The Treatment of Tips under the FLSA: Employer Deductions from Tip Credits

     Tip credits are subject to the same deductions from wages as normal, non-tip wages.  Deductions to cover cost of transaction charges of tips paid by credit card (as opposed to tips left in cash) are allowed.  Myers v. Copper Cellar Corp., 192 F.3d 546, 554 (6th Cir. 1999) (“The employer has an obvious legal right to deduct the cost of converting the credited tip to cash.”); Gillis v. Twenty Three East Adams Street Corp., 2006 U.S. Dist. LEXIS 12994 (N.D. Ill. Mar. 6, 2006) (ruling that pub did not violate FLSA by deducting from tips received by server an amount no greater than necessary to reimburse the pub for its expenses in processing credit card tip collections).  Where tips are charged on a credit card and the employer must pay the credit card company a percentage on each sale, then the employer may pay the employee the tip, less that percentage.  This charge on the tip may not reduce the employee’s wage below the required minimum wage.  The amount due the employee 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.


      In Reich v. Priba Corp., 890 F. Supp. 586 (N.D. Tex. 1995), the district judge posited, following a bench trial, that the employer had failed to prove that its standard 20% deduction from its waitresses’ credit card tips (see id. at 595) was reasonably compensatory.  The trial bench stated: 


 

“The court also concludes that Cabaret Royale failed to satisfy its burden of proving that the deductions from the waitresses’ tips for credit card processing fees were reasonable.  Cabaret Royale presented no documentation or records to support its contention that a percentage of the withholding covered the reasonable costs of credit card processing.  Cabaret Royale's arrangement with the waitresses appears to be nothing more than an impermissible shift to its employees of its costs of doing business.  The FLSA does not permit an employer to transfer to its employees the responsibility for the expenses of carrying on an enterprise.”

Id. at 596 (citations omitted).  Accordingly, proof that the employer’s standard deduction from its employees’ credit card tips reasonably compensated the employer only for no more than the overall costs of processing credit card tips, rather than other costs of doing business, would have safeguarded the employer’s statutory tip credit.

A compulsory charge for service, for example, 15% of the bill, is not a tip.  Such charges are part of the employer’s gross receipts.  Where service charges are imposed and the employee receives no tips, the employer must pay the entire minimum wage and overtime required by the Act.

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