Fifth Circuit Affirms Employers Cannot Withhold Optional Expenses from Credit Card Tips

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June 14, 2016

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Generally in the Fifth Circuit, employers can pay employees, who earn tips, less than the minimum wage as long as the employee receives enough in tips to make up the difference.  If not, the employer must make up the difference to ensure the minimum wage is met.  Though the rule seems simple, the complexity of tip credits—including situations such as when tips are shared—can get employers in trouble.  The Fifth Circuit recently highlighted another danger zone, stating that employers cannot hold back portions of credit card tips to pay for optional expenses.

The case was Steele v. Leasing Enterprises, Ltd., involving one location of Leasing Enterprises’s restaurant chain, Perry’s, in Texas.  The servers were paid a base wage of $2.13 per hour and kept their tips to achieve minimum wage.  If a customer paid and tipped with a credit card, Perry’s held back 3.25 percent of the tip.  The restaurant would then pay out the remainder of the charged tip in cash to the servers.  The restaurant argued that the 3.25 percent held back from charged tips was used to (1) offset card issuer fees, such as charge backs, void fees, and manual entry fees, and (2) pay for expenses related to paying out the remainder of the tips in cash, such as getting armored vans to transport cash to the worksite.

While the district court allowed Perry’s the right to offset the issuer fees, the appellate court ultimately stated that the offset violated the Fair Labor Standards Act (“FLSA”) because:

  1. The blanket 3.25 percent always exceeded the actual amount of the card issuer fees;
  2. The expenses related to paying out the tips in cash (e.g., hiring an armored van) was Perry’s business decision and not an actual fee related to the cost of credit card transactions;
  3. Perry’s could not prove that the fees were related to cancellation of transactions or manual entry of credit card numbers.

In general, costs directly attributable to credit card issuers can be offset from employee wages because they are charges from an outside entity, but Perry’s erred in holding back additional funds from the tip for optional, internal expenses.

Action Items

  • Look for further guidance from the Colorado Department of Labor and Enforcement.
  • In the interim, review the U.S. DOL guidance on independent contractors.


Disclaimer: This document is designed to provide general information and guidance concerning employment-related issues. It is presented with the understanding that ManagEase is not engaged in rendering any legal opinions. If a legal opinion is needed, please contact the services of your own legal adviser.

© 2016 ManagEase, Incorporated.

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