Employers: Understanding the tip credit and avoiding common mistakes when paying employees in New York
January 29, 2026
As of January 1, 2026, New York’s minimum wage increased to $16/hr [$17/hr in New York City, Westchester and Long Island].
In New York State, employers in the hospitality sector may be eligible to take advantage of a tip credit for the hourly wage paid to workers performing certain service jobs/tasks. Specifically, the Wage Tip Credit allows employers to pay service workers less money per hour than the mandatory minimum wage. There are different credits applied for different jobs.
Employers should not rely on or expect their payroll company to automatically advise of wage credits they may be entitled to nor will the payroll company automatically update the hourly wage for the workforce earning minimum wage when a mandatory minimum wage increase takes effect.
Understanding New York’s wage and hour rules and regulations and maintaining proper records is essential to avoiding and mitigating the expense of a labor audit or lawsuit. There are specific rules and regulations employers must follow if they are going to take advantage of the tip credit. Employers must be sure the correct wage forms are completed for every employee and they maintain accurate books and records to demonstrate the employees’ combined earned wages.
Common administrative errors that can cost employers $1,000s
- Misclassifying Non-Tipped Work
If a tipped employee performs non-tipped duties that exceed 20 percent of their shift (tasks such as cleaning or food prep), the tip credit cannot be taken that day. - Failing to Pay Overtime Properly
Tipped employees must be paid time-and-a-half on overtime hours based on the minimum wage rate, less any applicable tip credit. Improperly calculating overtime is both common and costly. - Improper Tip Pooling or Tip Withholding
Under Federal and State Law, tips belong to the employees. Employers may not keep any portion of tips for themselves or improperly divert tips to non-eligible employees. You must follow strict rules if you operate a tip pool or tip share arrangement.
Running afoul of State and/or Federal wage laws, rules or regulations can devastate a business and its owners particularly because shareholders and/or members of a business entity may be held personally liable for violating the laws.
A violation of the wages laws, rules and/or regulations may result in:
- State or Federal Labor investigation and audits
- Back pay calculated by the State or Federal Department of Labor
- Liquidated damages calculated up to 100% of the back pay owed
- Civil penalties
- Interest
- Attorney’s fees and costs incurred by the business
- A court Order to pay the attorney’s fees and costs of the successful employee(s)-plaintiff(s)
- Harm to the business/owners’ reputation and employee morale
Contact Gross Shuman before you and your business are faced with a wage claim or labor investigation and audit. Our team can review your wage practices and make recommendations to assist your business with compliance with the State and Federal laws and regulations before your business is with faced an audit or lawsuit.
Chanel T. McCarthy has over 15 years of experience assisting clients with their business needs – including negotiating various contracts and agreements, advising clients on the applicable wage laws, rules and regulations, representing businesses in labor audits and other government agency investigations. Chanel’s experience has included navigating the unique issues related to small businesses in construction, hospitality and closely held family businesses. Chanel also brings a wealth of experience in the areas of trust and estate administration and litigation, and other matters before the Surrogate’s Court. She can be reached at 716-854-4300 ext. 254 or [email protected].
