Perhaps it is the end of racing season in Saratoga, but the federal employment agencies are certainly looking to hit the trifecta against independent contractors, franchisors, parent companies, and similar entities under the guise of expanding the definitions of employer and employment.
First, a little background: on April 28, 2014, the U.S. Senate confirmed David Weil as the new head of the U.S. Department of Labor’s Wage and Hour Division. Before he was confirmed, Weil had published a book entitled The Fissured Workplace, a dense lament on the perceived evils of independent contracting and franchising, and companies that Weil claims attempt to "have it both ways" by not bearing responsibility for the workers from whom they ultimately benefit by virtue of the work performed. It was thus not unexpected that Weil would seek to remedy those perceived evils during his tenure; however, the extent to which this philosophy has reached other agencies is surprising.
Fast-forward to July 2015, during which Administrator Weil issued an Interpretation turning the classic test for independent contractor status on its head. The central tenet used to be control -- does the company set the worker's hours, have the power to discipline the worker, supervise and direct the worker, etc., or instead does the company simply give the worker the contours of the job, and pay contingent on the acceptability of the work? The new Administrator’s Interpretation, however, focuses on the "economic realities" of the work arrangement, and whether the worker is "economically dependent" on the company. Most workers have some dependence on the source of the income, and therefore unless a worker has multiple sources of income to demonstrate that he or she is truly in business for himself or herself, many people who currently consider themselves to be independent contractors are now employees in the eyes of the Wage and Hour Division. As Weil puts it in his interpretation: "Thus, applying the economic realities test in view of the expansive definition of 'employ' under the Act, most workers are employees under the FLSA."
But the Wage and Hour Division is not the only agency to get into the act. On August 27, the National Labor Relations Board issued a controversial decision in the Browning-Ferris case, basically holding that a staffing agency, franchisor, or contractor that reserves the right to make decisions affecting a worker’s employment, even if the entity does not actually exercise that right, will likely be considered a joint employer. In short, the NLRB is also seeking to follow Weil’s lead and fuse “the fissured workplace” to hold contractors and other types of entities responsible for possible employment violations under the guise of joint employment.
Not to be outdone, OSHA is going for the trifecta. Late last month, the International Franchise Association disclosed that it is receiving reports from its members that OSHA investigators are seeking information and documents during inspections to tie franchisors into those inspections in order to cite them as employers along with franchisees. The IFA is concerned that OSHA is (at the behest of unions such as SEIU) looking to simply treat franchisors as employers regardless of the details of a franchisor-franchisee relationship. Indeed, the IFA obtained a copy of an internal OSHA memo that shows that OSHA is looking to follow the WHD and NLRB’s lead. The memo states, in part:
"Issue Presented for OSHA:Whether for purposes of the OSH Act, a joint employment relationship can be found between the franchisor (corporate entity) and the franchisee so that both entities are liable as employers under the OSH Act.Ultimate determination will be reached based on factual information about the relationship between the franchisor and franchisee over the terms and conditions of employment. While the franchisor and the franchisee may appear to be separate and independent employers, a joint employer standard may apply where the corporate entity exercises direct or indirect control over working conditions, has the unexercised potential to control working conditions or based on the economic realities. As a general matter, two entities will be determined to be joint employers when they share or codetermine those matters governing the essential terms and conditions of employment and the putative joint employer meaningfully affects the matters relating to the employment relationship such as hiring, firing, discipline, supervision and direction."
The IFA is seeking more information from OSHA via the Freedom of Information Act, and its full statement can be found here.
In short, any entity with franchisees, independent contractors, or other vendors should be well aware that any investigation or inspection by the federal agencies tasked with enforcement of labor and employment laws -- the National Labor Relations Board, the U.S. Department of Labor’s Wage and Hour Division, and now, OSHA -- may seek to expand the investigation or inspection well beyond just the franchisee or contractor inspected, to any franchisor, parent company, or beneficiary of a contract for services.
On August 21, the United States Court of Appeals for the District of Columbia Circuit upheld the U.S. Department of Labor’s revisions to the “companionship exemption” under the Fair Labor Standards Act, and reversed two decisions issued by the U.S. District Court for the District of Columbia that struck down those revisions. The USDOL’s revised regulations eliminate the companionship exemption for home care workers who are employed by a third-party instead of by the patient or household, and greatly narrow the definition of “companionship services” for purposes of applying the exemption. According to estimates provided by the USDOL, nearly two million formerly exempt home care workers will now be covered by the FLSA’s minimum wage and overtime requirements. In 2013, the USDOL significantly revised its FLSA regulations regarding the “companionship exemption,” which renders the minimum wage and overtime requirements inapplicable to “any employee employed in domestic service employment to provide companionship services for individuals who (because of age or infirmity) are unable to care for themselves.” As revised, the regulations prohibit third-party employers, such as home care agencies, from claiming that their employees are exempt from the federal minimum wage and overtime requirements, even if the employees are providing companionship services. In addition, the revised rule greatly narrows the definition of “companionship services,” so that if an employee spends more than twenty percent of his or her time on the “provision of care,” the employee will be deemed not to be providing “companionship services,” regardless of whether the employee is directly employed by the family or by a third-party employer. Under the regulations, “provision of care” means assistance with the activities of daily living. The Home Care Association of America challenged the revised regulations in federal court, contending that the USDOL had exceeded its authority in adopting the revised regulations. The District Court agreed, and invalidated the regulations. On appeal, the D.C. Circuit Court of Appeals reversed the District Court, holding that the USDOL had the authority under the FLSA to revise the regulations. The Court further found that the USDOL’s decision to revise the regulations was “grounded in a reasonable interpretation of the statute” and was “neither arbitrary nor capricious.” Assuming that this decision stands and the USDOL’s revised regulations take effect, home care agencies will lose the benefit of the companionship exemption. Direct care workers who provide services in a patient’s home must be paid at least the federal minimum wage (and in New York, the current higher minimum wage of $8.75 per hour). In addition, home care agencies must pay home care workers overtime at one and one-half times the regular rate for hours worked in excess of 40 in a work week, unless the employee falls within one of the other FLSA exemptions. The time spent traveling from one patient to another is considered to be compensable hours worked, and will count toward the 40-hour threshold.
On July 22, 2015, the Fast Food Wage Board (which was empaneled at the direction of Governor Cuomo to investigate and make recommendations regarding an increase in the minimum wage for employees in the fast food industry) passed a resolution recommending that the minimum wage for employees in the fast food industry be raised to $15.00 per hour. The recommended increase will be phased in to take effect by December 31, 2018, in New York City, and by July 1, 2021, for the rest of the state. Governor Cuomo has publicly applauded the Wage Board's recommendation, which will almost certainly be accepted and adopted by the Commissioner of Labor.
Assuming the Commissioner of Labor issues an order accepting the Wage Board's recommendation, the fast food hourly minimum wage in New York City will increase to $10.50 on December 31, 2015, $12.00 on December 31, 2016, $13.50 on December 31, 2017, and $15.00 on December 31, 2018. The fast food hourly minimum wage in the rest of the state will increase to $9.75 on December 31, 2015, $10.75 on December 31, 2016, $11.75 on December 31, 2017, $12.75 on December 31, 2018, $13.75 on December 31, 2019, $14.50 on December 31, 2020, and $15.00 on July 1, 2021. At this point, the minimum wage for all employees is $8.75 per hour. On December 31, 2015, the minimum wage will go up to $9.00 per hour for all employees except fast food employees, who will be entitled to the higher minimum wage recommended by the Wage Board.
In the Wage Board's resolution, "fast food employee" is defined as any person employed or permitted to work at or for a fast food establishment where the person's job duties include at least one the following: customer service, cooking, food or drink preparation, delivery, security, stocking supplies or equipment, cleaning, or routine maintenance. The Wage Board's resolution does not contain any exemption for high school or college students, who often seek part-time jobs in the fast food industry and who generally are not trying to support themselves or their families on their income.
The term "fast food establishment" is defined as any establishment in New York serving food or drinks: (1) where customers order and pay for their items before eating, and the items may be consumed on the premises, taken out, or delivered; (2) which offers limited service; (3) which is part of a chain; and (4) which is one of 30 or more establishments nationally. The definition includes a franchisee who owns and operates only one fast food restaurant in New York State, if the franchisor and all other franchisees of the franchisor own and operate at least 30 such restaurants nationwide.
If the Commissioner of Labor adopts the Wage Board's recommendation as expected, the Commissioner's order could be subject to legal challenges based on its selective targeting of the fast food industry and potentially other grounds. It remains to be seen whether this minimum wage increase for employees in the fast food industry will withstand judicial scrutiny.
On July 15, the U.S. Department of Labor's Wage and Hour Division ("WHD") issued Administrator’s Interpretation No. 2015-1, which provides guidance regarding the misclassification of employees as independent contractors. According to the WHD Administrator's Interpretation, “most workers are employees” under the Fair Labor Standards Act ("FLSA").
The Administrator's Interpretation notes that the FLSA’s definition of “employee” is extremely broad and basic (“any individual employed by an employer”) and that to "employ" includes to "suffer or permit to work.” The WHD explains that this definition was intentionally designed to create "as broad of a scope of statutory coverage as possible."
In interpreting this broad definition, the WHD rejects the common law "control" test in favor of an “economic realities” test to determine employee or independent contractor status. The economic realities test focuses on whether a worker is economically dependent on an employer (which would indicate an employment relationship) or in business for herself or himself, (which would indicate an independent contractor relationship). The WHD evaluates the following six factors in making this determination, with no one factor being dispositive:
The extent to which the work performed is an integral part of the employer’s business.
Whether the worker’s opportunity for profit or loss depends on his or her managerial skill.
The extent of the worker’s investment compared to that of the employer.
Whether the work performed requires special business skills, judgment, and initiative.
Whether the relationship is permanent or indefinite.
The degree of control exercised by the employer over the worker.
According to the WHD, these factors should be evaluated in light of the broad definition of "employee" under the FLSA and the principle that the FLSA should be liberally construed to provide expansive coverage for workers.
Misclassifying employees as independent contractors can result in a number of potentially expensive consequences, such as liability for minimum wage and overtime violations, unemployment insurance contributions, workers' compensation coverage, and unpaid employment taxes. Therefore, organizations that have independent contractor relationships should examine those relationships closely to make sure that they do not cross the line into an employment relationship. It is also worth noting that, although written agreements with independent contractors can be helpful, they are not dispositive in establishing an independent contractor relationship.
Editor's Note: Our thanks to Luke O'Brien, one of Bond's Summer Law Clerks, who helped prepare this article.
In two recent cases decided on July 2, the Second Circuit Court of Appeals held that in many instances, unpaid interns may not necessarily be employees covered by the Fair Labor Standards Act ("FLSA") and the New York Labor Law ("NYLL"). In both cases (Glatt v. Fox Searchlight Pictures and Wang v. The Hearst Corporation), plaintiffs who had obtained internships at major media companies argued that they were entitled to wage payments under the FLSA and NYLL; in addition, they sought to bring their claims as class and/or collective actions, which would drive up the costs of litigation and significantly increase the potential liability. The Second Circuit adopted a standard that will likely make it more difficult for unpaid interns to establish employment status, and will likely make it more difficult for unpaid interns to litigate their FLSA and NYLL claims in a class or collective action. The Glatt and Wang decisions articulated two principles of great importance to employers considering internship programs. First and foremost, the Second Circuit rejected a rigid six-point test promulgated by the United States Department of Labor to determine whether interns should be considered employees, and instead adopted a more nuanced test of employment status that examines whether the employer or the intern is the “primary beneficiary” of the relationship. Second, the Court noted that because the circumstances of the internships at issue in the two cases were fact-specific, there is a high burden which plaintiffs must meet to show the requisite commonality to support a class or collective action. While these cases were pending in the Second Circuit, the college and university community was concerned that an important resource for experiential learning might be foreclosed if employers decided to discontinue their unpaid internship programs because of a concern about FLSA or NYLL liability. Because of the potential impact on higher education, the American Council on Education (together with six other national consortia of colleges and universities) asked Bond attorneys Shelley Sanders Kehl and E. Katherine Hajjar to file an amicus brief arguing that the Court should consider the educational value of internships. These arguments were adopted by the Court and featured prominently in its Glatt decision. The Court proposed the following seven (non-exhaustive) factors to be considered in determining who is the “primary beneficiary” in an internship placement, but also recognized that additional factors may be relevant:
The extent to which the intern and the employer clearly understand that there is no expectation of compensation;
The extent to which the internship provides training that would be similar to that which would be given in an educational environment, including the clinical and other hands-on training provided by educational institutions;
The extent to which the internship is tied to the intern’s formal education program by integrated coursework or the receipt of academic credit;
The extent to which the internship accommodates the intern’s academic commitments by corresponding to the academic calendar;
The extent to which the internship’s duration is limited to the period in which the internship provides the intern with beneficial learning;
The extent to which the intern’s work complements, rather than displaces, the work of paid employees while providing significant educational benefits to the intern; and
The extent to which the intern and the employer understand that the internship is conducted without entitlement to a paid job at the conclusion of the internship.
The Court explained that these considerations require “weighing and balancing all of the circumstances” and that a single factor will not be dispositive for a court to find that an intern is entitled to minimum wage. The Court went on to observe that its decision reflects the “modern internship,” and the importance of internships in an intern’s formal education. While the Court recognized that some internships may not pass muster under the primary beneficiary test, it established a protocol for designing internship opportunities that will qualify. This is good news both for interns and for employers, who will likely find it less risky to offer unpaid internships, providing real world experience to complement the formal education of today’s young adults.
The U.S. Department of Labor released its highly anticipated proposed rule on the Fair Labor Standards Act white-collar overtime exemptions today, along with a fact sheet summarizing the proposed rule. The proposed rule more than doubles the salary requirement to qualify for the executive, administrative, professional, and computer employee exemptions from the current level of $455 per week to an amount that is expected to be $970 per week by the first quarter of 2016, and significantly increases the salary threshold to qualify for the "highly compensated employee" exemption. The proposed rule also includes a procedure to automatically raise the minimum salary levels to qualify for the white-collar exemptions from year to year without further rulemaking. The USDOL estimates that nearly five million employees who are currently classified as exempt will immediately become eligible for overtime pay if the proposed rule is adopted as the final rule. The USDOL is proposing to set the salary requirement to qualify for the executive, administrative, professional, and computer employee exemptions at the salary level equal to the 40th percentile of earnings for full-time salaried workers, and the salary requirement to qualify for the highly compensated employee exemption at the salary level equal to the 90th percentile of earnings for full-time salaried workers. The USDOL used data compiled by the Bureau of Labor Statistics from 2013 in drafting the proposed rule, which provides for a minimum salary level of $921 per week to qualify for the executive, administrative, professional, and computer employee exemptions, and a minimum salary level of $122,148 per year to qualify for the highly compensated employee exemption. However, the USDOL stated in its Notice of Proposed Rulemaking that it will likely rely on data from the first quarter of 2016 if the proposed rule is adopted, which will result in a projected minimum salary level of $970 per week to qualify for the executive, administrative, professional, and computer employee exemptions. The proposed rule does not include any proposed revisions to the outside sales exemption. In addition, although there was some speculation that the duties requirements would also be revised to make the exemptions more restrictive, the USDOL's proposed rule does not include any revisions to the duties requirements to qualify for any of the white-collar exemptions. However, the USDOL stated in its Notice of Proposed Rulemaking that it is nevertheless seeking comments on whether the duties tests are working as intended to screen out employees who are not bona fide executive, administrative, or professional employees. So, there is still a possibility that the duties requirements could be revised based on comments received by the USDOL about the proposed rule. Employers should immediately begin to assess which employees who are currently classified as exempt will become non-exempt if the proposed rule is adopted as the final rule.
The New York State Department of Labor (“NYSDOL”) recently proposed new regulations governing the payment of employee wages via payroll debit cards – a growing practice among employers. These draft regulations, which are not yet final or effective, also set forth new requirements governing the payment of wages by direct deposit.
Regarding an employer’s use of these so-called “payroll cards,” NYSDOL has previously cautioned that paying employees in this manner raises a number of potential legal issues under the New York Labor Law. Even so, NYSDOL concurrently opined that employees may be paid lawfully through such payroll cards, so long as certain requirements are met. For example, according to NYSDOL, employers are required to first obtain written authorization from employees, and employees cannot be subjected to undue fees or encumbrances when accessing their wages through the payroll cards.
The proposed regulations track this prior guidance and, if enacted, will codify the specific requirements that must be met in order for employers to lawfully use such payroll cards. Among other things, employers will be required: (1) to provide specific, advanced disclosures to employees about the payroll card program in question; (2) to obtain the prior “informed consent” of employees; and (3) to ensure the payroll card program includes a long list of other mandatory terms and conditions (e.g., employees must be provided with access to at least one ATM network offering withdrawals at no cost).
With respect to direct deposit, the proposed regulations would require employers to maintain an employee's written consent to be paid through direct deposit during the entire duration of the employee's employment and for six years after the last deposit is made. In addition, employers would be required to provide a copy of the written consent to the employee and to make the direct deposits at a financial institution selected by the employee.
Notably, the proposed regulations would not apply to individuals working in executive, professional, or administrative positions who earn in excess of $900.00 per week.
The proposed regulations are currently open for public comment. We will continue to monitor this issue and report on any further developments.
Editor's Note: Our thanks to Stephanie Hoppe, one of Bond’s Summer Law Clerks, who helped prepare this article.
On March 27, 2015, the U.S. District Court for the Southern District of New York granted the plaintiffs’ motion to compel disclosure of a report prepared by a Human Resources (“HR”) consultant in class action litigation under the Fair Labor Standards Act (“FLSA”) and state wage and hour laws. In Scott v. Chipotle Mexican Grill, Inc., Chipotle claimed that a number of documents sought by the plaintiffs during discovery were privileged communications that were protected from disclosure. One such document was a report from an HR consultant examining the activities of four employees holding Chipotle’s apprentice position. Chipotle claimed that the report was subject to the attorney-client privilege because one of its attorneys retained the HR consultant to help him assess whether the apprentice position should be classified as an exempt or non-exempt position. The Court disagreed with Chipotle and ordered that the report be turned over to the plaintiffs. In general, the attorney-client privilege -- upon which Chipotle was relying -- applies to communications between an attorney and his/her client that were intended to be, and were in fact, kept confidential, and were made for the purpose of obtaining or providing legal advice. In certain limited situations, however, communications can fall within this privilege even if not made between an attorney and a client. The so-called “agent of attorney” doctrine acts to extend the attorney-client privilege to shield communications that are not between an attorney and client when the purpose of the communication is to assist the attorney in rendering legal advice to the client. Such communication must be “necessary” or “highly useful” for effective consultation between the client and attorney. This exception has been applied sparingly, in very limited circumstances. Here, the Court held that Chipotle failed to establish that the HR consultant did anything more than factual research to assist Chipotle in making a business decision, rather than to assist an attorney in rendering legal advice to Chipotle. The Court explained that the report did not provide any specialized knowledge that the attorneys could not have acquired or understood on their own or directly through Chipotle (their client). There was also no indication that the consultant was taking information that was incomprehensible to Chipotle’s attorneys and putting it into a “usable form,” rather than merely consolidating employee interviews and delivering a factual analysis. The Court rejected Chipotle’s argument that the report should be considered privileged because the consultant was hired by a law firm and the report was specifically drafted for an attorney, because the agent-of-attorney doctrine does not consider form over substance. The final nail in Chipotle’s coffin was the fact that no legal advice was actually provided by its attorneys following receipt of the HR consultant’s report, which indicated that the report was not created for the purpose of assisting the attorneys in providing legal advice. The Chipotle decision emphasizes the need for employers to exercise the utmost care when deciding whether to utilize the services of an HR consultant. Although the Court ruled upon a situation where an attorney was involved, at least tangentially, with the HR consultant, employers must recognize that when an HR consultant is simply providing advice to an employer and there is no attorney involvement at all, such communications or resulting reports would undoubtedly not be privileged. Even if an attorney is involved, however, the privilege still will not apply if the consultant’s investigation is merely factual, does not assist the employer’s attorney in rendering legal advice, and does not provide information outside of the attorney’s general expertise that is essential to effective consultation between the attorney and client. In such situations, there is a risk that the employer will be required to disclose any communications and reports from the consultant during future litigation, which potentially could be devastating depending upon the content of those communications and reports.
On March 9, 2015, the United States Supreme Court ruled unanimously in two consolidated cases that a federal agency does not have to go through the formal rulemaking process, which includes providing public notice and an opportunity for comment, “when it wishes to issue a new interpretation of a regulation that deviates significantly from one the agency has previously adopted.”
The underlying issue in the two cases -- Perez v. Mortgage Bankers Association and Nickols et al. v. Mortgage Bankers Association -- began when the United States Department of Labor (“DOL”) changed its opinion regarding whether mortgage-loan officers are covered by the so-called “administrative exemption” of the Fair Labor Standards Act. Prior to 2004, DOL's Wage and Hour Division issued written advisory opinions that mortgage-loan officers are not eligible for the administrative exemption, and are entitled to payment of overtime for hours worked over 40 in a work week. In 2004, DOL revised its white collar exemption regulations, but there was some ambiguity regarding whether mortgage-loan officers fell within the revised administrative exemption. In 2006, DOL's Wage and Hour Division issued a written advisory opinion that mortgage-loan officers qualify for the administrative exemption as revised in 2004. However, in 2010, DOL's Wage and Hour Division changed its mind and issued a written advisory opinion that mortgage-loan officers do not qualify for the administrative exemption.
The Mortgage Bankers Association challenged this 2010 administrative interpretation in federal court, alleging, among other things, that DOL’s interpretation was procedurally invalid in light of a previous decision by the U.S. Court of Appeals for the D.C. Circuit (Paralyzed Veterans v. D.C. Arena L.P.). Under the so-called “Paralyzed Veterans doctrine,” an agency may not significantly revise its interpretation of a regulation without providing public notice and an opportunity for comment pursuant to the Administrative Procedure Act ("APA"). The D.C. Circuit re-affirmed the doctrine in the Mortgage BankersAssociation cases, holding that the 2010 administrative interpretation had to be vacated because DOL did not hold a notice-and-comment period.
The Supreme Court reversed the D.C. Circuit's decision. In an opinion penned by Justice Sonia Sotomayor, the Court held that the “Paralyzed Veterans doctrine" is contrary to the clear text of the APA’s rulemaking provisions, and it improperly imposes on agencies an obligation beyond the ‘maximum procedural requirements’ specified in the APA.” Justice Sotomayor stated that although the D.C. Circuit was correct that the APA requires agencies to follow the notice-and-comment requirements when amending or repealing a substantive rule -- in the same manner as issuing a substantive rule in the first instance -- the D.C. Circuit “went wrong” when it applied the same reasoning to interpretations of rules. In sum, “[b]ecause an agency is not required to use notice-and-comment procedures to issue an initial interpretive rule, it is also not required to use those procedures when it amends or repeals that interpretive rule,” unless “notice or hearing is required by statute.”
The implications of the Supreme Court's decision reach far beyond the FLSA status of mortgage-loan officers. The Supreme Court’s ruling paves the way for federal agencies to make significant changes to its interpretations of rules without notice to the public and an opportunity for public comment. Although employers can still look to administrative interpretations (such as opinion letters issued by DOL's Wage and Hour Division) for some guidance in complying with employment laws and regulations, employers should be diligent about keeping up with any changes to those administrative interpretations.
Jennifer Brand, Associate Solicitor of Labor, spoke at the American Bar Association Federal Labor Standards Legislation Committee’s Mid-Winter Meeting on February 26. Ms. Brand provided an update on important USDOL initiatives and activities. Ms. Brand discussed recent litigation involving interns and confirmed that the USDOL still believes the six factors outlined in its Fact Sheet #71 is the proper test to determine whether an unpaid internship is lawful. Ms. Brand did acknowledge that as the workplace evolves, it may, in unusual situations, be appropriate to consider other factors.
Ms. Brand also discussed the USDOL's appeal of the U.S. District Court for the District of Columbia’s order vacating two major provisions in the USDOL’s Home Care Rule originally intended to be effective January 1, 2015. The new rule would have excluded third-party employers from relying on the companionship and live-in domestic worker exemptions and would have significantly narrowed the definition of companionship services. It is anticipated the case will be heard in the May term.
Finally, Ms. Brand acknowledged that the highly anticipated proposed changes to the white-collar exemptions would not be published this month as the USDOL had previously suggested. She further stated that they are “not imminent.” Although she would not comment on specifics, she stated that the USDOL is examining the appropriate salary level test and whether the duties test needs to be revised. Practitioners believe that the proposals will include, among other things, raising the salary level test and narrowing the duties test of the exemptions to make it more difficult to classify employees as exempt. Some of the expected changes may include implementing a strict percentage of exempt and non-exempt duties and the possible elimination of the “concurrent” duties test whereby an employee may perform exempt and non-exempt duties at the same time.
New York State's Acting Commissioner of Labor, Mario Musolino, issued an Order today, accepting most of the recommendations made by the Hospitality Industry Wage Board, including the recommendation to increase the minimum wage for all tipped employees in the Hospitality Industry to $7.50 per hour effective December 31, 2015. The one recommendation that the Acting Commissioner rejected was the one that would have provided certain employers with some relief from this significant increase in labor costs -- namely, the recommendation to allow employers to take $1.00 off the hourly minimum wage for tipped employees if the weekly average earnings of their employees (wages paid plus tips received) equals or exceeds 150% of the regular minimum wage in New York City or 120% of the regular minimum wage in the rest of the state. So, to summarize, the Acting Commissioner's Order will: (1) increase the minimum wage for all tipped employees in the Hospitality Industry (regardless of whether they are classified as food service workers, service employees, or resort hotel service employees) to $7.50 per hour effective December 31, 2015; and (2) implement a $1.00 increase in the minimum wage for tipped employees in the Hospitality Industry who work in New York City, which would take effect if and when the legislature enacts a higher minimum wage rate for New York City. The Acting Commissioner also accepted the Wage Board's recommendation to review whether the current system of cash wages and tip credits should be eliminated. The Acting Commissioner's Order will be effective 30 days after notice of its filing is published in at least 10 newspapers of general circulation in the state. Employers in the hospitality industry should begin to consider how this significant increase in labor costs attributable to the employment of food service workers and service employees will impact their businesses in 2016 and beyond.
On September 15, 2014, the New York State Commissioner of Labor assigned the three-member Hospitality Industry Wage Board ("Wage Board") with the task of reviewing and making recommendations regarding what changes, if any, should be made to the minimum wage rates and tip credits for food service workers and service employees in the hospitality industry. After conducting several meetings, the Wage Board voted on January 30, 2015, to recommend that the minimum wage rate for all tipped employees in the hospitality industry (regardless of whether they are classified as food service workers or service employees) be increased to $7.50 per hour effective December 31, 2015. The webcast of the Wage Board's January 30 meeting can be found here.
Governor Cuomo has expressed his support for the Wage Board's recommendation, which will now be reviewed by the Commissioner of Labor. If the Commissioner of Labor accepts the Wage Board's recommendation, the Hospitality Industry Wage Order will be revised to reflect the increase.
Under the current Hospitality Industry Wage Order, employers are required to pay food service workers a minimum wage of at least $5.00 per hour, and may take a tip credit of no more than $3.75 per hour, provided that the total amount of tips received plus the wages paid equals or exceeds the current regular minimum wage of $8.75 per hour. The term "food service worker" is defined as any employee who is primarily engaged in serving food or beverages and who regularly receives tips. This includes "front of the house" employees such as wait staff, bartenders, captains, and bussing personnel, but excludes delivery workers. Employers are currently required to pay service employees (other employees in the hospitality industry who customarily receive tips but are not involved in serving food or beverages) a minimum wage of at least $5.65 per hour, and may take a tip credit of no more than $3.10 per hour, provided that the total amount of tips received plus the wages paid equals or exceeds $8.75 per hour. Service employees at resort hotels are subject to a special rule that allows them to be paid a minimum wage of at least $4.90 per hour. Non-service employees ("back of the house" employees such as cooks and dishwashers) must be paid the regular minimum wage of $8.75 per hour, and no tip credit may be taken for those employees.
So, the Wage Board's recommendation (if it is accepted by the Commissioner of Labor) would drastically increase the tipped employee minimum wage as of December 31, 2015, by $2.50 for food service workers, by $1.85 for most service employees, and by $2.60 for service employees at resort hotels. The Wage Board also voted to make two other recommendations to the Commissioner of Labor: (1) if the legislature enacts a higher regular minimum wage for New York City, then the minimum wage for tipped employees in the hospitality industry who work in New York City would increase by $1.00 effective on the date that the higher regular minimum wage goes into effect; and (2) if a hospitality industry employer can demonstrate that the weekly average earnings of an employee (wages paid plus tips received) equals or exceeds 120% of the regular minimum wage (or 150% of the regular minimum wage if the employee works in New York City), then the employer would be eligible to pay $1.00 less than the applicable tipped employee minimum wage.
Employers in the hospitality industry should begin to consider how this potentially significant increase in labor costs attributable to the employment of food service workers and service employees will impact their businesses, and should evaluate what adjustments may need to be made in the event that the Commissioner of Labor accepts and implements the Wage Board's recommendation. We will report on any further developments as they occur.
