
calculation of the employee’s regular hourly rate. This rule will change effective January 1, 2011. The
new Wage Order specifically requires that all non-exempt employees must be paid an hourly rate of
pay. Only employees who qualify under the administrative, executive, and professional exemptions
may be paid on a salary basis.

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If an employer fails to pay non-exempt employees on an hourly basis, the regular hourly rate will be
calculated by dividing the employee’s total weekly earnings, not including exclusions from the regular
rate, by the lesser of 40 hours or the actual number of hours worked during the week.

All employers must pay non-exempt employees for overtime work at the rate of 1 1/2 times the
employee’s regular rate for hours worked in excess of 40 hours in one workweek. In calculating
overtime for tipped employees, the new Wage Order emphasizes employers are prohibited from
subtracting the tip credit from the regular hourly rate first and then multiplying the reduced rate by
one and one half. The Wage Order also includes an example of how overtime should be calculated
for tipped employees.

Tip sharing and tip pooling
Tip sharing is a practice in which a directly tipped employee shares a portion of his or her tips with
another eligible, tipped employee who participated in providing service to the customer. Mandatory
tip sharing is permitted under current law and under the new Wage Order. Although the employer
can mandate the percentage, the employees must handle all of the transactions themselves.
Employers must maintain records relating to the tip sharing system for six years, as described below,
and the records must be regularly made available to participants for review.

By contrast, tip pooling is a practice in which the tips of directly tipped employees are pooled
together and redistributed among other eligible, tipped employees. Although tip pooling is legal
under federal law, New York currently prohibits mandatory tip pooling. Under the new Wage Order,
however, employers will be permitted to require food service workers to participate in a tip pool and
may set the percentage for distribution. Only food service workers may receive distributions from the
tip pool. Employers must maintain records relating to the tip sharing system for six years, as
described below, and the records must be regularly made available to participants for review.

In a mandatory tip sharing or tip pooling system, eligible employees are limited to other food service
workers who participate in providing service to customers. In order to be eligible, the employee must
“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.” Examples of eligible occupations
include wait staff, counter personnel serving customers, bus persons, bartenders, service bartenders,
barbacks, food runners, captains who provide direct food service to customers, and hosts who greet
and seat guests.

Employers who operate a tip sharing or tip pooling arrangement must maintain records for six years,
which include (1) a daily log of tips collected by each employee, (2) a list of the occupations the
employer deems eligible to receive tips through the tip sharing or tip pooling system, (3) the shares of
tips that each occupation is scheduled to receive, and (4) the amount of tips that each employee
receives from the tip share or tip pool.

Service charge rules
Under the New York Labor Law, an employer cannot retain any part of an employee’s gratuity. The
New York Court of Appeals has held that this restriction applies to any service charge that the
customer understands to be a gratuity. The new Wage Order imposes a rebuttable presumption that
any additional charge to a customer, such as any charge for “service” or “food service,” is a gratuity
and must be distributed to the employee. If the employer charges a customer any fee that is neither

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for food/beverage nor a gratuity to service employees, the employer must notify the customer in
writing of the purpose of the charge. For instance, a charge for administration of a banquet must be
clearly identified as such in the employer’s contract for services with the customer, and on any menu
or bill listing prices, using ordinary language in a font size no smaller than 12-point font. The records
must be kept for at least six years.

Spread of hours pay/set-off eliminated
Under the current wage orders, if an employee’s workday exceeds 10 hours from beginning to end,
including any breaks and/or intervals off duty, the employee is entitled to receive an additional hour
of pay at the minimum wage rate. While employers are currently permitted to apply a set-off
provided that the wages paid to the employee for hours worked exceed minimum wage, the new
Wage Order eliminates this set-off. Effective January 1, 2011, on each day on which the spread of
hours exceeds 10, the employee must receive one additional hour of pay at the basic minimum hourly
rate. The additional hour cannot be offset by any credits for meals or lodging. However, the
additional hour is not a payment for time worked and need not be included in calculating the regular
rate for overtime.

Uniforms and maintenance
When an employee is required to purchase a uniform, the employer must reimburse the employee for
the cost by the next payday. A uniform is defined as clothing required to be worn while working,
except clothing that may be worn as part of an employee’s “ordinary wardrobe.” The new Wage
Order defines “ordinary wardrobe” to mean “basic street clothing selected by the employee where
the employer permits variations in details of dress.”

New York employers who require employees to wear a uniform currently must pay a weekly cleaning
allowance. Although recognized under federal law, the “wash and wear” exemption is not currently
recognized under state law. The new Wage Order includes a “wash and wear” exception, providing
that an employer need not pay the cleaning allowance if the uniforms can be washed by the employee
with other personal garments, do not require dry cleaning or other special treatment, and are given to
employees (or reimbursed by the employer) in sufficient numbers in relation to the average number
of days per week worked by the employee. The weekly uniform allowance amount depends on hours
worked (e.g., $9.00 per week for workweeks over 30 hours) and is not subject to offset. No uniform
maintenance allowance is required if the employer makes laundry service available to employees on a
frequent basis at no cost and provides employees with notice in writing.

Credits for meals and lodging
Under current law, employers may take a credit against the minimum wage for meals and/or lodging.
The new Wage Order places limitation on the maximum value for meals and lodging. For restaurants
and all-year hotels, meals can be valued at no more than $2.50 per meal and are subject to maximum
numbers per day. The Wage Order also includes maximum values for lodging credits to restaurant
employees, lodging credits in all-year hotels, and meal and lodging credits in resort hotels.

The meals provided must contain a variety of wholesome and nutritious foods, including at least one
food from four defined food groups. Meals are deemed to be furnished when made available to the
employee during reasonable meal periods and when customarily eaten by that employee.

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Wage deductions
Consistent with existing law, the new Wage Order emphasizes that deductions for spoilage, breakage,
non-payment by customers, cash shortages or losses, and fines for disciplinary purposes, are
prohibited. Nor may the employer charge employees separately for these items.

For further information, please contact your Nixon Peabody attorney or:

•        Joseph A. Carello at 585-263-1434 or jcarello@nixonpeabody.com

•        Tara Eyer Daub at 516-832-7613 or tdaub@nixonpeabody.com

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