Restaurants Can Deduct Credit Card Fees From Servers’ Tips, But Should They?

A few days ago, the minimum wage in Minnesota increased for the first time in years to $8/hour, putting it slightly above the federal minimum of $7.25. Some businesses are responding to the pay hike by tacking on “minimum wage” fees to customers or by taking credit card service charges out of servers’ tips.

The Minneapolis Star-Tribune has two stories on the reaction to the $.75/hour increase. The first involves a small cafe in Stillwater, MN, that has begun tacking on a $.35 “minimum wage” fee to customers’ bills.

The owner claims that the wage hike will ding him for an additional $10,000 a year, but rather than raise the prices on his menu, he added the new fee to each bill.

Some in the area are not thrilled with the new charge and a few are even calling for a boycott.

The cafe’s manager tells the Star-Tribune that the owner just “wants people to be aware we’re a small business and we’re trying to stay open… if you raise prices and don’t tell anyone, that seems more backhanded to me.”

Whatever you think of the fee, it’s effectively a slight increase to menu prices that consumers are being made aware of.

A more controversial tactic is being used by a company that owns eight restaurants in the Minneapolis-St. Paul area. In addition to raising menu prices, the owners have decided that when a customer puts their tip on a credit card, the fee for that credit card will be deducted from the tip the server ultimately receives.

So if you put a $10 tip on your family’s $50 meal and put the whole thing on a credit card, your server will only receive what’s left after the service fees. It’s estimated that this will reduce the servers’ tips by about 2%.

On the one hand, 2-3% isn’t that much money. On the other hand, a server whose base salary is below minimum wage and relies on tips to pay the bills can argue that every penny matters.

One employee tells the Star-Tribune that the credit card fees should be the owners’ problem.

“It’s their choice to accept credit cards, and the customers’ choice to pay with them,” explains the server, “it’s not up to me.”

Whether you agree with the practice or not, it’s perfectly legal, so long as the deduction doesn’t cause the employee to earn less than the minimum wage.

According to the U.S. Dept. of Labor:

Where tips are charged on a credit card and the employer must pay the credit card company a percentage on each sale, the employer may pay the employee the tip, less that percentage.

For example, where a credit card company charges an employer 3 percent on all sales charged to its credit service, the employer may pay the tipped employee 97 percent of the tips without violating the [Fair Labor Standards Act]. However, 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.

Another employee points out that making servers pay for credit card fees is no way to boost team spirit: “It’s just bad morale when [the owner] drives up in a Porsche, and yet he wants my 2 ­percent.”

This is the time on Sprockets when we vote:

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  1. C0Y0TY says:

    Amy’s Baking Company was just ahead of the times.

  2. econobikerredux says:

    “Stillwater cafe faces heat for adding ‘minimum wage fee’ to tab.
    The owner claims that the wage hike will ding him for an additional $10,000 a year, but rather than raise the prices on his menu, he added the new fee to each bill. ”

    The café owner is just doing what the airlines, phone companies, and pizza delivery companies are getting away with right now WITHOUT any ninny wining complaining customers .

  3. furiousd says:

    If they get tipped in cash, they don’t have to pay the fee, they don’t have to share in tipping pools (a stupid practice in my opinion), and they have the potential for not reporting these on their taxes as income. Wouldn’t this policy of involving the business in the tipping process without having the business subsidize their tipping encourage employees to encourage customers to ask for tips in cash?

    Further, why is no one upset at the taxes that poor people have to pay? Last time I got a raise my tax level changed enough to where it amounted to an additional $7 a month instead of the $54 a month I was expecting. For people who live at the poverty line, why penalize them for working and have them looking at friends living off of government assistance? Why not only tax income if you make a certain percentage above the poverty line? Then you won’t have as many complaints about small businesses being mean to their employees and demanding minimum wage increases so that the government can continue to take a cut of their pay. The family business I grew up in could only afford high school students as employees because minimum wage is so high (and you can imagine all the trouble it was to have so many in their first job), and payroll was consistently the single highest expense we had to deal with.

    Raising minimum wage isn’t the answer, changing the structure of the system is. Too many people accept things for the way they are and turn to the closest source available for a demon to deride rather than looking at a wider perspective and seeing if a change in form is needed. Blaming business owners for their employees not making enough in tips is a ridiculous argument, just like thinking that dropping teacher’s salaries is the right way to cut education costs.

  4. Xenotaku says:

    I just did some research on this Oasis Cafe.

    Today they’re open 6am-8pm. According to Urban Spoon, it shows them open for Breakfast-Lunch-Dinner every day, so we’ll assume that they’re open the same hours every day. That’s 14 hours a day.

    Now, we’ll take his $10,000 quote. I don’t know this diner myself, but based on experience at local diners, I’d assume that, at any given time, there’s likely to be a manager, 1-2 chefs, 1-2 wait staff, and 1-2 bus staff. Now, we’ll take the manager and the chefs out, since they’re probably getting over minimum wage already. So that’s 2-4 minimum wage staff. Probably more at busier times, less at lulls. We’ll say there’s an average of 3 minimum wage staff overall. 3 people, at $.75 extra, for 14 hours a day, is an additional $31.50 per day that he’s paying. Now, I’d personally guess that he’s closed on at least Christmas and Thanksgiving, but we’ll say that he’s open all 365 days a year. That comes out to $11,497.50 extra a year that he’s paying. Okay, so his $10,000 quote is fair.

    However, now we look at his $.35/person charge. Assuming that there’s a minimum of 10 people per hour average (which, IMO, means they’re really slow. A fast casual restaurants in a financial district runs about 100 people an hour during lunch, and more than 10 during lulls), that means $3.50 an hour he’s pulling in, and $49 a day. In that same year as above, that comes out to $17,885. Which is still a bonus of $6,387.5 for him.

    He may or may not have more than the 3 employees we guessed (by my same above math, 2.5 employees/hour average would be $9,581.25, hence the 2.5-3 employee guess to reach his $10,000 estimate). But he almost certainly has more than 10 customers per hour. So he’s doing this to make himself more money.

    • CzarChasm says:

      You have forgotten that in addition to what he pays the employees, he will have more payroll tax, more workers comp tax, etc.

      Still, overall, I appreciate the writeup and the work you put into thinking about the math, and i agree, he will probably make more on the surcharge than he spends on the wage increase.

    • MathManv2point0 says:

      Yes, as Czar said, nice math.

  5. Liberal says:

    there is a timebomb in doing that to the employees. the labor dept has always had that rule. but this is different and it will require some thought. my first impression is you would have to provide me with some detailed proof of every penny and i would want to keep records and that would not be very private for the credit card holder.

  6. maximusmmivx says:

    The article title seems a bit misleading here. The law is merely allowing the restaurant to take the percentage of the credit card fees that applies to the tip from the tip. That makes sense to me. They can’t deduct the credit card fees in whole from the tip.

    • CzarChasm says:

      I agree, but it is still pretty weak of the restaurant if you ask me. If they really feel the need to make up that couple of percent, they should have a credit card surcharge (or cash discount).

  7. webalias says:

    The Stillwater Minnesota restaurant’s owner tacking on a 35 cent “minimum wage fee,” which he claims is in the interest of public awareness, is simply a mean-spirited way of making a political point. The business obviously has dozens of other costs for which it could just as logically add a separate fee to each customer’s check. Many of these costs are also determined by, or the result of, state or federal laws and regulations. He likely pays a whopping amount for heat and electricity — in Minnesota, these rates must be approved by the Public Utilities Commission. He has costs to conform with health codes and safety regulations set by a variety of statutes and government agencies. He pays for trash collection, he pays for water and sewer service, he pays his phone bill, he pays taxes. Even his food costs are determined in part by the heavy hand of government and its role in subsidizing certain farmers and agribusinesses while placing tariffs and import barriers on others — the result is increased prices for some of the foods on the menu. So why single out a modest increase in the minimum wage? The only reason is that he’s ticked off and wants to make a point.
    (On the other hand, I’m probably as much a hypocrite as he is, and if a restaurant or bar provides cable TV for its customers, I’d approve a 35 cent “media gouging fee” to call attention to another Comcast price increase.)

  8. RupturedDuck says:

    “On the one hand, 2-3% isn’t that much money. On the other hand, a server whose base salary is below minimum wage and relies on tips to pay the bills can argue that every penny matters.”

    Come on, Consumerist. You can do better than that. “An employer may pay a tipped employee not less than $2.13 an hour in direct wages if that amount plus the tips received equal at least the federal minimum wage, the employee retains all tips and the employee customarily and regularly receives more than $30 a month in tips. If an employee’s tips combined with the employer’s direct wages of at least $2.13 an hour do not equal the federal minimum hourly wage, the employer must make up the difference. Some states have minimum wage laws specific to tipped employees. When an employee is subject to both the federal and state wage laws, the employee is entitled to the provisions of each law which provide the greater benefits.” So says

    So their base salary is the minimum wage. It’s a different argument that the base tip wage is below the base generic non-tip wage. Yes, I’m picking nits. But accuracy of information is crucial in the entire minimum wage debate. Being accurate helps ensure the debate remains clear and points out the base minimum wage disparities between tipped and non-tipped employees is inherently unfair.

    • jdgr says:

      And it’s important to remember that in Minnesota “[t]here are no tip credits against the minimum wage allowed in Minnesota. Employers of wait staff or other tipped employees may not use employee tips to
      offset the minimum wage. Tipped employees must be paid the minimum wage for all hours worked” (via). I get that it’s one of the few states that has this rule, but it does mean that the base tipped wage for servers isn’t different from a non-tipped wage in Minnesota. (For more information on Minnesota wage regulations, check out the handouts on this page.)

      The overall discussion still needs to be about using tipping to provide “better wages” to your customers instead of increasing your costs. It’s all cost to customer, so in the end it’s the same to me (except fewer employees will get screwed over). There are many arguments out there, but I do agree with RupturedDuck that places that have the minimum wage disparity between tipped and untipped employees is ridiculous. When I moved to Minnesota, I was surprised that the disparity didn’t exist any longer, and although I still tip, I’m glad that I’m actually helping to provide more of a living wage instead of just helping the employer make up the actual minimum wage.