Restaurant owners and operators are under fire from any number of directions these days. Two of the strongest attackers these days are the New York State Department of Labor (“DOL”) and the plaintiffs’ bar. The media reports almost on a weekly basis another restaurant either facing a class/collective action, or being investigated by the DOL for a violation of wage and hour laws. Typically, these cases involve any number of allegations, including: failure to pay overtime and spread of hours, managers in the tip pool, improper tip sharing, and improper treatment of tips concerning banquet service charges.
While wage and hour laws and DOL regulations are often arcane and don’t make a lot of business sense to owners faced with the realities of day to day operations, they still have to be complied with, and they still have significant financial liability for non-compliance. Adding fuel to the fire, New York’s DOL relies on “guidelines” in this area that are sometimes more than 30 years old and out of date with today’s restaurant operational realities. This month’s column will answer some of the basic questions concerning “tip appropriation” and spread of hours law in New York.
Basic Premise: Tipping
The basic premises concerning “tips” are as follows: in no event may the employer or his/her “agent” share in the employees’ tips; an employee cannot consent to the employer sharing in the tips; non-service employees may not share in tips.
So, who exactly is an “agent” of an employer? An owner, officer of the corporation or a general manager clearly fit the bill and cannot share in tips. But, what about a maitre ‘d? Or, an assistant manager? This is where it can get murky. The DOL has stated that an agent, “does not include a mere supervisory employee who does not have the authority to hire or fire.” This probably comes as a surprise to most owners. Just because a maitre ‘d has “supervisory” responsibilities over the rest of the dining room personnel does not necessarily mean that the maitre ‘d cannot share in employee tips. The DOL will look at each situation on an individual basis, and pay particular attention to whether the maitre ‘d (or another employee) “acts in the place of the owner”, by performing such functions as hiring and firing employees, or other managerial responsibilities such as disciplining and setting wages or work schedules. Simply “supervising” the service of the dining room will not necessarily be enough to exclude an employee from receiving tips.
What about Tip Sharing?
What does “tip sharing” mean? Very simply, it is when a waiter shares the earned tips with “any employee who participates with the waiter in rendering some personal service to the patron.” New York law specifically permits the sharing of tips by a waiter/server with a buser or “similar” employee. The DOL has opined on numerous occasions about the definition of a “similar” employee. While it is commonly understood that tip sharing includes wait staff, bartenders, captains and busing employees, the DOL has also included in that definition typical front-of-the-house employees such as hostesses, captains, short order cooks and sushi chefs - employees who “render service” and have contact with the guests. However, the DOL has stated that chefs, dishwashers or other non-service employees who render “no direct service” to the public may not share in tips. Restaurant owners should carefully review their tip sharing practices and evaluate which employee classifications are sharing in tips, as penalties for non-compliance with federal and state labor laws are substantial.
A restaurant owner can compel a waiter to share his/her tips with another “similar” employee. Owners also have the right to require waiters to “tip out” to the rest of the service staff. However, as discussed below, they do not have the right to force a server to pool his/her tips.
What about Tip Pooling?
By definition tip pooling is simple: all tip earnings of the service employees are intermingled and then redistributed. By application it is a more complicated process. Briefly, here are some of the ground rules: to be acceptable under law, a tip pool “must be completely voluntary, initiated by the employees themselves with or without the knowledge of management, and not made part of the terms of hire or conditions of continuing employment.” This means that an employer may not be involved in a tip pool - other than that of a “ministerial” or administrative function of “distributing tips charged on credit cards according to a formula devised solely by the affected employees.” I can hear the questions now. No, a restaurant owner cannot determine whether or not he wants to be a “pooled house” - it is up to the employees only.
The DOL has given owners a little bit of a break. They have advised restaurant owners that if employees having decided to pool tips, and further agreed that the employer should play a part in the collection and/or distribution of the pooled tips, the DOL has found it reasonable for the owner - if it chose to participate - to demand that the terms of the tip pool agreement be reduced to writing. The employees should put the terms of the pool in writing and give it to the owner with a list of participating employees. If the employees refuse to put it in writing, the employer could refuse to participate in the collection/distribution. This is an essential defense for employers and should be implemented where tip pools are in place.
Complications certainly arise with tip pooling, and employers need to be aware of some ways they can become ensnared. First, neither management nor the employees can make new hires participate in the tip pool. Any employee can opt-out at any time - certainly an administrative nightmare - however, there are exceptions in rare occasions, including service teams, which will not be addressed in this column. Second, when employees initially consent to the formation and implementation of a tip-pool, 100% of the wait staff do not need to consent -any one can opt-out and keep his/her own tips subject to any tip sharing that the employer may require.
Finally, while the tip pool is a creature of employee creation, management still has the right to discipline an employee caught stealing from it. An employer is permitted under New York law to consider the gratuity pool funds as employee property and discipline an employee for misappropriating or stealing such funds - just as an employer would presumably discipline an employee for stealing another employee’s personal property.
Spread of Hours
If you have been on the unfortunate receiving end of a wage and hour class/collective action under New York Labor Law, or have undergone a DOL audit, you may have seen the words “spread of hours”. Failure to pay “spread of hours” in the appropriate circumstance can be a costly error for employers. New York’s Labor Law requires the following: “on each day in which the spread of hours exceeds 10, an employee shall receive one hour’s pay at the basic minimum wage rate before allowances....” For example, if a server worked a double - an a.m. shift from 11:30 a.m. to 2:30 and then a p.m. shift from 8:00 p.m. 11:30 p.m. - that server would be entitled to 7.5 hours of pay that day. 6.5 hours for the hours worked, plus 1 hour extra pay because the “spread of hours” exceeded ten hours in that work day. Unfortunately, this extra hour of pay is sometimes overlooked in payroll calculations, and can be a costly violation for employers given that the statute of limitations under New York’s Labor Law is 6 years.
The above are just a few of the areas that restaurant owners need to pay particular attention to in these litigious times. However, a general understanding of wage and hour law goes a long way toward preventing costly and time consuming litigation. While it is almost impossible to make one’s organization bullet-proof and immune from a lawsuit, it is possible to decrease the appeal of a class/collective action to an aggressive plaintiffs’ bar. Auditing payroll and tipping practices is a good start.
Carolyn Richmond is a partner at Fox Rothschild, LLP. She can be reached at