Employers in New York currently are permitted to pay tipped workers a direct cash wage that is below the State minimum wage and take a “credit” for some of the tips received by employees to satisfy the difference between the cash wage paid and the full minimum wage. For example, in New York City beginning in 2018, servers for large employers (those with 11 or more employees) may pay servers a direct wage of $8.65 per hour and take a $4.35 per hour credit for tips received by employees (so long as the employees receive at least $4.35 per hour in tips). Combining the two equals the 2018 NYC minimum wage rate for large employers, $13.00. But all of that may be coming to an end if New York Governor Andrew Cuomo gets his way. Today, Governor Cuomo announced that, as part of his upcoming State of the State address, he plans to direct the New York Department of Labor (NYDOL) to schedule public hearings to evaluate the possibility of ending minimum wage tip credits in the State. This is not the first such challenge to the continued use of the tip credit.

If this change is made, tipped workers will have a big boost to their income and employers a big blow to their bottom line. Employers will be required to pay servers and other tipped employees the full minimum wage and such “front of the house” workers also will be entitled to keep the tips they receive on top of the direct wage. Such a move will widen the already large gap between the front of the house workers (e.g. servers) and “back of the house” employees (e.g. cooks) who, under New York law, do not and cannot receive any tips. Notably, the federal DOL has issued proposed regulations that would permit employers who do not take tip credit to share tips with employees in the kitchen to address the income inequality. But without some other change to NY law expanding the group of employees permitted to share tips, service staff would get to keep it all, on top of their proposed wage increase, as the elimination of the credit is, in effect, a substantial wage increase.

In reaction to the increased labor costs imposed on business by the rising minimum wage and shrinking tip credits, some restaurants have eliminated tipping altogether, a trend that might accelerate if tip credits are eliminated. Those who oppose tip credits argue that tips no longer serve as a bonus for good service, but instead often only bring the workers’ wages up to the legal minimum. Governor Cuomo’s announcement also points to studies that show African-American employees often are tipped less than their white co-workers and that workplaces using the tip credit have a higher rate of sexual harassment.

As it recently did with respect to predictive scheduling, the NYDOL will hold public hearings to solicit input from workers, businesses and other interested parties, and likely will receive testimony from pro-employee and pro-employer groups. An eventual decision by the NYDOL to eliminate the tip credit would have a significant impact on those industries where employees rely heavily on tips.