Employers Legally Deduct Processing Fees

Can Employers Legally Deduct Processing Fees from Tips?


Tips are crucial in the service industry and serve as a major source of income for workers. But in some states, employers deduct processing fees from employees’ tips. This means less income for service employees than they’re entitled to, which raises illegal and moral concerns.

In fact, businesses in some states collect 3% of all credit card tips earned by restaurant servers. Employers collect this sum to cover the transaction fee. Each year, this practice gets more and more criticism. So, can employers deduct processing fees from tips? Mostly, yes. But there are states like Maine, Massachusetts, and California where employers cannot deduct a processing fee from tips.

What happens is that when the tips get charged via credit card, employers have to pay the company a percentage on every sale rather than pass on the full tip to a worker. Now, when it comes to deducting processing fees from tips, consider the difference between an employee’s and employer’s perspective. 

Employees’ Perspective on Deduction

A business can get 2% or 3% of tips for credit card processing to save money. But it doesn’t work in the best interest of the employees. In fact, it demoralizes employees. From the perspective of servers, losing money in credit card processing impacts their savings and wages. 

Why Do Some States Prohibit the Deduction of Processing Fees from Tips?

Maine, Massachusetts, and California have strict laws that prohibit the deduction of processing fees from tips. Legally, the law states that workers can keep the whole share of a gratuity. In some pooling practices, servers often share tips with hostesses and cooks.

Customers also have every legal right to decide who should get the tipped payment. Practically, there shouldn’t be an argument about whether or not an employer should negotiate with employees to deduct 2%-3% of their tip for credit card processing. 

If you don’t operate in Maine, Massachusetts, or California, then it’s a different story. In these states, business owners deduct the processing fees from workers’ tips. But before you do decide to make these deductions, consider the financial and legal issues. 

For instance, if you run a restaurant, you naturally want to retain your most talented employees. But if you deduct processing fees from workers’ hard-earned tips, it is very likely won’t have high morale.

Rules of the Game: Deducting Credit Card Processing Fees through Gratuities

Even the states that allow employers to deduct a processing fee from workers’ gratuities have rules. For instance, an employer is not allowed to deduct the processing cost of the entire bill from a worker’s tip.

On the bright side, business owners can take out a portion of gratuity to cover the cost of processing fees from a worker’s tip. Understand that tipped employees are protected under the Fair Labor Standards Act (FLSA). But a lot depends on the circumstances that propel an employer to deduct credit card processing fees.

So, if a customer pays the tip via credit card and the owner has to pay the credit card processing company, the employer would be within his rights to deduct the processing percentage from the server’s tip. Contrary to misguided perception, the employer cannot deduct the whole processing fee. In fact, it should be no more than the amount covered to process the whole tip.

How Do You Calculate the Deduction?

Pricing complexity is one of the factors that makes deducting processing fees from tips complicated. Typically, credit card companies charge restaurants a specific percentage that depends on many factors, like the restaurant’s POS system and the type of credit.

In some cases, the court supported a restaurant’s right to deduct a value no higher than the amount of the credit card processing fee. Still, restaurants should be cautious about this practice. If they do deduct the processing fee, be on top of the legal technicalities to avoid a potential lawsuit. The best shot for restaurants is to deduct relatively less than their processing costs. 

Deducting Fees from Tips: Understand the State Laws

While it is a legal practice, service industry players should be aware of local and state laws that prohibit deducting credit card processing fees from employees’ tips. Currently, Maine, Massachusetts, and California are the three states where employers cannot make processing fee deductions from tips.

On the other hand, when it comes to states like Montana, Kentucky, and Delaware, the law is unclear. In these states, current laws on tips don’t mention credit card processing deductions. Instead, these states’ laws have stipulations that highlight gratuities should go to employees.

But this often makes it difficult for courts to rule in favor of an employee or business owner. If you’re a restaurant owner in one of these states and plan to deduct credit card processing fees from a worker’s tip, make sure to reach out to a licensed and professional attorney for guidance. 

While California’s law doesn’t allow business owners to engage in this practice, Colorado’s law doesn’t prohibit it. In fact, Colorado has more complex rules that allow employers to deduct processing fees, but under certain conditions and circumstances that often confuse business owners. 

Similarly, the law is unclear about whether or not employers can deduct processing fees from servers’ tips in Delaware and Kentucky. The confusion directly stems from the fact that laws don’t mention credit card processing or deductions from server tips.

For instance, Kentucky law states that business owners cannot take away tips from their workers unless there is federal or state involvement or direction. Still, it’s not clear whether or not this rule works for credit card processing fees.

Now, there are states like New York, Vermont, Utah, North Carolina, and Minnesota that allow employers to deduct processing fees legally. But standard FLSA rules about deducting fees also apply in these states. The Vermont Department of Labor recommends employers should have written policies, written memos, or employee handbook guidelines for workers in place.

What’s General Rule?

So, is it legal to deduct processing fees from tips? Yes. But if don’t run business operations in Maine, Massachusetts, or California, be more cautious about deducting credit card processing fees from their servers’ tips. Of course, the general rule across the U.S. is that tips belong to servers. But there are always exceptions when it comes to this rule.

Some states now allow business owners to claim a credit tip. It allows employers to pay less than the standard minimum wage, assuming the employee earns a good chunk of tips that cover the difference. So, instead of taking part in employees’ tips for credit card processing, these employers see these tips as part of employees’ wages to meet minimum wage requirements.

Most states allow employers to give employees the freedom to share their tips and have pooling arrangements. This makes it possible for business owners to distribute tips to workers who ordinarily wouldn’t get them. 

On the flip side, some states’ laws now allow the deduction of tips to cover credit card processing fees. States like New York, Vermont, Utah, North Carolina, and Minnesota explicitly have laws that allow employers to reduce workers’ tips for processing credit card fees.

For instance, if the charging fee of a credit card is 2%, the employer would be able to get 2.5% of each worker’s tip. But in the Golden State, a fee is viewed as another expense that business owners need to pay rather than put this burden on an employee.

Tip Deductions: What are the Alternatives?

Businesses and restaurants with tipped workers overpaying across the United States. So, whether you’re in the process of deducting your workers’ tips for a processing fee or operate in a state that bans deductions of tips, make sure you’re not overpaying for your credit card processing. 

All employers should review and compare their credit card processing statements with their current available pricing options. You can also use data comparison software to easily check the fees and rates you’re paying. You don’t have to just make sure your credit card processing is secure – prioritize your staff’s happiness and follow “your” state’s credit card processing practices.

Final Thoughts

Credit card processing fees hit restaurant establishments’ bottom line. So, from the perspective of owners, it makes sense to lower overall expenses. But this is where deducting those credit card processing costs from workers’ tips becomes a legal and ethical conundrum.

The truth is that tips represent and hold a customary tradition and value for customers and servers. It allows customers to demonstrate their appreciation for satisfied service to bartenders, waiters, and other workers in the service industry.

The legal issues stem from the fact that the law, in most states, focuses on gratuities rather than specifying credit card processing fees. But in retrospect, employers in states like Maine, Massachusetts, and California have the legal right to deduct processing fees from their employees’ tips.

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