Is It Legal to Deduct Credit Card Processing Fees From Gratuities Paid to Tipped Employees?

Yes – deducting credit card processing fees from gratuities paid to tipped employees is generally permissible under both the federal Fair Labor Standards Act (FLSA) and Minnesota law.  The Department of Labor (DOL) addressed this issue in a 2006 opinion letter.  The DOL’s position is that it is not a violation of the FLSA for an employer to reduce “the amount of credit card tips paid to the employee by an amount no greater than the amount charged to the employer by the credit card company.”  It is also permissible for an employer to “deduct an average standard composite amount for tip liquidation, rather than individually calculating the precise charge for each transaction, so long as the total amount collected reasonably reimburses the employer for no more than the total amounts charged by the credit card companies attributable to liquidating credit card tips.”

The rule is the same under Minnesota law.  Regulations from the Minnesota Department of Labor and Industry provide that “[w]here a tip is given by a customer through a credit or charge card, the full amount of tip must be allowed the direct service employee minus only the percentage deducted from the tip in the same ratio as the percentage deducted from the total bill by the service company.”  See Minn. R. § 5200.0080, subp. 7.

An employer who deducts credit card processing fees from gratuities paid to tipped employees must still comply with all other applicable requirements of the FLSA and Minnesota law.

Takeaway for Employers:  An employer who deducts credit card processing fees from gratuities paid to tipped employees should be careful not to deduct more than the amount charged by the credit card company.

About Michael Miller

Michael is a Chambers-rated attorney in Briggs and Morgan's Employment, Benefits, and Labor group and is head of the firm’s Employment Law Counseling and Compliance practice group. He has 25 years experience counseling employers to prevent unwanted litigation and advises companies of ongoing changes in federal, state and local employment law. Michael advises employers in all areas of employment law including discipline and discharge, leaves of absence, wage and hour compliance, non-compete and confidentiality agreements, affirmative action plans, background checking, and drug/alcohol testing. For Michael's full bio, click here.

Posted on January 23, 2012, in Wage and Hour and tagged . Bookmark the permalink. Leave a comment.

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