Is it legal for employers to deduct the costs of credit card processing from servers’ tips? In most cases, yes, it’s legal (except in California, Maine, and Massachusetts where this practice is prohibited). When tips are charged on a credit card and employers must pay the credit card company a percentage on each sale, they are allowed to pay the employee the tip, less that percentage. How do you, as an employer, mediate the negative response this practice might incite in your employees?

More about the fee

Let’s say a customer had a great experience at your restaurant, and gives one of your servers a generous tip. If the customer uses a credit card to complete the transaction, there is typically a 2-3% transaction fee charged by the credit card company to process the transaction.

If the customer leaves a $5.00 tip on a $20.00 check using a credit card, it costs the restaurant 3% to process the transaction, meaning the total cost to process that transaction is $0.75. (25 x 0.03 = 0.75.) Of that total, the cost to process the employee’s tip is 15 cents. (5 x 0.03 = 0.15.)

Under the Fair Labor Standards Act, employers are allowed to deduct that 3% processing fee from employees’ tips, so long as this does not hinder the employee from making at least minimum wage. The employee’s earnings must be paid no later than the regular pay day and may not be held while the employer is awaiting reimbursement from the credit card company.

Employers, at this 3% processing rate, would need to give 97% of the tip to the employee (per FLSA regulations). The employer could deduct 15 cents from the employee’s tip, giving the employee $4.85. Note that you are not permitted to deduct the full cost of the transaction ($0.75), because the employee would only get $4.25, or 85% of the tip.

How do employees feel about the deduction?

While withholding that 2-3% does help offset a restaurant’s credit card processing fees, it can also harm employee morale. Tipped workers are generally not earning large incomes, so losing part of their pay can have an impact on their household budgets. Withholding these seemingly small amounts can create an impression that your employees are being held accountable for something beyond their control (whether or not customers use credit cards).

Ways to cope with the negative effects

Restaurants have come up with some potential ways to mediate the negative impacts of this practice, including…

• Shopping around for a credit card processing company that charges smaller fees
• Reduce or eliminate the "charge" to the tipped employee. Counterbalance the extra credit card fees by saving money in other ways, like
  • Planning workers shifts carefully to avoid overstaffing and
  • Looking for ways to reduce wasted supplies and energy

Why do certain states prohibit the practice?

California, Maine and Massachusetts restaurants prohibit this practice. In Massachusetts, for example, law expressly states that employees are entitled to keep the entire portion of a gratuity left by a patron (except if there is a tip pooling practice where servers must relinquish a certain percentage to busboys, cooks, hostesses, etc.)

Their reasoning? The customer should have the right to determine who receives the payment. The amount should not be subject to negotiation with the employer.

If you don't operate your restaurant in California, Maine or Massachusetts, then it is the option of the business owner whether or not to charge the tipped employee for the credit card processing fees related to their earned tips. It is important to weigh the immediate financial impact against other factors, like retaining top talent and keeping employee morale high.

Questions on tips and credit card processing fees? Reach out to me or a member of our Hospitality Services Group.