The U.S. Department of Labor (DOL) recently issued an opinion letter stating that restaurant employers may deduct an average standard composite amount from tips included on customers' credit card payments to recover the charges imposed by the credit card companies for liquidating the tip amounts, rather than deducting the precise amount charged by each credit card company.
The U.S. Department of Labor (DOL) recently issued an opinion letter stating that restaurant employers may deduct an average standard composite amount from tips included on customers' credit card payments to recover the charges imposed by the credit card companies for liquidating the tip amounts, rather than deducting the precise amount charged by each credit card company. However, the employer may not deduct an amount that exceeds the employer's actual expenses incurred in transferring to cash the tips charged on a credit card. Additionally, an employer cannot deduct its administrative costs associated with credit card transactions from an employee's tips.
The opinion letter was issued in response to an employer's inquiry regarding whether employers can deduct an "average standard composite amount" from credit card tips to recapture the charges imposed by the credit card companies and the expenses incurred by the employer for those transactions, as opposed to deducting only the exact charges associated with each credit card transaction.
The company seeking the opinion stated that it incurs expenses when liquidating the tips charged to credit cards. The expenses include the fee paid to the credit card companies (an average of 2.9% of each transaction) and additional expenses including "the 'time value of credit card collections' (which includes 'internal time processing credit cards charges' and 'internal time reconciling credit card charges'), credit card charges for gift certificate sales, the cost of the credit card terminal and dedicated phone lines, 'house account collections,' and 'house account charge and collection costs.'" The company cited a case in which the court held that employers can legally deduct the costs of converting credit card charged tips to cash. The company interpreted the court's opinion to mean that it could deduct an average standard composite amount and that this deduction could exceed the fees charged by the credit card company because it would include the additional expenses incurred by the employer.
The DOL disagreed with the company's interpretation of the case, stating, "the court approved the 'standard composite percentage' only in circumstances where the employer demonstrates 'that, in the aggregate, the amounts collected from its employees, over a definable time period, have reasonably reimbursed it for no more than its total expenditures associated with credit card tip collections.' Such deductions, the court concluded, must not enrich the employer, 'but instead, at most, merely restore[] it to the approximate financial posture it would have occupied if it had not undertaken to collect credit card tips for its employees.'" The DOL also cited the Wage and Hour Division's position that employers can only deduct the fees associated with the tip collection from the employees' tips, and that "the other costs that [the company] wishes the tipped employees to bear must be considered the normal administrative costs of [the company's] restaurant operations."
Employers' Bottom Line:
Based on the DOL's opinion letter, restaurant employers may deduct an average standard composite amount from tips included on customers' credit card payments to cover the costs of converting the tips to cash, instead of deducting the exact amount charged by each credit card company. However, this amount cannot include any indirect or administrative costs incurred in collecting the tips from the credit card transactions. While DOL opinion letters are expressly limited to the situation described by the person seeking the opinion, and are not legally binding, they provide insight into the position the DOL may take when faced with similar situations.
If you have any questions regarding this opinion letter, or labor or employment related issues in general, please contact the Ford & Harrison attorney with whom you usually work or the author of this Alert, Tomeka Hart, thart@fordharrison.com or 901-291-1522.