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Managing Tip Credits And Service Charges Under Wage And Hour Laws

According to the New York Department of Labor, food service workers in the Empire State should receive a minimum tip credit of $5.15 per hour. Other service workers should receive a minimum tip credit of $2.60 per hour. Whether employers are starting new businesses or not, it is important to gain a complete understanding of how these tip credits work. Employment regulations in the United States and New York change frequently, and tip credits and other service charges can intersect with wage and hour laws in various ways. 

Compliance should be a key priority for restaurant owners and other entrepreneurs who employ tipped employees. An experienced employment law attorney in New York may be able to provide advice and guidance on this topic. Consider delving deeper into this subject with Schwab & Gasparini. Employers may contact our Syracuse Office at (315) 422-1333, our Hudson Valley Office at (914) 304-4353, or our Albany Office at (518) 591-4664. 

What Are Tip Credits in New York?

Tip credits allow employers to pay their workers slightly less than the minimum wage. In certain sectors, employees earn a considerable portion of their income through tips. As a result, employment laws in New York allow employers in these sectors to subtract a predetermined “tip credit” from the minimum “base” hourly wage. 

Excluding New York City, Long Island, and Westchester, the minimum wage in New York State is $15.50 as of 2025. For general tipped service workers, the tip credit is $2.60. When an employer subtracts $2.60 from the minimum wage of $15.50, the result is a base wage of $12.90. This is what employers must pay their tipped service workers per hour in New York State. The tip credit for tipped food service workers is $5.15, resulting in an even lower base wage of $10.35 per hour. 

What Is the Difference Between Tip Credits and Service Charges?

Tips and service charges are similar, but with a few important distinctions. Tips belong to the employees, while service charges belong to the business (such as a restaurant). While tips are usually optional, service charges are typically mandatory. Restaurant staff warn patrons ahead of time about these service charges, which are often listed on menus and receipts. Employers cannot retain tips, but they can keep service charges. Tips do not count toward the revenue of a business. In contrast, service charges are considered revenue, and they are therefore subject to sales tax. 

While employers cannot retain tips in New York, they can use tips to legally reduce their wages using the tip credit system. Note that employers can still voluntarily distribute service charges among their workers if they choose. New federal tax changes provide employees with tax credits for tips. In contrast, there are no such tax credits available for service charges levied by businesses. 

How Should New York Employers Manage Tip Credits and Service Charges in New York?

It is illegal to “misclassify” tips as service charges in New York, and this is a common mistake for many employers. Although this might seem like a valid business strategy, it could lead to various penalties, employment lawsuits, and other issues. Business owners should strive to clearly and promptly communicate the details of their tip policies to their employees. For example, a restaurant owner might provide a new hire with a written summary of the tip credit system, along with their base wage. A restaurant owner might also choose to communicate the details of any tip pooling arrangements between existing employees. Although these communications may not be mandatory, they can reduce the chance of subsequent disputes. 

One of the most important requirements is to cover the “shortfall” if total earnings do not reach the state minimum wage after an employee earns their tips. For example, an employee might earn less than $5.15 per hour in tips at a restaurant in New York State. Perhaps they earned only $3.15 per hour in tips during an eight-hour shift. In this situation, the employer may be obligated to cover the shortfall of $2 per hour to ensure minimum wage compliance. In other words, the employer would need to add $16 to the paycheck of that employee. These situations can become quite complex, and it may be helpful to consult with Schwab & Gasparini to address more specific questions about tip credits, service charges, and minimum wage laws in New York. 

Wage Theft Counts as Larceny in New York

Wage theft falls under New York State Penal Law Section 155 and is therefore classified as larceny. Employers who commit this offense could face criminal charges due to a bill signed by Governor Kathy Hochul in 2023. That being said, intent is an important element of larceny in New York, which means employers may be able to avoid penalties for accidentally violating wage and hour laws. However, employers should still be even more careful to avoid these violations due to the potential for criminal charges. As long as prosecutors can establish that an employer knowingly flouted minimum wage and tip credit laws, they may press for a conviction.

Aside from criminal consequences, employers should also be aware of the threat of litigation. An employee can sue an employer for unpaid wages and other damages. If the employee discovers wage violations, including unpaid tips, spanning multiple years, these damages can be highly significant. 

Learn More About Wage and Hour Laws With Schwab & Gasparini

While online research may provide employers with plenty of actionable insights into tip credits, service charges, and wage and hour laws, one has to remember that these laws change frequently. For example, the Department of Labor has announced that it will increase the minimum wage on an annual basis, using the three-year moving average of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) as a guide. Annual wage increases and other changes highlight the potential benefit of keeping a close eye on new wage and hour laws in New York. An experienced employment law attorney in New York may have up-to-date information on these changes, and their guidance may be more accurate and current than information from online articles. Consider discussing this subject further with Schwab & Gasparini. Employers may contact our White Plains Office at (914) 304-4353. 

Mon Nov 10 2025, 12:00am