The Difficulty in Lawfully Compensating Tipped Restaurant Employees

Customer Service Magic tipped employees
Article contributed by Ilan Weiser, Ellenoff Grossman & Schole LLP

After more than a decade of relentless litigation many restaurants now think they are operating lawfully because they are tracking time, paying employees hourly, and paying overtime. It is highly recommended that those restaurants speak with their attorneys to make sure they are in compliance with other, perhaps less well-known regulations, especially concerning their tipped employees.

Specifically, there has been an uptick in litigation against restaurants alleging violation of the so-called “80/20 Rule.” This law prohibits restaurants from taking the tip credit if on any day its tipped employees work in a non-tipped occupation for two hours or more, or for more than 20% of their shift, whichever is less. What this means is that a delivery worker working a 10-hour shift cannot spend three hours of that shift performing non-tipped work, such as polishing silverware, chopping vegetables, or cleaning the restaurant.  If that occurs, the law is violated, and the restaurant loses their ability to take the tip credit for that day and pay that delivery worker below the standard minimum wage. The resulting liability could include the restaurant owing that delivery worker the difference between the tipped minimum wage and standard minimum wage for all hours worked that day, plus additional liquidated damages and the delivery worker’s attorneys’ fees.

A restaurant’s exposure to labor law claims as it concerns tipped employees does not stop there. A restaurant also can fall victim to similar legal liability by failing to provide adequate notice to its tipped employees that it is taking a tip credit. New York State, for example, has stringent requirements that tipped employees be provided written notice of the restaurant’s intention to take a tip credit, as opposed to federal law which permits such notice be given verbally.

Failure to give adequate notice of the tip credit can result in legal liability with potential damages similar to that of the 80/20 Rule, or worse. In addition to the restaurant being liable for the damages mentioned above, failure to provide a tipped employee with adequate notice of the restaurant’s intention to take a tip credit will also likely result in statutory violations, such as those under the New York State Wage Theft Prevention Act (“WTPA”).

Currently, failure to provide written notice of the tip credit under the New York State WTPA can result in penalties up to $10,000.00, per employee. The Courts have come down hard against restaurants concerning claims for failure to give such adequate written notice, at the time of hire and in weekly wage statements issued to tipped employees, as is required under the New York State WTPA. For example, tipped employees have been successful litigating against their restaurant employers for such violations, despite the fact that in some cases, they were provided written notices that contain their correct regular rate of pay, correct overtime rate of pay, and were distributed in the employee’s native language.

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However, if the restaurant, for example, failed to check the box for “tips” under “allowances” taken on the form Notice provided by the New York State Department of Labor, shrewd plaintiffs’ attorneys have argued that such is not sufficient notice under the law, and thus, their clients are entitled to the full value of damages under certain sections of the New York State WTPA, in addition to the difference between the tipped minimum wage and standard minimum wage for all hours worked, liquidated damages, and attorneys’ fees, as mentioned above.

In addition, many restaurants in New York do not yet realize that state law now differentiates between tipped ‘food service workers’ (i.e., servers, bussers, bartenders) and tipped ‘service employees’ (i.e., delivery workers).

The main impact of this fairly recent distinction is that the restaurant must pay these two categories of employees different cash wage rates. The distinction has been in effect since December 31, 2016, however, many restaurants continue to pay all tipped employees equally, which is problematic.

The above examples are just a few of the many legal pitfalls restaurants are still currently facing concerning their tipped workers. The threat of costly litigation is so severe that some restaurants have decided to do away with tipping altogether. The vast majority of restaurants still employ tipped workers, and those employees want to continue to receive tips, as seen by the grassroots movements across the nation, and especially in New York, to combat government efforts to abolish the tip credit.

Know that there are other ways to modify your operations which may decrease the likelihood of a lawsuit from tipped employees if your restaurant does not want to take the drastic measure of eliminating tips altogether.

  1. The restaurant should be accurately tracking how much time tipped employees spend performing non-tipped work. If the tipped employee is performing non-tipped duties for two hours or more or more than 20% of their shift (whichever is less), then the restaurant should be paying that employee at least the regular non-tipped minimum wage for that work time.
  2. The restaurant may want to implement a company policy prohibiting tipped employees from performing non-tipped work because tracking non-tipped work time can be difficult from an administrative standpoint. This way, the restaurant may not need to worry about complying with the 80/20 Rule.
  3. Some restaurants have also started to outsource the job functions of certain tipped employees, especially delivery workers, to third parties not affiliated with the restaurants themselves in an effort to further avoid liability for these wage and hour violations.

Restaurants are urged to periodically examine their pay and timekeeping practices concerning their tipped employees so as to ensure they are in compliance with applicable law and limit legal exposure to the fullest extent possible.


EGS LLP Ilan Weiser tipped employeesIlan Weiser is an Associate in the Labor & Employment practice group at Ellenoff Grossman & Schole LLP in New York City. Mr. Weiser exclusively represents businesses of all sizes and sectors on how best to comply with the federal, state and local labor laws that govern their operations. Mr. Weiser’s principal area of expertise is employment law litigation and has vigorously defended hundreds of his clients in federal and state court and before various governmental agencies against claims of employment discrimination and unfair pay practices. Mr. Weiser has particularly in-depth knowledge of wage and hour law and regularly defends and counsels his clients in class and collective lawsuits concerning claims for unpaid wages. Mr. Weiser is also the Chair of the Labor & Employment Subcommittee of the New York City Bar Association Hospitality Committee. He can be reached by phone at 212-370-1300 or by email at iweiser@egsllp.com