Joining a budding national trend, renowned restaurateur Danny Meyer of Union Square Hospitality Group last week announced that he will eliminate formal tipping at his restaurants starting in 2016. Meyer stated that the new policy, aptly named “Hospitality Included,” is meant to better compensate “back of house” staff, who are legally restricted from receiving tips, and to make the dining experience less complicated for diners.
But is there a more subtle, yet potentially more significant, legal benefit as well? By eliminating tipping, Meyer and other like-minded restauranteurs might be shielding themselves from costly legal exposure for wage and hour violations.
Historically, restaurants have been able to offset part of their payroll costs by taking advantage of federal and state tip credits, which allow them to pay waiters and other customer-facing “front of house” employees at a lower hourly rate, provided they receive a certain amount in tips. Despite the obvious financial advantage to this approach, the industry has been plagued in recent years with class and collective actions stemming from alleged tipping violations. (See examples here, here, and here.) Such claims include failing to pay minimum wage, improperly including kitchen workers in servers’ tip pools, using a portion of tips to servers of alcohol and wine to pay sommeliers’ salaries, and failing to provide required notice of the tip credit.
Furthermore, some hospitality industry experts, such as Michael Lynn of the Cornell University School of Hotel Administration, believe that tipping inherently disadvantages minority workers, suggesting that tipping practices could put employers at risk of disparate impact discrimination class action suits.
A “no tipping” policy eliminates these litigation risks. In addition to simplifying an employer’s payroll and reducing paperwork, the end of tipping could mean the end of costly class action allegations of tip pool, tip share, and service charge violations, as well as minimum wage and overtime violations predicated on an improper tip pool or share.
Moreover, over the next few years, the benefit to employers from tipping will be greatly reduced as more municipalities and states raise their minimum wage rates while reducing the tip credit. For example, as of December 31, 2015, the minimum wage rate in New York is set to rise to $9.00 an hour. New York’s Acting Commissioner of Labor has accepted the recommendation of a Wage Board to reduce the tip credit from $4.00 an hour to $1.50 an hour as of December 31, 2015. This will effectively increase the minimum wage for tipped workers in New York from $5 to $7.50 an hour at the end of this year. Other increases in minimum wage rates are occurring nationwide—San Francisco voted last November to increase its minimum wage to $15 per hour by 2018, Chicago will bring the minimum wage to $13 by 2019, and many other cities and states have follow suit.
The success of Meyer’s “Hospitality Included” approach remains to be seen. For now, it seems that adopting a no-tipping policy has several strategic benefits that will help the hospitality industry combat class and collective actions stemming from tipping violations and a rapidly increasing minimum wage.