Under federal law, an employer can deduct credit card fees from tips, but only the actual processing fee the card company charges on the tip portion of the transaction. Nothing more. Processing rates typically fall between 1.5% and 3.5%, so on a $20 tip the legal deduction is somewhere around 30 to 70 cents. A handful of states prohibit the practice entirely, and where they do, state law controls and you keep the full tip.
What the Federal Rule Actually Allows
Tips are the property of the employee under the Fair Labor Standards Act, whether or not the employer takes a tip credit against the minimum wage.1eCFR. 29 CFR Section 531.52 – General Characteristics of Tips The statute bars employers from keeping employee tips “for any purposes, including allowing managers or supervisors to keep any portion.”2Office of the Law Revision Counsel. 29 USC 203 – Definitions
The credit card fee deduction is a narrow exception to that ownership rule. The Department of Labor’s Field Operations Handbook lets an employer pass the transaction cost through to the tipped employee. The handbook’s own example: if the card company charges 3% on all sales, the employer can pay out 97% of the tip. Anything above the processor’s actual charge counts as illegally keeping the employee’s tips.3U.S. Department of Labor. Field Operations Handbook Chapter 30 – Tips, Tip Credit, and Tipped Employees
How the Deduction Has To Be Calculated
The percentage applies to the tip alone, not to the full check. If a customer leaves a $20 tip on a $100 meal at a 2.75% processing rate, the deduction comes to about 55 cents. Running the fee against the full $120 charge is a violation.
Rounding up is also a violation. An employer whose real rate is 2.75% cannot deduct a flat 3% or 4% and pocket the difference. When a restaurant runs multiple card networks with different rates, it must either track each transaction or use a blended average that reflects true cost. A standard composite that exceeds what the card companies actually charge is specifically prohibited.3U.S. Department of Labor. Field Operations Handbook Chapter 30 – Tips, Tip Credit, and Tipped Employees
Costs That Cannot Come Out of Your Tips
The exception covers the processing fee itself and nothing adjacent to it. The DOL handbook rules out several related costs:
- The time between running the card and receiving the funds is the employer’s cost, not yours.
- Card readers, software, and dedicated phone lines are ordinary business expenses.
- Bookkeeping, payroll processing, and other administrative overhead cannot be folded into the deduction.
Employers also cannot bundle real processing fees with other losses. Register shortages, walkouts, broken glassware, and property damage are business costs. Deducting any of that from your tips, even when combined with a legitimate fee, violates the tip ownership rules.3U.S. Department of Labor. Field Operations Handbook Chapter 30 – Tips, Tip Credit, and Tipped Employees
The Minimum Wage Floor Still Applies
If you’re paid under the tip credit system, your base wage can be as low as $2.13 per hour, with tips expected to bring your total to at least the $7.25 federal minimum.4U.S. Department of Labor. History of Changes to the Minimum Wage Law Many states set a higher minimum, and where state and federal rates differ you get whichever is greater.5U.S. Department of Labor. Minimum Wage
Credit card fee deductions reduce the tip amount that counts toward that floor. If small tips and processing deductions push your effective hourly pay for the workweek below the applicable minimum wage, your employer has to cover the shortfall on your regular payday. This is measured on a workweek basis.
Miss that make-up payment and it becomes a minimum wage violation. The DOL can order back wages plus an equal amount in liquidated damages. The statute of limitations is two years, or three years if the violation was willful.6U.S. Department of Labor. Back Pay
When Credit Card Tips Have To Be Paid
Your employer cannot sit on your credit card tips while waiting for the card company to settle. Tips collected electronically must be distributed no later than the regular payday for the workweek in which they were earned.7eCFR. 29 CFR Part 531 – Wage Payments Under the Fair Labor Standards Act of 1938 When payroll timing genuinely prevents an exact calculation before payday, the tips must be paid as soon as practicable afterward.8U.S. Department of Labor. Fact Sheet 15 – Tipped Employees Under the Fair Labor Standards Act Cash flow between the restaurant and the processor is a separate problem and does not extend that deadline.
States That Ban the Deduction Outright
A small number of states prohibit any deduction from tips for credit card processing costs. In those jurisdictions, the employer absorbs the fee as a normal business expense and pays out the full tip shown on the receipt. Where state law protects workers more than federal law, the state rule controls.
Penalties can be substantial. Some states allow treble damages on the amount illegally withheld, along with interest and attorney’s fees. If you work in food service or hospitality, your state labor department’s page on tipped employees is the place to check.
Service Charges Are a Different Category
A mandatory service charge, like the automatic 18% or 20% added for large parties, is not a tip under federal law. The IRS treats it as a service charge when the payment is compelled by employer policy rather than left to the customer’s discretion.9Internal Revenue Service. Tip Recordkeeping and Reporting That money belongs to the employer, and any portion passed to you is paid as wages, not tips. The credit card fee deduction rules do not reach service charges at all.
What To Do If Your Deduction Looks Wrong
If your employer is deducting more than the actual processing fee, using a flat rate above the real charge, bundling other costs into the deduction, or taking any deduction at all in a state that bans it, you have ways to get the money back.
Start with documentation. Save pay stubs, credit card tip slips, and any written policy about tip deductions. If the deducted percentage looks high, ask coworkers or check the card processor’s published rates. Concrete records make the difference between a suspicion and a claim.
You can file a confidential complaint with the DOL’s Wage and Hour Division by calling 1-866-487-9243 or filing online.10U.S. Department of Labor. How to File a Complaint The agency will not disclose your name or the existence of the complaint, and retaliation for filing is prohibited. If investigators confirm violations, they can order the employer to pay the full amount illegally withheld.
You can also file a private lawsuit for back pay and an equal amount in liquidated damages, plus attorney’s fees and costs.6U.S. Department of Labor. Back Pay The two-year statute of limitations extends to three years for willful violations. Individual paychecks may show small amounts, but across a staff and a year of shifts the totals grow quickly, and wage and hour attorneys often take these cases on contingency.