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For restaurants across New York State, staying abreast of evolving labor laws can feel like a full-time job. One area that frequently causes confusion is the distinction between service charges and tips, as well as how to remain compliant with state law while ensuring fair compensation for your hardworking staff.
The recent shifts in how customers pay and how restaurants choose to distribute those payments have made it crucial for establishments to clearly understand the rules governing these transactions. Missteps can lead to significant penalties, unhappy employees, and even damage to your reputation.
Here are the key considerations for New York State restaurants aiming for full compliance.
Service Charges and Tips Definitions Under New York Law
The fundamental difference lies in who “owns” the money and how it’s treated under New York Labor Law:
Tips (Gratuities)
A tip is a gratuity freely given by a customer to an employee for service rendered. Under New York law, tips are the property of employees and generally cannot be retained by the employer, except in limited cases involving valid tip pooling arrangements.
Service Charges
A service charge is a mandatory fee added to a customer’s bill by the restaurant. Unlike tips, service charges are initially the property of the employer. However, New York law has a strong presumption that any charge that is not for food and drink is a tip and must be given to the employee who provided the service, unless the employer clearly and conspicuously notifies the customer that the charge is not a gratuity and will not be distributed as such.
The Pitfalls of Mislabeling in New York
One of the biggest compliance traps in New York is mislabeling a service charge as a tip, or vice versa. Here’s why it matters:
Customer Perception & Legal Presumption
Customers generally understand that tips are distributed directly to the staff. If a mandatory “service charge” isn’t clearly explained as an employer-controlled fee, New York law presumes it’s a tip intended for staff, and thus must be distributed to them. If you fail to do so, you’re in violation.
Wage Laws & Tax Implications
The treatment of service charges and tips differs significantly under minimum wage, overtime, and tax laws. Incorrect classification can result in underpayment of wages, incorrect tax withholdings, and violations of both New York Labor Law and the Fair Labor Standards Act (FLSA).
Key Compliance Considerations for New York Restaurants
1. Transparency and Disclosure are Paramount
If you implement a service charge, it must be clearly and conspicuously disclosed to the customer before they incur the charge. This means:
Prominent Menu Placement
Include a clear statement on your menu explaining the service charge, its percentage, and what it covers (e.g., “A 20% service charge will be added to all bills to support fair wages and benefits for our team, and is not a gratuity for staff.”). The disclosure cannot be hidden on the back of a menu or in small print.
Verbal Disclosure
Encourage your front-of-house staff to verbally inform customers about the service charge, especially for larger parties, banquets, special functions, or package deals, where such charges are common.
Clear Wording on Bills
Ensure the service charge is distinctly labeled on the bill, separate from the subtotal and any sales tax.
Banquet/Special Function Specifics
For banquets, special functions, or package deals, the charge must be clearly identified as for “administration,” and customers must be notified that it is not a gratuity or tip. If a combination charge is used (part administration, part gratuity), it must be broken down into specific percentages or portions in writing to the customer.
Delivery Fees
If you charge a delivery fee that is not fully given to the delivery employee, you must clearly notify customers that it is a delivery charge retained by the employer and not a tip.
2. Distributing Service Charges to Employees
While service charges are initially considered employer property, New York law has strict rules regarding them if they are perceived as or intended to be gratuities for employees.
Presumed to be Tips
As noted, if a service charge is not clearly and conspicuously disclosed as not a gratuity, it is legally presumed to be a tip and must be distributed in full to the service employees or food service workers who provided the service. Employers cannot withhold any portion of such a service charge.
Can be Part of Wages (if properly disclosed)
If a service charge is clearly disclosed as an administrative fee not intended as a gratuity, the employer can retain it. If the employer then chooses to distribute portions of this service charge to employees, these funds are considered wages and are subject to all applicable payroll taxes and withholdings. They can be used to meet minimum wage and overtime obligations.
No “Tip Credit” on Service Charges
You cannot take a tip credit against a service charge, even if distributed to employees. A tip credit allows employers to pay a lower direct wage to tipped employees if their tips make up the difference to the minimum wage required by law. Service charges are not tips for this purpose.
3. Understanding Tip Pooling and Tip Credit
If your restaurant relies on traditional tipping, New York State has specific rules for tip pooling and the tip credit:
Tip Pooling is Legal, with Restrictions
New York allows employers to require tip pooling, but strict rules apply. Only employees who customarily and regularly receive tips (e.g., servers, bartenders, bussers, food service workers) can participate.
No Management Participation
Employers, managers, and supervisors are prohibited from participating in tip pools, even if they occasionally perform duties that involve tips.
Fair Distribution
The tip pool arrangement must be fair and reasonable, and employers must maintain detailed records of the tip-sharing or pooling system.
Tip Credit
New York State allows employers to take a tip credit, meaning they can pay a lower direct cash wage to tipped employees, provided the employees’ tips bring their total earnings up to at least the full state minimum wage. The amount of the tip credit varies by location within New York State (e.g., New York City, Long Island, and Westchester vs. the remainder of New York State) and by employee classification (e.g., “tipped service employees” vs. “tipped food service workers”). As of January 1, 2025, minimum wage rates range from $15.50 (Remainder of NYS) to $16.50 (NYC, Long Island, Westchester).
- Crucial Note: If an employee’s combined cash wage and tips do not meet or exceed the full minimum wage, the employer must make up the difference.
- Dual Jobs: The tip credit can generally be applied to all hours worked by an employee who performs both tipped and non-tipped duties if the non-tipped duties are related to the tipped occupation and are customarily performed by tipped employees in that industry. However, if an employee spends more than 20% of their shift or over two hours on non-tipped tasks unrelated to their tipped duties, the tip credit may not apply for that time.
- Written Notice: Employers must provide employees with written notice regarding the tip credit and how it works. Failing to do so can result in losing the right to claim the tip credit.
Credit Card Processing Fees
Employers in New York are legally allowed to deduct a proportionate percentage from credit card tips to cover the actual processing fees charged by credit card companies. However, all credit card tips (minus allowable deductions) must be paid to employees by the next regularly scheduled payday.
Best Practices for Clear Communication and Compliance
To avoid confusion and foster a positive environment for both staff and customers throughout New York State:
Train Your Staff Thoroughly
Ensure that all employees, especially those interacting directly with customers, understand your restaurant’s policies on service charges and tips, as well as the specifics of New York Labor Law. They should be able to confidently and accurately explain them to diners.
Educate Your Customers
Consider placing a small, tasteful card on tables or including a subtle note on your website that explains your compensation model, particularly if you’re using a service charge in lieu of traditional tipping. Clear signage at the point of sale is also vital.
Review Your Payroll Practices Regularly
Audit your payroll to ensure that service charges and tips are being processed correctly for tax purposes and distributed in compliance with New York wage and hour laws. Maintain meticulous records of tips received, tip distributions, and any service charges.
Provide Written Policies
Clearly document your tip pooling policies, tip credit notices, and service charge explanations, and provide them to employees.
Consult Legal Counsel
The nuances of New York State labor law can be complex. When in doubt, consulting with a legal professional specializing in labor law is always the best course of action to ensure full compliance and protect your business from costly disputes.
The Bottom Line
The landscape of compensation in the restaurant industry is continuously evolving, and New York State has robust protections for workers. By proactively understanding and implementing compliant practices regarding service charges and tips, restaurants across New York can ensure fair treatment for their employees, transparency for their customers, and ultimately, a more stable and successful business.
Let GTM Help Your Restaurant Navigate Compliance
If staying on top of all the above compliance issues seems overwhelming and you don’t have the HR staff to support you, GTM can help. Our HR experts can work with you on a consistent or as-needed basis to ensure you are doing everything the right way, freeing up your time to run your restaurant with the peace of mind that you are in compliance with labor laws. Fill out the brief form below to learn more.
