Can an Employer Deduct Credit Card Costs from Employee Tips?

These days, a lot of restaurant customers pay for food and drinks with a credit card, and they often leave a tip by credit card, rather than leaving cash. Credit card companies usually charge restaurant owners transaction fees. How should employers handle tips paid by credit card, and can employers use the tips to cover the credit card transaction fees? The answer is perhaps, depending on the location and within limits, and written consent from the employees may be needed.

Federal Law

The federal Fair Labor Standards Act (FLSA) has rules about deducting credit card fees from tips. Under the FLSA, employers are not allowed to deduct more than the actual transaction fee charged by the credit card company. For example, if a credit card company charges a 2% transaction processing fee, then the employer may pay tipped employees 98% of their credit card tips. The employer would not be allowed, in this scenario, to apply 10% of the credit card tips towards its credit card operating costs.

Also, employers cannot offset credit card fees against tips if doing so reduces an employee’s hourly wage to below the minimum wage. In addition, federal courts and the Department of Labor generally conclude that an employer’s right to offset the cost associated with credit card tip collections is limited to the cost required for collection. An offset is not available, for example, for time spent by servers processing credit card transactions or the employer’s cost of having additional cash on hand to pay out credit card tips.

The amount due to employees for credit card tips must be paid by the next regular payday and cannot be withheld while an employer is awaiting reimbursement from a credit card company. Employers can recover credit card tips from employees when credit card charges are uncollectible, if doing so does not reduce employee tips retained to below the tip credit amount (or the employee’s wages to below minimum wage)

State Laws

In addition to the FLSA rules, some states have additional limits on what an employer can deduct from tips, or other requirements. For example, employers in Texas must get written employee authorization to deduct credit card service charges from credit card tips (40 Tex. Admin. Code § 821.28(e)). Pennsylvania does not allow employers to deduct any credit card or other processing fees from tips (34 Pa. Code § 231.113). State laws may also require notice to customers about how tips are handled so that customer understands what is and is not going to the employee.

Takeaways: Owners Generally Should Not Keep Tips, and Should be Careful About Deducting Credit Card Fees from Tips

Owners, managers, and supervisors are generally not allowed to keep any of the tips left by customers, with a few exceptions (such as the limited right depending on location to deduct credit card processing fees, mentioned above, or tips that he or she receives directly from customers based on the service that he or she directly and solely provides).

It is generally good practice for employers to have a written notice regarding tips, so that there is no confusion about how tips will be handled. In some cases, beyond the scope of this note (such as if the employer makes use of a tip credit), notice is mandatory.

For more information, see the Department of Labor Fact Sheet #15: Tipped Employees Under the Fair Labor Standards Act (FLSA) here.