In an article in the NY Daily Record in May, Steven Carling advised restaurants and hotels in Western New York to take extra precautions that the Fair Labor Standards Act regarding wage and hours laws. The U.S. Department of Labor, Wage and Hour Division has been conducting more surprise visits to assess tipped employees, the misclassification of employees as exempt from minimum wage and overtime and wage payments made “off the books” to avoid paying for payroll-related taxes and insurances.

Minimum wage and overtime for tipped employees

Restaurants are particularly susceptible to violations, as they often start from small businesses that do not have economic access to payroll and human resource companies to ensure compliance and remain up to date on changes in the law.

In New York, minimum wage is $7.25 per hour. Employees who routinely receive tips may be paid $5 per hour as long as they receive at least $2.25 per hour (the “tip credit”) in voluntary tips. Banquet servers or room service employees, whose tips are automatically added onto a customer’s check as gratuity or a service charge must receive the minimum wage because these tips are not voluntary. The employees are also still entitled to the tips they earn from the mandatory charges added to the customer’s check.

Overtime is paid for every hour worked over 40 in a week. The overtime rate for a tipped employee is actually calculated at the $7.25 rate, not $5, and then the tip credit is deducted. In other words, for overtime, a tipped employee should be paid (7.25 x 1.5) – $2.25, or $10.87 per hour.

Classifying management as exempt or non-exempt

Employers must pay employees minimum wage and overtime for all hours worked over 40 unless the employee meets certain exemptions. These exemptions are primarily based on job duties and salary.

To not be considered “hourly,” the primary duty must involve independent decision-making on critical matters. An exempt manager must directly supervise at least two employees and have significant input in the hiring, scheduling, discipline, performance reviews and firing of the employees. The manager can also perform non-managerial duties, such as occasionally serving food or doing dishes as long as the primary responsibilities are to oversee operations and supervise employees.

Salary paid to exempt employees cannot fluctuate (as it may with hourly employees). The salary must be at least $543.50 per week in New York. If the Department of Labor finds that the employee does not meet the salary test, the employer may be forced to pay the employee back overtime pay for previous weeks that the employee worked over 40 hours.

Cash payments

Cash payment to employees for overtime at the regular rate is illegal, although it is common practice in the hospitality industry. Employers are required by law to keep records of all hours worked and wages paid to an employee. Paying off the books creates a serious liability for employers – if an employee claims to have worked without pay, there are no records to prove otherwise and the employer will be forced to pay the employee again. If the employee lies about the number of hours worked, the employer cold even be stuck paying overtime for hours that were never actually worked.

In any of these situations, “this is the way business is done” is not a veritable defense. Getting caught violating any of these laws can have costly consequences. Business owners are ultimately responsible for ensuring that all laws and procedures are followed. If you are not sure what they are, it is best to consult with your attorney or a payroll and human resource consultant.