Where are my Credit Card Tips?

Generally, federal and state labor laws mandate that any tip or gratuity received by an employee is money that belongs exclusively to the employee who earned the tip. There are some well-understood exceptions for such activities as tip pooling arrangements. But, under no circumstances, can an employer share in employee tips or convert such tips to their own use. Illegal tip sharing or tip pooling is a form of wage theft. Employers that engage in wage theft can be severely punished under both federal and state laws.

But what about tips and gratuities that are given via credit cards?

The general rule is the same. Even if paid via credit card, tips and gratuities are the property of the employee. Employers must remit those tips and gratuities to employees. How quickly an employer must remit those tips and gratuities depends on state law. At the latest, federal law requires employers to disburse their servers’ tips on or before the next regular pay date.

But what about the processing fees that are charged by credit card companies?

As most know, credit card companies charge a “processing fee” for credit card purchases. The processing fees range from 2% to 5%. Under federal law and under the labor laws of most states, it is illegal for an employer to charge or make a profit on charging employee’s credit card processing fees to convert their credit card tips and gratuities. But, to be clear, an employer can only lawfully deduct the processing fee for the TIP PORTION of the bill; not the processing fee for the whole customer bill. Practically speaking, this means that — as USAToday recently wrote — tipped workers are not receiving the full gratuity that the customer intended.

However, the lawful deductibility of processing fees is not the rule in every state.

Some states explicitly prohibit employers from deducting credit card processing fees from employee tips/gratuities. Specific prohibitions are in place in California, Maine and Massachusetts. More states are expected to change their laws since this has become an emerging trend as employee-rights activists agitate to obtain added labor law protections for service workers. Further, in some states, to discourage employers from deducting credit card processing fees, labor laws have been changed to prohibit an employer from using a “tip credit” if they deduct processing fees from employee tips/gratuities.

Colorado is an example of a state that has done both. See Colo. Dept. of Labor fact sheet here.

Under Colorado’s labor laws — revised in 2019 — employers are prohibited from any claim to or right of ownership in or control over an employee’s tips. Further, if tips are paid via a credit card, it is impermissible for employers to deduct credit card processing fees from an employee’s tips. Finally, if an employer takes impermissible deductions from an employee’s tips, then such deductions nullify the allowable tip credits toward the minimum wage.

Call the Employee Rights Attorneys at Herrmann Law Today

If you have questions about your wages, overtime, tips or gratuities, service charges, or wage deductions, please call the wage and overtime attorneys at Herrmann Law, PLLC. Call us at (817) 479-9229 or submit your case by using our Online Contact page. We are proven, experienced, employee-focused attorneys representing workers across the United States in all types of workplace disputes.