Article contributed by Valerie Bluth, Ellenoff Grossman & Schole LLP
Most bar and restaurant employers in New York have a handle on the basics of proper payment of tipped and non-tipped employees – employers must be tracking employee hours worked, paying at least the minimum wage applicable to the employer’s location for hours worked up to 40 in a week (less the tip credit as applicable to tipped employees), and paying overtime for hours worked over 40 in a week.
However, with these seemingly simple mandates come some important distinctions and pitfalls that can lead to big liability. Detailed below are some common wage/hour pitfalls hospitality industry clients regularly encounter.
Incorrect Calculation of the Overtime Rate for Tipped Employees
It is axiomatic that non-exempt employees are entitled to be paid at a higher rate for hours worked over 40 in a single workweek, and conventional wisdom is that the “overtime” rate is 1.5 times the employee’s hourly rate of pay. However, when dealing with tipped employees, the calculation is not so simple.
Hospitality employers often make the mistake of considering the “tipped rate” – the regular minimum wage less the applicable tip credit – the employees “hourly rate” when calculating overtime, and simply multiply that tipped rate by 1.5. The correct overtime rate calculation for employees paid the tipped rate is actually 1.5x the full minimum wage, less the amount of the tip credit.
For example, in 2018, a hospitality employer in New York City with 20 employees must pay tipped food service employees a minimum of $13.00 per hour, less a $4.35 per hour tip credit, or $8.65 per hour. The correct overtime calculation is not ($8.65 x 1.5), but rather (($13.00 x 1.5) – $4.35). So, the overtime rate for such a tipped food service employee is $15.15/hour – not $12.98/hour.
Blended Rate Overtime for Employees Paid Multiple Rates in a Single Workweek
Additional overtime calculation issues come into play if an employee works over 40 hours in a week and works at two different rates of pay in that week. In that case, the employer must pay overtime based on a “blended” rate.
The good news is, for a non-tipped employee, the “blended” rate is an easy calculation. To find the blended rate, multiply each rate by the number of hours worked at that rate, add those totals together, and then divide that sum by the total number of hours worked in that week. However, the employee is not paid 1.5x that blended rate for hours over 40. Rather, because the employee has already been paid at a straight time rate for all hours, just divide the blended rate in half and pay that half-time rate as the overtime premium for each hour over 40.
By way of example, assume an employee works 35 hours as a line cook between Monday and Thursday, earning $13/hour, and then works 10 hours catering a private event on Friday, earning $30/hour. The employee’s blended rate and overtime premium would be calculated as follows:
- $13/hour x 35 hours = $455
- $30/hour x 10 hours = $300
- Total Straight Time Pay: $755
- Total Hours Worked: 45 hours
- Blended Rate: $755/45 hours = $16.78
- Overtime Premium: $16.78 (blended rate)/2 = $8.39
- Overtime Owed: $8.39 (overtime premium rate) x 5 (overtime hours worked) = $41.95
The calculation gets a bit more complicated when an employee works part of the week in a tipped position earning the tipped rate, and part of the week in a position for which the employer does not take the tip credit. In that case, employers must calculate the blended rate, and half-time overtime premium, without regard to the tip credit. The employer then calculates the number of hours the employee worked at the tip rate multiplied by the tip credit, and then subtracts that amount from the pay otherwise owed. In visual terms, the calculation is:
[(Rate A x hours worked at Rate A) + (Rate B x hours worked at Rate B) + (half-time overtime premium x hours over 40)] – (tip credit x hours worked at tipped rate).
For example, assume a server worked 45 hours in a week, of which 35 were spent on regular wait staff duties at $8.65 per hour ($13.00 per hour less the $4.35 tip credit), and 10 hours were spent working at a private event at $30 per hour (the only difference between the line cook in the example above and this server is that the server was paid a tipped rate for 35 hours). Based on the above calculations, the employee would be owed $796.95 if no tip credit was taken. To properly account for the tip credit for the 35 hours worked at a tipped rate in that week, the calculation would be as follows:
- Total Pay Owed for Week, Incl. Overtime Hours: $755 straight time + $41.95 overtime = $796.95
- Tip Credit Taken for Week: $4.35 x 35 hours = $152.25
- Total Owed for Week, Including Overtime and Less Tip Credit: $644.70
The 80/20 Rule
Another often overlooked issue regarding the wages of tipped employees is the so-called “80/20” rule, which involves tipped employees performing non-tipped duties. Under New York law, the employer cannot take the tip credit for any day that a tipped employee works in non-tipped occupation or performs non-tipped duties like setting tables, rolling silverware or making coffee for 2 hours or more, or for more than 20% of the employee’s workday, whichever is less. Thus, if an employee works in both a tipped and non-tipped position or spends too much time performing non-tipped duties, the employer will “lose” the tip credit.
Employers must ensure that their tipped employees are not violating the so-called “80/20” rule. In that regard, employers should carefully monitor the non-tipped duties of tipped employees to ensure they do not lose the tip credit. As a practical matter, because of the difficulty in recording the time spent on tipped vs. non-tipped work on a given day, wherever possible employers should avoid assigning non-tipped work to tipped employees to avoid the loss of the tip credit. It is not uncommon for a tipped employee to later claim that they should have been paid the full minimum wage because they spent too much time on non-tipped work.
Payroll Company Errors
A final word of caution: even where an employer knows the correct overtime rate calculations, it is not uncommon for the employer’s payroll company to miscalculate the overtime rate. Employers should regularly audit paystubs or payroll earnings reports to ensure that employees are being paid the correct overtime rate. If an employer determines that the payroll company has been paying employees an incorrect overtime rate, a broader audit should be conducted to determine the extent of the underpayment on a by-employee basis, and steps taken to rectify the underpayment.
Valerie Bluth is an associate in the Labor & Employment Group at Ellenoff Grossman & Schole LLP. For ten years, Ms. Bluth has exclusively represented and advised clients in employment-related matters, with a particular focus in the hospitality industry. Above all, Ms. Bluth works tirelessly to ensure clients are in compliance with an ever-changing landscape of federal, state and local employment laws, especially with respect to pay practices and employment policies, and to devise practical solutions for any employment problems that might arise. Ms. Bluth can be reached at (212) 370-1300 or firstname.lastname@example.org.