Nation’s Restaurant News , Feb 18, 2008 by Dina Berta, Reproduced with permission.
Amid a swirl of controversy, some restaurants have scuttled plans to deduct portions of credit card processing fees from servers’ tips as a way to offset wage hikes and other increased operational costs that are squeezing profit margins. After a public outcry earlier this month, Outback Steakhouse parent OSI Restaurant Partners, whose multibrand system includes 1,200 restaurants in 26 states, backed down from a plan to require servers to cover the proportion of charge card fees related to their gratuities.
Tampa, Fla.-based OSI, whose brands include Carrabba’s Italian Grill, Roy’s and Fleming’s Prime Steakhouse & Wine Bar, had implemented the policy in January in Illinois and Arkansas. But when employees and customers complained, OSI dropped the deductions and promised to refund credit card processing fees already withheld from servers.
The practice is prohibited in some states, such as California and Colorado, but it is legal under federal labor laws. Where permissible, some operators continue to make servers pay the proportion of the fees related to tip amounts, despite controversies and the risk of losing disgruntled employees.
Restaurants typically pay credit card companies fees that can range from 1.5 percent to 3 percent of a transaction. The fees apply to the total tab, including tip, though some operators pass on to servers the percentage of the fee not related to the meal portion of the ticket. For example, if a meal tab is $100 and the tip is $20, an employer whose 3-percent fee would be $3.60 may withhold 60 cents–3 percent of the tip–from the server on that one transaction.
One Outback Steakhouse server told local media in Arkansas that the policy would cost her an estimated $800 a year if she worked five shifts a week. Customers who were made aware of the new policy were said to have jotted pointed objections to it on their credit card slips and then left their tips in cash.
OSI’s chief legal officer, Joseph Kadow, said the company first considered making the deductions because of escalating costs.
“It is no secret that all casual-dining restaurant companies are facing unprecedented cost increases and substantial declines on profitability,” Kadow said. “It is our responsibility to adjust to this environment and take appropriate action to protect the business.”
Kadow said the decision was not made lightly; company officials at first considered the deduction to be fair because of what it considers the competitive and generous slate of benefits it offers to employees, such as health insurance, vacation pay and meal discounts.
“However, upon reflection, we realized this decision is inconsistent with our principles and beliefs,” Kadow said. “We will take care of our people and our customers, and the institution of OSI will take care of itself.”
Other operators continue to make the deductions, regardless of controversy or fears of employee turnover.
Servers and bartenders at Gandy Dancer, a fine-dining restaurant in Ann Arbor, Mich., complained when its Houston-based parent company, Landry’s Restaurants Inc., in January began charging them 1.5 percent of their tips to cover the proportion of credit card processing fees related to gratuities.
Servers were surprised when they received tips at the end of a shift and learned a couple of dollars had been deducted, said waiter James Andrews, who has worked at the Gandy Dancer for two and a half years.
“What burned me up about it was there was no warning or disclosure about the policy,” Andrews said.
Restaurants that make servers pay for credit card processing fees run the risk of alienating employees, said service consultant Paul Paz, founder of WaitersWorld.com and a career server at a Stanford’s Restaurant & Bar in Portland, Ore. Although the processing fees may be a small part of each transaction, the deductions can add up, Paz said.
“With the withering labor pool, we have to ask if this is a practice that enhances our image or will it be another deal-breaker that deters good job candidates,” he said.
Despite the controversy, Landry’s, which operates about 200 restaurants in 29 states and the two Golden Nugget hotel-casinos in Nevada, has not changed its policy.
“Federal law expressly allows for the practice of deducting the credit card charge from tips left on a credit card. Where allowed by state law, this is our practice,” Landry’s executive vice president Steven Scheinthal said in a statement. He declined to comment further.
Landry’s policy was upheld in a Houston federal court a few years ago in a class-action suit filed against the chain on behalf of six servers at a Joe’s Crab Shack in Chicago.
The Fair Labor Standards Act permits an employer to deduct the processing fee from an employee’s tip as long as the deduction does not put the employee’s pay below the minimum wage.
In Colorado, the practice invalidates the state’s tip credit, which makes it impractical for employers, said Pete Meersman, chief executive of the Colorado Restaurant Association.
California’s Legislature banned the practice in 2001 after a state superior court decided in favor of the deduction. The state judge had ruled it permissible for Specialty Restaurants Corp. of Anaheim to assess the fee from servers’ tips.
Specialty, which now has 23 restaurants in about a dozen states, no longer deducts the fees from servers tips in California or Colorado but continues the practice in other states, said Nikki Hickman, controller for the company, which owns such restaurants as the Castaway, the Reef and 94th Aero Squadron.
The practice, however, has not become controversial in other states, she said.
The deductions have been a long-standing policy at Specialty’s concepts, so employees have grown to accept the charge, Hickman said. The restaurants pay out tips nightly rather than including them in paychecks, so the deductions have a less obvious impact.
“Most servers look at themselves as being self-employed and [see the deductions as their cost of doing business,” Hickman said.
Related Information
June 20th, 2009 | 
I am a server, and i have my credit card fees deducted, not only from tip but from check. Would i be able to write off those deductions on my taxes? And is it legal to charge from the check and the tip?
Hi Bart – Good question. I must first state that we do not offer “Legal Advice” and I would direct you to: The Official IRS tipping tax laws.
I think it would be difficult to deduct them as expenses because they are not really expenses but rather things that just limit your income. Additionally, I doubt that there is a law against how your employer chooses to deduct “his” expenses. Albeit, not very fair to you. I hope someone else with more tax knowledge can weigh in here for you as well.
You can certainly deduct them as Job expenses because they are linked to the generation of income. The issue is if it’s worth your time. Here’s why: Job expenses are allowed to the extend they exceed 2% of your adjusted gross income, and have to be itemized, meaning that these expenses plus other deductions such as mortgage interest, real estate taxes, donations, must be higher than your standard deduction.
Example:
Your employer charges you 3% on tips paid with credit card. Let’s say that’t $20k. Then the job expenses would be $600.
Assuming your total income was $25k, 2% of it is $500. The excess of job expenses is now only $100.
If you are single and do not own a property, your standard deduction is $5700.
$5700 vs $100. Which deduction would you choose?
I’ve actually known about this problem for a while, and as a tipped employee in a different industry (car detailing), I know how it feels. I always try to make sure I tip in cash, whenever possible, and if I have no choice but to use the card, I try to tip more than I normally would to make up the difference.
While this may not seem fair when considering this from the employee’s perspective, lets look at this from the employer’s perspective. The employer is providing a fair wage. They pay a 1.5 to 3.5 percent fee on all sales paid by credit card. The tip is added earnings to the employee and do not reflect on the employer at all. Why should the employer be expected to pay extra cash whena patron chose to leave a tip on a credit card. The employer does not determine the amount of the tip or if one is left. The employer pays a fee on the money he is earning why shouldnt the employee pay the fee for money they earn left on credit?
@brian-As a tipped employee, I understand that my tip is mainly based on my service (food does play a factor in it but we won’t go there). However, the employer’s get off easy when it comes to servers (or anyone who makes a living on tips). I have worked in the restaurant industry for 8 years and have probably only ever received 10 paychecks in those 8 years. In addition, those paychecks were usually only a couple of dollars never more than $30 or $40. Actually the only time I have ever received a paycheck from a bar or restaurant, is for my training. In all reality, servers work for a restaurant for free. We actually work for the guests. Customers are the ones that pay us, not the restaurant. It is the restaurants decision to accept credit cards and it should be their responsibility to pay the fees. Honestly it is like them taking money from our tips to pay the electric. Credit card fees are an overhead (business) expense and should be paid by the restaurant.
@Victoria – You do not work for the restaurant for free. I have heard this complaint from servers before, but really it’s just basic math. At the end of your shift, you take home your tip money. However, you haven’t paid taxes to the government on those tips. Since the majority of your income is taken home in cash, your paycheck pays your taxes which is why your check is $0.00/void. If you are unhappy that your checks are $0.00, then blame the government for taking your money in taxes. If your check didn’t pay your taxes you would owe quite a bit come April 15.
As for the processing fee being the employer’s responsibility because they accept credit cards: If your employer didn’t accept credit cards, you wouldn’t have customers to wait on. The majority of Americans use credit cards over cash. People would be more likely to choose a restaurant that accepted credit cards over a restaurant that did not.
Is this legal in Virginia?
Jenny, my paycheck doesn’t nearly pay all of my taxes.I still owe $1500 in taxes at the end of the year on top of having a zero paycheck every week. And we don’t eat for free or at cost either. The restaurant still makes money on servers with discounted food. Servers are required by law to claim all tips whether being cash or credit. Now we are being taxed on what we don’t make. I have been in the restaurant business for over 20 years and credit card companies are part of evil america. If people in this country would stand together like TRUE Americans and not cowards we would all boycott these corrupt credit card companies. 20-25% of my income already goes to taxes, fica, social security, etc. That doesn’t include health insurance towards are corrupt doctors, drug companies, and western medicine that poisons us in the long run. Serving always gets rated as one of the top 10 most stressful jobs in the country and it requires a lot of money in proper nutrition to keep your body free of mental and physical stress from working in this business as customers and employers have become increasingly demanding over the years. How dare an employer garnish my wages by an additional 3% to support corrupt credit card companies. If customers knew about this they would avoid credit cards and restaurants that did this to their employees if they were true American’s. No one HAS to use a credit card and cash will always be the best method of payment. People in this country haven’t gotten lazy and let corporate America control them. I refuse to work for restaurants with this policy and therefore another professional server with 20+ years experience will be pumping gas for a living at minimum wage and receiving food stamps and other government aid instead. And all of these jackasses that use credit cards can pay for my government assistance in their taxes instead of me. There is always a way to get even with evil people. Once America wakes up I will return to the business I once loved working in for the past 20 years. Until then consumers can have inexperienced servers take care of them and tip less for bad service and help continue this downward spiral this once great country is in. If consumers don’t like it or can’t afford it DON’T go out to eat. And those that do will be served in a gracious manner. Quality not quantity is the key to all good business. Enough Said!
Here’s a link to an article written by a TRUE American.
http://restaurants.about.com/b/2008/01/29/employer-takes-servers-tip-money-to-pay-for-credit-card-fees.htm
I was a server for years, and as long as the employer pays the tip fee on goods and services, deducting my part is fine with. Where my problem stood, was that people generally don’t kow how to tip. Also, VV, you really have no idea how payroll works if you really feel that you work for the restaurant for free because you have no check. (Do you not realize, the employer has to pay on your behalf..helloo?)
can i protest this garnishment to my employer.. if so how
Jude,
I’m sure you could share your disagreement with you’re employer but what success you have depends on your employer and how much they value your opinion. In other words, are you a big fish in a small pond or a small fish in a big pond?
Good luck!
thanx but i am a small fish in a big pond… it is a large chain .hopefully a lot of people will be upset and we can get something done.. their reasoning for doing this is nuts everything they want the fees for they have taken away from us.. no raises no vacation . hell they can have my 40% discount for meals…i figured it out and this will costr me over 300 dollars a year at normal hrs. no o.t but whatever i will try to get people to pay cash tips .thanx again jude
I have been in the restaurant business for 35 years. First as a server and now as a owner. I can honestly say I have never worked with people that are bigger hypocrites than servers. They constantly EXPECT people to leave tip (which they don’t have to do) or the wine. The complain about everything. They among a lucky few that don’t even claim all they make. I have never known one server who is honest. Everyone has to pay taxes on their full wages but servers. So DONT COMPLAIN until you pay your fair share.
Also, in this economy every person is taking a financial hit but servers. The restaurants raise their prices to stay in business and their tip percentages go up – more money, money not claimed for taxes wow so hard to feel sorry for you.
They also think that the owners are making money – wake up. Have you ever had to meet a payroll?
In Washington state, starting Jan 1 2011 we will be paying our servers $9.04 an hour plus tips. We have been in business for 30 years and lost 100.0000 in our restaurant just this year. A server never even asks how the restaurant is doing. THEY HAVE NO CLUE ! Of the restaurants that go out of business 30% of the time is from employee theft. We have some great employees they work hard but so does everyone else. Try to get them to share a couple of dollars with the cooks or busboys whew …. don’t mess with their money.
SO QUIT COMPLAINING !!!!!!