Employee misclassification is a serious issue for restaurant owners in New York, leading to costly fines, back pay claims, and legal penalties. Proper classification of workers as employees or independent contractors and as exempt or non-exempt under wage and hour laws is essential to maintaining compliance and avoiding lawsuits. This guide outlines key classification rules and best practices to help restaurant employers prevent costly mistakes.
Why Employee Classification Matters
- Compliance with Wage and Hour Laws – Misclassified workers may be owed unpaid wages, overtime, and benefits.
- Avoiding Penalties and Lawsuits – The U.S. Department of Labor (DOL) and New York State enforce strict penalties for misclassification.
- Protecting Business Finances – Employers may be liable for unpaid payroll taxes, Social Security, and workers’ compensation.
Employee vs. Independent Contractor: Understanding the Difference
New York restaurants must determine whether workers are employees or independent contractors based on the degree of control and independence in their job duties. Misclassifying employees as independent contractors can result in fines, back wages, and tax liabilities.
Key Factors in Worker Classification
According to the New York State Department of Labor (NYSDOL) and the IRS, a worker is generally an employee if:
- The employer controls how, when, and where the work is performed.
- The worker does not provide their own equipment (e.g., a server using the restaurant’s tools, uniforms, and POS system).
- The worker cannot work for multiple businesses freely.
- The work is an integral part of the restaurant’s business (e.g., cooks, servers, bartenders).
A worker is more likely to be an independent contractor if:
- They set their own schedule and provide services to multiple clients.
- They use their own tools and equipment.
- They operate under a contract with clearly defined project-based work.
- The restaurant has limited control over their work and methods.
Consequences of Misclassifying Workers as Independent Contractors
- Unpaid wages and overtime liabilities.
- Penalties from the IRS and NYSDOL for unpaid employment taxes.
- Denial of benefits claims (health insurance, workers’ comp, unemployment insurance).
- Legal claims for wrongful termination or employment discrimination.
Exempt vs. Non-Exempt Employees: Understanding Overtime Rules
Employees must also be classified correctly under the Fair Labor Standards Act (FLSA) and New York Labor Law as either exempt or non-exempt from overtime pay.
Non-Exempt Employees (Eligible for Overtime Pay)
Most restaurant workers, including servers, bartenders, dishwashers, cooks, and hosts, are non-exempt employees, meaning they:
- Must be paid at least minimum wage (including tip credits where applicable).
- Must receive overtime pay (1.5x regular rate) for hours worked over 40 per week.
Exempt Employees (Not Entitled to Overtime Pay)
To be exempt from overtime, an employee must meet both salary and duties tests:
- Earn at least $1,125 per week ($58,500 per year) in New York (2024).
- Perform executive, administrative, or professional duties (e.g., general managers, executive chefs with decision-making power).
- Have hiring, firing, and supervisory responsibilities.
Common Wage and Hour Misclassification Mistakes in Restaurants
- Misclassifying Kitchen Staff or Servers as Independent Contractors
- Most restaurant workers do not qualify as independent contractors because they rely on the employer’s schedule, equipment, and supervision.
- Failing to Pay Overtime for Salaried Employees
- If a manager or chef earns below the exempt salary threshold, they must be paid overtime regardless of job title.
- Improper Use of Tip Credits
- Employers must comply with New York tip credit rules and ensure workers earn at least minimum wage when tips are included.
- Tip pooling must follow legal guidelines, and managers cannot take a share.
- Not Keeping Proper Payroll Records
- Employers must maintain time records, payroll documentation, and tip reporting records for at least 6 years in New York.
- Misclassifying Assistant Managers as Exempt
- If a restaurant manager spends most of their time performing non-managerial tasks (e.g., serving, cleaning, cooking), they may be misclassified as exempt and owed overtime pay.
Best Practices to Avoid Misclassification Issues
- Conduct an Internal Audit – Regularly review job descriptions, payroll records, and employee classifications.
- Use Written Contracts for Independent Contractors – Clearly define work scope, pay structure, and independence.
- Train HR and Management Staff – Ensure managers understand classification laws and wage rules.
- Maintain Accurate Work Records – Keep detailed records of employee schedules, pay, and tip allocations.
- Consult Legal and Payroll Experts – Work with employment attorneys or payroll professionals to ensure compliance.
Conclusion
Employee misclassification can result in severe financial penalties, lawsuits, and reputational damage for New York restaurant owners. Ensuring workers are correctly classified as employees or independent contractors, and as exempt or non-exempt, is critical to maintaining compliance with wage and hour laws. By implementing strong recordkeeping, training, and audit practices, restaurant owners can protect their business from costly wage disputes and legal liabilities.