Can An Employer Deduct Credit Card Fees From Tips? California, Maine, and Massachusetts do not allow processing fees to be taken out of tips at this time. Nolo.com says that the law could be clearer in the states of Delaware, Kentucky, and Montana.
In each of these states, the current laws about tips don’t say much about credit card processing fees, but they do say that tips belong to the employee. It needs to be clarified if courts in those states would rule in favor of a business or an employee. If you want to take processing fees out of your servers’ tips, you should talk to a lawyer in your area.
Can An Employer Deduct Credit Card Fees From Tips?
Most of the time, it is against the law for an employer to take credit card fees out of a worker’s tips. Tips are considered the employee’s property, and an employer can’t take money out of an employee’s tips unless it’s required by law or the employee has written permission to do so. When it comes to credit card fees, the employer, not the employee, is responsible for paying these fees.
Some people need to follow this rule, though. For instance, in some states, employers can take a small amount (usually around 3%) out of an employee’s tips to pay credit card processing fees. But these deductions are usually limited to the number of fees the employer paid, and the employee must be told ahead of time about the deduction.
It’s important to know that the rules for tip deductions can vary from state to state, so it’s a good idea to check the laws in your state to find out what is and isn’t allowed. If you think your boss is taking too much money out of your tips, you should talk to a lawyer specializing in employment law.
Figuring out the deduction
Pricing complexity is another consideration when taking processing fees out of tips. Credit card processors usually charge restaurants a percentage, which can change based on the type of card used and how it’s entered into the POS system.
According to Bloomberg’s Bureau of National Affairs, the courts have consistently ruled that businesses are not in violation of FLSA criteria if “the employer establishes by a preponderance of the evidence that ‘in the aggregate, the sums collected from its employees, over a definable time period, have reasonably compensated it for no more than its entire costs related with credit card tip collections.'” In another case, the court said that a restaurant could only deduct as much as the processing fee costs.
This means that, in the past, courts have usually sided with businesses as long as the restaurant didn’t charge more than it cost to process the tips as a whole.
In this case, it’s better to be safe than sorry. Before you decide how much to take out of servers’ tips, you’ll need to know how much your usual credit card processing fees are. To be safe, deduct your costs.
State laws might be a good idea on how to take fees out of tips
In most states, there are no laws that either say credit card processing fees can’t be taken out of an employee’s tips or say they can. The rest of the states either don’t allow the deduction, don’t say anything about it, or have laws about general tips but not the deduction. This makes it seem like they need help figuring out what to do.
Expressly Banned or Uncertain
Nolo.com says that the following states have laws that clarify that fees can’t be taken out of tips or have unclear laws on the subject.
California: It’s illegal.
State law in California says that customers’ tips must be given to the worker in full. The whole credit card processing fee has to be paid for by the employer.
Colorado: It’s not against the law, but there are rules.
Colorado rules are a little more complex. If an employer keeps any of an employee’s tips, they may have to put up a sign about it. Also, you might not be able to get the employee tip credit if you take processing fees out of your tips. If you live in Colorado and want to deduct fees from tips, you should talk to a licensed attorney.
Delaware: I don’t know.
Delaware’s law says that employees own their tips (unless they are part of a valid tip pool), but it doesn’t say anything about credit card processing fees. It needs to be clarified if employers can take a deduction for processing fees, and Delaware courts have yet to decide on this.
Kentucky: I don’t know.
Like Delaware, Kentucky’s laws don’t say anything directly about taking credit card processing fees out of tips. Kentucky law says that employers can’t take tips unless they are required to by federal or state law. It needs to be clarified whether this statement is true for processing fees.
Maine: Not allowed.
Most people think that Maine law says processing fees can’t be taken out of gratuities. The law says that tips given by credit cards will be treated the same as tips given directly to an employee. According to Nolo, this means employers can’t take fees out of an employee’s tip.
Massachusetts: It’s not allowed.
There are two laws about tips in Massachusetts. One says that “tips” include gratuities that customers add to the bill and pay for with a credit card. The second law says that employers can’t take money out of their workers’ tips unless it’s for a valid tip pool. Together, these laws make it illegal for employers to take fees out of tips paid by credit cards.
Montana: I don’t know.
Montana law doesn’t say anything directly about processing fees, but it does say that all tips, even those left by credit cards, belong to the workers who earned them.
Expressly Allowed By law, you can take credit card processing fees out of your tax return in the following states:
- New York City
- The state of North Carolina
The FLSA rules about fee deductions still apply in Vermont. Also, it is a good idea to let employees know ahead of time. Some Labor Departments, like the Vermont DOL, say that the policy should be written down in the employee handbook or a written memo.
Other ways to avoid tip deductions
If tip deductions aren’t allowed in your state, or you don’t want to do that with your employees, your best bet is to make sure you’re paying enough for credit card processing in the first place. Unfortunately, many restaurants and other places where employees get tips pay them too much.
Look at your credit card processing statement and compare your current prices to what restaurants can do. CardFellow has a free quote comparison tool that lets you put in your business information and see the rates and fees you could be charged. It’s free, confidential (no sales calls!, and you don’t have to do anything. Try it out here.
Getting credit card processing with lower overall costs can help your bottom line and keep your employees from being upset.