NYC Employment Attorney on Proper Tip Credit Payment for Restaurant Workers
If you work in the restaurant industry in New York City or own a local eatery, tip credit rules can get confusing. Tipped employees have special protections under both federal and New York law, and any missteps by an employer can lead to serious legal consequences. Whether you are a restaurant manager or a server, understanding these rules is critical. Below, our employment law firm in NYC explains how tip credits work, when they can be taken, and why you cannot require tip-eligible workers to share tips with managers or other ineligible employees. Be aware that minimum wage laws and tip tax credits may change and often do change. For the latest regulations and legal advice, consult an attorney today.
Table of Contents
- What Is a Tip Credit Under NY and Federal Law?
- Notification Requirements: Why Written Notice Matters
- Prohibited Tip Pooling and Tip Sharing Practices
- Tax Withholding Obligations for Employers
- Consequences of Violating Tip Credit Rules
- Disclaimer
1. What Is a Tip Credit Under NY and Federal Law?
A “tip credit” lets employers pay tipped workers a reduced wage, as long as the tips they earn bring their total pay up to or above the minimum wage. This system is authorized at both the federal and state level. However, New York has its own additional requirements, which can be stricter than federal law.
- Federal Law (FLSA): Under the Fair Labor Standards Act (FLSA), an employer can pay below the standard federal minimum wage if the worker regularly receives tips. The idea is that tips make up the difference. But for the employer to take this credit, employees must be notified that part of their wage will come from tips.
- New York Law: The New York Labor Law (NYLL) also allows a tip credit, but it sets higher minimum cash wages for tipped employees than federal law does. New York also imposes more stringent notice requirements. If an employer fails to follow every step, the tip credit can be lost.
Failing to follow the rules often leads to wage and hour lawsuits. For instance, in Salinas v. Starjem Rest. Corp., 123 F. Supp. 3d 442 (S.D.N.Y. 2015), a restaurant violated New York Labor Law when it forced employees to share tips with managers who were not eligible to receive them. This case highlights how serious these violations can be.
2. Notification Requirements: Why Written Notice Matters
New York law does not allow an employer to claim the tip credit unless employees receive specific notice. This notice must be in writing and explain several details. Federal law also requires notification, but New York goes further.
Tip Credit Notice Under New York Law
According to 12 N.Y.C.R.R. § 146-2.2, an employer who wants to claim a tip credit must:
- Inform the employee in writing that part of their wages will come from tips.
- Provide this notice in English and in the employee’s primary language if that version is available on the NY Department of Labor’s website.
- Explain that if the tips do not reach the full minimum wage, the employer must pay the difference.
- Obtain a signed acknowledgment of receipt from the employee.
- Keep that acknowledgment on file for six years.
A generic government poster about the minimum wage does not meet these requirements. The written notice must be specific enough so the employee understands that the employer intends to rely on tips to satisfy part of the wage.
Employer’s Burden to Prove Proper Notice
If you are an employer, you bear the burden of proving these requirements were met. An oral promise is not enough. The employer must show the proper written notice was given. Courts have taken this rule seriously, as in Mangahas v. Eight Oranges Inc., No. 22-CV-4150 (LJL), 2024 WL 4555669, at *13 (S.D.N.Y. Oct. 22, 2024). There, the court states that if written notice is missing, an employer cannot claim any tip credit.
3. Prohibited Tip Pooling and Tip Sharing Practices
Restaurant workers often pool tips, but managers and certain back-of-house staff are never allowed to keep part of those tips. This rule exists under both federal and New York law.
Federal Law: FLSA
Under the Fair Labor Standards Act, employers cannot let managers, supervisors, or owners take any portion of employees’ tips. 29 U.S.C. § 203(m)(2)(B) states that an employer “may not keep tips received by its employees for any purposes.” It applies whether or not the employer claims a tip credit. In other words, if a manager with hiring or firing power takes a share of tips, the employer is in violation.
New York Labor Law
New York Labor Law § 196-d mirrors federal law on this issue. The statute says:
“No employer or his agent or an officer or agent of any corporation, or any other person shall demand or accept, directly or indirectly, any part of the gratuities, received by an employee ….”
This language clearly bars any tip-sharing scheme that benefits managers or others who do not customarily receive tips. The case Shahriar v. Smith & Wollensky Rest. Grp., Inc., 659 F.3d 234 (2d Cir. 2011), confirmed that only employees who serve customers—like waiters and busboys—are allowed to receive a share of the pooled tips.
When a business violates these rules, employees can file claims to recover the tips that were improperly taken or diverted. In many cases, the court may award “liquidated damages” on top of the wages owed.
4. Tax Withholding Obligations for Employers
Restaurants often misunderstand their tax obligations when it comes to tip income. Under 26 C.F.R. § 601.401(a)(3), employers must deduct and withhold the required amounts from wages. This responsibility remains with the employer whether or not the correct amounts are actually withheld. If an employer fails to do so, it can face liabilities for unpaid payroll taxes, interest, and possible penalties.
Why This Matters for Tip Credit Employees
Although tip credit employees receive a reduced wage rate, the employer still needs to factor in all tips as taxable income. The employer must:
- Keep accurate records of total tips received.
- Report those tips as part of the employee’s wages.
- Withhold Social Security and Medicare taxes, along with any applicable state taxes.
Some businesses assume that because the employee is receiving most pay from tips, the business is off the hook for withholding. That is incorrect and can lead to substantial tax troubles later. It is vital to track all tips correctly and withhold accordingly.
5. Consequences of Violating Tip Credit Rules
Restaurants that fail to follow these requirements can face a range of consequences. Both state and federal law provide employees with strong legal remedies.
Loss of the Tip Credit
If an employer never gave the written notice or failed to pay back employees when tips fell short, the employer can lose the tip credit entirely. The court may order that employees be paid the full minimum wage for every hour worked. This can add up to a large amount over time.
Repayment of Withheld Tips
When an employer violates the rule against tip pooling with managers, it must repay all misappropriated tips. Under 29 U.S.C. § 216(b), the employer may also owe liquidated damages on top of the wages owed.
Lawsuits and Legal Fees
Employees can bring lawsuits on behalf of themselves and possibly other workers who faced the same violation. Courts often award legal fees to the prevailing employees. This can make litigation costly for noncompliant employers.
Real-World Example: Salinas v. Starjem Rest. Corp.
In Salinas v. Starjem Rest. Corp., 123 F. Supp. 3d 442 (S.D.N.Y. 2015), a restaurant was found to have violated the NYLL by forcing employees to share their tips with management. The employer also lost any tip credit defense because it was using tips improperly. Cases like this underscore the importance of strict compliance with both state and federal requirements.
Contact an Experienced NYC Employment Attorney
Our employment law firm in NYC is dedicated to protecting employee rights and guiding businesses to comply with New York’s tip credit requirements. We offer consultations by video, phone, or in-person to discuss your specific situation. If you are searching for a New York City employment lawyer familiar with tip credit rules, reach out to DeToffol & Gittleman to schedule a consultation.
Disclaimer
The information in this article is for general purposes and is not legal advice. Employment laws vary by jurisdiction and may change frequently. You should consult an attorney for advice specific to your circumstances and the most current legal developments.
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