If you’re in a business
where your employees earn customer tips, chances are that patrons sometimes use
their credit cards to pay gratuities. From a business perspective, this has
financial consequences, as credit card companies often charge a service fee
based on the entire charge, including goods, services, and any included tips.
Some employers attempt to recoup these credit card fees by deducting part of
the cost from an employee’s tips. But is this legal? We’ll take a look at
federal developments on this issue.
Strict State Rules
service fees from an employee’s tips. Labor Code Section 351 provides that a
gratuity is the sole property of the employee for whom it is left and an
employer cannot take any portion of that tip.
This section goes on to
state that if you permit customers to pay gratuities by credit card, employees
are entitled to the full amount of the tip—without deductions for credit card
processing fees or other costs charged to you by the credit card company. You
are required to pay out the gratuities to the employees by the next regular
payday following the date that the customer authorized the credit card payment.
The HR Management & Compliance Report: How To Comply with California Wage & Hour Law, explains everything you need to know to stay in compliance with the state’s complex and ever-changing rules, laws, and regulations in this area. Coverage on bonuses, meal and rest breaks, overtime, alternative workweeks, final paychecks, and more.
More Lenient Federal
Position
If you have employees
located outside
who receive gratuities, you may be able to take advantage of federal law, which
is more generous to employers on tip deductions. (Check to be sure the other
state or states don’t have another applicable law.) As a general rule,
employers in this situation can deduct credit card service fees from gratuities
without violating the Fair Labor Standards Act (FLSA).
A recent U.S. Department
of Labor opinion letter addressed how an employer can calculate the credit card
fee deduction.1
The
restaurant-employer requesting the opinion told the DOL that it wanted to
deduct 4.8 percent from tips to recoup its costs for liquidating charged tips
to cash. This figure was based on the average credit card fee of 2.9 percent
charged by the credit card issuer plus other expenses such as the value of the
time the employer spent processing credit card charges as well as the cost of
the credit card terminal and dedicated phone lines.
The DOL explained that
an employer may reduce the amount of credit card tips only by an amount that is
no greater than the amount charged to the employer by the credit card company.
And, the employer may deduct an average amount for such expenses—rather than
individually calculating the precise charge for each transaction—as long as
this amount doesn’t exceed the amount the credit card company charged.
However, deductions for
the other types of expenses indicated by the employer here are prohibited
because such expenses are simply normal administrative costs for the
restaurant’s operations. For example, time spent by servers processing credit
card sales is an activity that generates revenue for the restaurant and isn’t
just for the purpose of collecting tips. Further, the cost of dedicated phone
lines is the same, regardless of whether a tip is included in a credit card
transaction. Consequently, following the opinion letter’s reasoning, the
restaurant could deduct no more than 2.9 percent from its employees’ tips.
For More Information
You can link to the
California Labor Code at www.leginfo.ca.gov/calaw.html.
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1
FLSA2006-1