Featured on Employment Law This Week:  The Department of Labor (“DOL”) rolls back the 80/20 rule.

The rule prohibited employers from paying the tipped minimum wage to workers whose untipped side work—such as wiping tables—accounted for more than 20 percent of their time. In the midst of a federal lawsuit challenging the rule, the DOL reissued a 2009 opinion letter that states that the agency will not limit the amount of side work a tipped employee performs, as long as that work is done “contemporaneously” with the tipped work or for a “reasonable time” before or after that work. The letter was previously withdrawn by the Obama administration.

Watch the segment below and read our recent post.

Watch Paul DeCamp’s full segment here.

Under the Fair Labor Standards Act (“FLSA”), employers can satisfy their minimum wage obligations to tipped employees by paying them a tipped wage of as low as $2.13 per hour, so long as the employees earn enough in tips to make up the difference between the tipped wage and the full minimum wage. (Other conditions apply that are not important here.) Back in 1988, the U.S. Department of Labor’s Wage and Hour Division amended its Field Operations Handbook, the agency’s internal guidance manual for investigators, to include a new requirement the agency sought to apply to restaurants. Under that then-new guidance, when tipped employees spend more than 20% of their working time on tasks that do not specifically generate tips—tasks such as wiping down tables, filling salt and pepper shakers, and rolling silverware into napkins, duties generally referred to in the industry as “side work”—the employer must pay full minimum wage, rather than the lesser tipped wage, for the side work.

This provision of the Handbook flew largely under the radar for years. This was partly because the Department did not publicize the contents of the Handbook, and party because the Department did not bring enforcement actions premised on a violation of this 20% standard. And historically, virtually nobody in the restaurant industry maintained records specifically segregating hours and minutes spent on tip-generating tasks as compared to side work.

In 2007, a federal district court in Missouri issued a ruling in a class action upholding the validity of the 20% standard, and that decision received an enormous amount of attention and publicity. In the years that followed, a wave of class actions against restaurants flooded the courts across the country, all contending that the restaurants owe the tipped employees extra money because of the Department’s 20% standard in the Handbook.

In January of 2009, in the waning days of the George W. Bush Administration, the Department issued an opinion letter rejecting the 20% standard, superseding the Handbook provision, and stating that there is no limit on the amount of time a tipped employee can spend on side work. Six weeks later, however, in March of 2009, the Obama Administration withdrew that opinion letter. In subsequent years, the Department filed several amicus curiae briefs in pending court cases endorsing the 20% standard, and the Department even modified the Handbook provision to make the requirements even more difficult for employers to satisfy.

In late 2017, a divided three-judge panel of the U.S. Court of Appeals for the Ninth Circuit concluded, in nine consolidated appeals presenting the same issue, that the Department’s 20% standard is not consistent with the FLSA and thus was unlawful. A few months later, however, a divided 11-judge en banc panel of the same court reached the opposite conclusion, ruling by an 8-3 vote that the 20% standard is worthy of deference.

In July of 2018, the Restaurant Law Center, represented by Epstein Becker Green, filed a declaratory judgment action against the Department in federal court in Texas challenging the validity of the 20% standard under the FLSA, the Administrative Procedure Act, and the U.S. Constitution. Roughly a month before the employers’ deadline to file a certiorari petition with the Supreme Court regarding the en banc Ninth Circuit ruling, and just days before the government’s response is due in the Texas litigation, the Department reissued the 2009 opinion letter.

This opinion letter, now designated as FLSA2018-27, once again rejects the 20% standard and clarifies that employers may pay a tipped wage when employees engage in side work so long as the side work occurs contemporaneously with, or in close proximity to, the employees’ normal tip-generating activity. This opinion letter should put an end to the many pending cases, including numerous class actions, that depend on the 20% standard.

The overall take-away for employers is that at least under federal law, side work performed during an employee’s shift, in between tip-generating tasks, should present no concern. The same should be true of side work performed at the start or end of an employee’s shift, so long as the side work does not take too long. An employee coming in fifteen or thirty minutes before the restaurant is open to help get the restaurant ready for the day, followed by the remainder of the shift in which the employee generates tips, seems to be consistent with the new opinion letter. Likewise for employees who spend some time at the end of the shift helping to close the restaurant for the day. But employers should use common sense and good judgment, as having tipped employees spend hours and hours performing side work may still give rise to risks. And it remains important to be aware of any state or local law requirements that may differ from federal law.

In our June 28, 2018 post on District of Columbia voters approving Initiative 77, which would incrementally increase the minimum cash wage for tipped workers to $15.00 per hour by July 1, 2025, and effectively eliminate the tip credit staring July 1, 2026, we noted the possibility of action by the D.C. Council to amend or overturn it. Consistent with the opposition to the initiative previously expressed by a majority of the Council, on July 9, 2018, a seven-member majority of the Council introduced a bill (Tipped Wage Workers Fairness Amendment Act of 2018) to repeal Initiative 77. As the Council is now on a two-month summer recess, no further formal action will occur until the fall. Furthermore, considerable publicly expressed opposition to repealing a voter-approved initiative may lead to a compromise that extends the phase-in period or otherwise modifies the terms of the initiative, rather than a complete repeal. Meanwhile, two federal Congressmen have sponsored a budget rider barring spending funds to implement the initiative, although such efforts often fail. In short, it appears the future effectiveness of the initiative will remain in doubt for some time.

Voters in the District of Columbia on June 19, 2018 approved an initiative (Initiative 77) that would incrementally increase the minimum cash wage for tipped workers to $15.00 per hour by July 1, 2025, and starting July 1, 2026 to the same amount as the then-minimum wage for all other workers, effectively eliminating the tip credit. If the initiative takes effect, the District would join seven states that do not have a separate minimum wage for tipped workers, i.e., Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington.

The D.C. Council previously enacted legislation raising the minimum cash wage for tipped workers to $3.33 on July 1, 2017; $3.89 on July 1, 2018; $4.45 on July 1, 2019; and $5.00 on July 1, 2020, consistent with increases in the general minimum wage to $12.50, $13.25, $14.00, and $15.00 that will take effect on the same dates. Each year thereafter, the minimum wage will increase in proportion to the annual average increase in the CPI-U for the Washington area. D.C. Code §32-10003.

The voter initiative would change the minimum cash wage for tipped workers to $4.50 on July 1, 2018; $6.00 on July 1, 2019; $7.50 on July 1, 2020; $9.00 on July 1, 2021; $10.50 on July 1, 2022; $12.00 on July 1, 2023; $13.50 on July 1, 2024; $15.00 on July 1, 2025; and to whatever the minimum wage then is for other workers on July 1, 2026. These provisions will not apply to employees of the District of Columbia, or employees performing services under contracts with the District of Columbia.

It is not yet clear whether the initiative will become law, at least it its present form. It passed by only 55 percent in an election in which turnout was only 16.7 percent. Before it becomes law, it must clear review by the D.C. Council, which could amend or overturn it. So far, the measure has faced public opposition from Mayor Muriel Bowser and a majority (eight) of the D.C. Council, as well as many restaurant owners, wait staff and bartenders, who fear it will increase direct labor costs, force staffing reductions, and significantly reduce the amount of tips received. Both the Restaurant Association of Metropolitan Washington and the separate “Save our Tips” campaign already have stated that they will take their fight to the Council. If the Council approves the measure, it must then clear a thirty-legislative-day review period by the Congress. At best, the initiative is not likely to take effect until sometime in the fall of 2018.

In the meantime, employers currently taking the tip credit should note the increase in the minimum for tipped employees to $3.89 (and for all other employees to $13.25) taking effect on July 1, 2018. Notably, supporters of the initiative have stated that they will not seek retroactive effect of the initiative’s July 1, 2018 increase to $4.50.

[Read the update—July 16, 2018—“Proposed D.C. Council Legislation Puts Voter-Approved Elimination of Tip Credit Into Question.”]

A number of states and localities are about to implement mid-year hikes in the minimum wage. Below is a summary of the minimum wage increases (and related tipped minimum wage requirements, where applicable) that go into effect on July 1, 2018.

Current New
State Special Categories Minimum Wage Tipped Minimum Wage Minimum Wage Tipped Minimum Wage
Maryland $9.25 $3.63 $10.10 N/A
Nevada Employees with qualified

health benefits

$7.25 N/A
Employees without

health benefits

$8.25 N/A
Oregon General $10.25 $10.75
Urban (Portland Metro Urban Growth Area) $11.25 $12.00
Rural (Nonurban) $10.00 $10.50
Washington, D.C. $12.50 $3.33 $13.25 $3.89

 

Current New
Locality Categories Minimum Wage Tipped Minimum Wage Minimum Wage Tipped Minimum Wage
CA          
Belmont, CA N/A $12.50
Emeryville, CA 56 or more employees $15.20 $15.69
55 or fewer employees $14.00 $15.00
Los Angeles, CA (City) 26 or more employees $12.00 $13.25  
25 or fewer employees $10.50 $12.00  
Los Angeles, CA (County) Unincorporated areas of LA County, 26 or more employees $12.00 $13.25  
Unincorporated areas of LA County, 25 or fewer employees $10.50 $12.00  
Malibu, CA 26 or more employees $12.00 $13.25  
25 or fewer employees $10.50 $12.00  
Milpitas, CA $12.00 $13.50  
Pasadena, CA 26 or more employees $12.00 $13.25  
25 or fewer employees $10.50 $12.00  
San Francisco, CA Generally $14.00 $15.00  
Government-supported employees $12.87 $13.27  
San Leandro, CA $12.00 $13.00  
Santa Monica, CA 26 or more employees $12.00 $13.25  
25 or fewer employees $10.50 $12.00  
IL  
Chicago, IL $11.00 $6.10 $12.00 $6.25
Cook County, IL $10.00 $4.95 $11.00 $5.10
ME          
Portland, ME $10.68 $5.00 $10.90 N/A
MD
Montgomery County, MD 51 or more employees $11.50 $4.00 $12.25 N/A
11-50 employees, and provides certain home health services or is tax-exempt under 501(c)(3) $11.50 $4.00 $12.00 N/A
10 or fewer employees $11.50 $4.00 $12.00 N/A
MN
Minneapolis, MN 101 or more employees $10.00 $11.25
100 or fewer employees N/A N/A

This post was written with assistance from John W. Milani, a 2018 Summer Associate at Epstein Becker Green.

Earlier today, the Ninth Circuit issued its opinion in cases involving the Department of Labor’s (“DOL”) “80/20 Rule” regarding what is commonly referred to as “sidework” in the restaurant industry.  Agreeing with the arguments made by our new colleague Paul DeCamp, among others, the Ninth Circuit issued a decidedly employer-friendly decision.  In so doing, it disagreed with the Eighth Circuit, potentially setting the issue up for resolution by the United States Supreme Court.

As those in the restaurant industry are aware, restaurant workers and other tipped employees often perform a mix of activities in the course of carrying out their jobs.  Some tasks, such as taking a customers’ orders or delivering their food, may contribute directly to generating tips.  Other tasks, such as clearing tables, rolling silverware, and refilling salt and pepper shakers—activity generally known in the industry as “sidework”— arguably generate tips indirectly.

In 1988, the DOL issued internal agency guidance purporting to impose limits on an employer’s ability to pay employees at a tipped wage, which under federal law can be as low as $2.13 per hour, if employees spend more than 20% of their working time on sidework.  This guidance, commonly known as the “80/20 Rule,” has led to a wave of class and collective action litigation across the country, including a 2011 decision from the U.S. Court of Appeals for the Eighth Circuit deferring to the Department’s guidance as a reasonable interpretation of the Fair Labor Standards Act (“FLSA”) and its regulations.

Today, the Ninth Circuit issued a 2-1 decision in Marsh v. J. Alexander’s LLC, concluding that the Department’s attempt to put time limitations on how much sidework an employee can perform at a tipped wage is contrary to the FLSA and its regulations and thus unworthy of deference by the courts.

The Department adopted the 20% limitation as a purported clarification of the Department’s “dual jobs” regulation, which addresses employees who work in separate tipped and non-tipped jobs for the same employer.  The Ninth Circuit explained, however, that the 20% limitation on sidework was inconsistent with the statutory notion of an “occupation,” as well as the regulation’s focus on two distinct jobs.

Because the 80/20 Rule did not in reality stem from the statute or the regulations, the Court determined that it constitutes “an alternative regulatory approach with new substantive rules that regulate how employees spend their time” and thus amounts to a “‘new regulation’ masquerading as an interpretation.”

In reaching this conclusion, the Court disagreed with the Eighth Circuit’s analysis and conclusion, noting that “the Eighth Circuit failed to consider the regulatory scheme as a whole, and it therefore missed the threshold question whether it is reasonable to determine that an employee is engaged in a second ‘job’ by time-tracking an employee’s discrete tasks, categorizing them, and accounting for minutes spent in various activities.”

The plaintiffs in these cases may well seek rehearing en banc, and it remains to be seen what approach the Department will take regarding the 80/20 Rule in response to today’s decision. And the split between the circuits certainly suggests that this is an issue that may well be resolved by the Supreme Court.

Tips Do Not Count Towards the Minimum Wage Unless a Worker Qualified as a “Tipped Employe"In Romero v. Top-Tier Colorado LLC, the Tenth Circuit Court of Appeals ruled that tips received by a restaurant server for hours in which she did not qualify as a tipped employee were not “wages” under the FLSA, and therefore should not be considered in determining whether she was paid the minimum wage.

Tipped Employees & the FLSA

The FLSA provides that employers may take a “tip credit” and pay employees as little as $2.13 per hour if: (i) the tip credit is applied to employees who customarily and regularly receive tips; (ii) the employee’s wages and tips are at least equal to the minimum wage, and (iii) all tips received by a tipped employee are retained by the employee or pooled with the tips of other tipped employees.

In Romero, the Tenth Circuit noted that an employee may hold both tipped and non-tipped jobs for the same employer.  In those cases, the employee is entitled to the full minimum wage while performing the job that does not generate tips.

Moreover, the Circuit Court cited to the directive in the Wage Hour Division’s Field Operations Handbook stating that, if a tipped employee spends more than 20% of his or her time performing related-but-nontipped work, then the employer may not take the tip credit for the amount of time the employee spends performing those duties.

The Plaintiff’s Claims

The plaintiff in Romero worked as a server at the defendants’ restaurant.  The defendants paid her a cash wage of $4.98 an hour, and took a tip credit to cover the gap between the cash wage rate and the federal minimum wage.

The plaintiff contended that she also worked in nontipped jobs for the defendants, and that she spent more than 20% of her workweek performing related-but-nontipped work. Therefore, she concluded she was entitled to a cash wage of at least $7.25 per hour during certain hours, and filed a lawsuit in the U.S. District Court for the District of Colorado claiming violations of the federal minimum wage.

The defendants’ moved to dismiss the complaint because plaintiff did not allege that her total weekly earnings, when divided by the number of hours worked, ever fell below the federal minimum wage rate. The District Court reasoned that a minimum wage violation is determined by dividing an employee’s total pay in a workweek by the total number of hours worked that week.  Because the plaintiff did not allege facts that would establish such a violation, the District Court granted the defendants’ motion and dismissed the complaint.

In light of that reasoning, the District Court never considered whether the plaintiff was properly considered a tipped employee.

When are Tips Considered “Wages” Paid by the Employer?

The Tenth Circuit Court of Appeals reversed the judgment of the District Court. The Tenth Circuit “assumed” that the district court correctly stated that an employer satisfies the FLSA’s minimum wage requirements so long as, after the total wage paid to each employee during any given week is divided by the total time that employee worked that week, the resulting average hourly wage is $7.25 per hour or more.

But the Tenth Circuit held that the existence of a minimum wage violation depends on the “wages” paid by an employer to an employee. The Court stated that tips are “wages” paid by an employer only when the tips are received by a worker who qualifies as a tipped employee under the FLSA.

Accordingly, the Tenth Circuit reversed the District Court’s dismissal of the plaintiff’s complaint. The Tenth Circuit directed the District Court to reconsider its ruling by examining the threshold question of whether the tips received by the plaintiff were “wages” for purposes of the minimum wage requirements of the FLSA.

What is the Impact of an Improper Tip Credit?

Assume, for example, that the plaintiff worked 40 hours in a given week, was paid cash wages of $199.20 (or $4.98 per hour) and received tips of $90.80.

If the evidence demonstrates that the plaintiff was a tipped employee at all times, she was paid wages of $290.00 (or $7.25 per hour) and the defendants did not violate the federal minimum wage.

However, the evidence could demonstrate that the plaintiff performed so much related-but-nontipped work that she did not qualify as a tipped employee at any time. As explained by the Tenth Circuit, the plaintiff’s tips would not count as wages and therefore she was paid $90.80 below the minimum wage.  The defendants could then be liable to her for that amount (as well as potential liquidated damages and attorneys’ fees).

The Tenth Circuit’s decision is consistent with the rulings of other circuit courts. Therefore, employers who are taking tip credits therefore must pay close attention to the specific requirements of the FLSA, and should not consider themselves insulated from liability merely by the fact that their tipped employees are earning more than the minimum wage.

Over the past year, there has been an increased discussion of Fair Labor Standards Act (“FLSA”) requirements for tipped employees. The courts have focused on a number of issues related to tipped employees, including addressing who can participate in tip pools and whether certain deductions may be made from tips. While the FLSA requires employers to pay a minimum wage of $7.25 per hour in most cases, Section 203(m) of the FLSA provides that employers may take a “tip credit” and pay as little as $2.13 per hour to employees who customarily and regularly receive tips, so long as two criteria are satisfied:

  • the employee’s wages and tips are at least equal to the minimum wage, and
  • all tips “received” by a tipped employee are actually retained by the employee or added into a tip pool that aggregates the tips of a group of tipped employees.

Notably, 29 CFR § 531.55 states that a “compulsory charge for service . . . imposed on a customer by an employer’s establishment, is not a tip . . . .” However, some states (such as New York) have their own requirements for determining whether a service charge will be considered a “tip.”

Who Can Be Treated as a Tipped Employee?

When a tip pool is covered by Section 203(m) of the FLSA, an employer may not divert tips from tipped employees by including “non-customarily tipped employees” in the tip pools. But whether an employee customarily (and regularly) receives tips may be unclear.

In Montano v. Montrose Restaurant, the U.S. Court of Appeals for the Fifth Circuit considered a tip pool in which the employer included a “coffeeman,” and the parties submitted conflicting evidence regarding the coffeeman’s duties. The Fifth Circuit concluded that an employee can be part of a tip pool if it can be expected that the customer intended the employee to receive a portion of the tip. Satisfying that requirement depends on such factors as whether the employee had more than a de minimis interaction with the customers who leave the undesignated tips and whether the employee is engaging in customer service functions.

In Schaefer v. Walker Bros. Enterprises, the Seventh Circuit evaluated a plaintiff’s contention that he and other employees at his restaurant (who primarily worked in a tipped capacity) had to be paid the full minimum wage during any time spent performing non-tipped work. The Seventh Circuit noted that the DOL’s Field Operations Handbook states that an employer may pay the tip-credit rate for time that tipped employees spend on non-tipped duties “related to” their tipped work. According to the Seventh Circuit, making coffee, cleaning tables, and “ensuring that hot cocoa is ready to serve” and that “strawberries are spread on the waffles” are activities related to a tipped server’s work. The Seventh Circuit characterized other duties, however, such as wiping down burners and woodwork and dusting picture frames, as “problematic” because they did not seem to be “closely related to tipped duties.” But the time spent on those duties was “negligible” and therefore did not require the restaurants to pay the normal minimum wage rather than the tip-credit rate for those minutes.

Can Credit Card Fees Be Deducted from “All Tips”?

In Steele v. Leasing Enterprises, Ltd., the Fifth Circuit considered whether an employee is receiving “all tips” when an employer deducts the costs and fees associated with collecting tips that are paid through a customer’s credit card.

To offset costs associated with credit card tips, the defendant retained 3.25 percent of any tips paid by credit card. According to the defendant, the costs included not only fees charged by the card issuer, but also the cost of cash deliveries made by an armored vehicle three times per week to ensure that the employees could be paid their tips on a daily basis (as the employees had requested).

Based on prior authority from the Sixth Circuit and a DOL opinion letter, the Fifth Circuit agreed that the defendant could offset credit card tips by the amount of the credit card issuer fees and still satisfy the requirements of Section 203(m). One week later, the Southern District of Ohio reached a similar conclusion in Craig v. Landry’s, Inc., ruling that “controlling precedent specifically permits” the deduction of credit card processing fees as long as the amount of the deduction “reasonably approximates the charge incurred by the employer.”

What Other Fees or Costs Can Be Deducted from “All Tips”?

After approving the deduction of credit card issuer fees from the gross tips in Steele, the Fifth Circuit turned to the question of whether an employer violates Section 203(m)’s requirements if the employer deducts costs other than direct fees charged by the credit card issuers. The defendant argued that employers could deduct the additional expenditures associated with paying credit card tips and still maintain the tip credit. Specifically, the defendant argued that the additional costs that it was incurring in arranging for the payment of tips paid via credit card, such as the cost of the armored car deliveries to its restaurants, could be deducted from the gross tips.

The Fifth Circuit concluded that “an employer only has a legal right to deduct those costs that are required to make such a collection.” While the defendant had no choice but to pay to credit card issuer fees, the costs relating to its thrice-weekly armored car deliveries were discretionary costs resulting from internal business decisions by the defendant. Therefore, deducting those amounts from employees’ tips was a violation of Section 203(m).

It is worth noting the Eastern District of New York added an interesting twist to this principle in Widjaja v. Kang Yue USA Corp. The court had previously ruled that the defendant violated the minimum wage as a result of, among other things, improperly withholding 11.5 percent of credit card tips. In a late-2015 ruling on damages, the court found that the defendant was liable for the difference between the minimum wage and the hourly wage that it actually paid its tipped employees. Moreover, the court in Widjaja held that the wage deficiency could not be offset by the tips actually received by the tipped employees because those tips were not an hourly wage. Consequently, because it improperly applied the tip-credit rule, the employer received no credit against the minimum wage for the tips actually received by its tipped employees.

Is There a Cause of Action for Withheld Tips If the Employer Does Not Take a Tip Credit?

Several years ago, the DOL revised 29 C.F.R. § 531.52 to provide that all tips are the property of the employee and, thus, must be passed along to the tipped employee or a pool of tipped employees regardless of whether the employer has taken a tip credit under Section 203(m). Because the FLSA, on its face, does not specifically prohibit or address wage deductions that do not result in minimum-wage violations, there has been substantial controversy regarding the DOL’s authority to issue this regulation.

Earlier this year, in Oregon Rest. & Lodging Ass’n v. Perez, the Ninth Circuit noted that Section 203(m) of the FLSA is silent as to employers that do not take a tip credit. Therefore, the Ninth Circuit concluded that the DOL has the authority to regulate “tip pooling” practices even if employers do not take tip credits. Conversely, this past summer, federal courts in Florida and Georgia arguably joined with the position taken by the Fourth Circuit and courts in Maryland, New York, and Utah that Section 203(m) of the FLSA does not create a cause of action for improperly withheld tips unless the employer is taking a tip credit.

A version of this article originally appeared in the Take 5 newsletter Five Critical Wage and Hour Issues Impacting Employers.”

By Jeffrey Ruzal

President Obama has spent much of his second term zealously pursuing an increase to the current $7.25 federal minimum hourly wage. While it is not clear whether a federal wage hike is in the offing, many states have recently taken measures to increase their own minimum wage rates. Effective January 1, 2014, Arizona, Colorado, Connecticut, Florida, Missouri, Montana, New Jersey, New York, Ohio, Oregon, Rhode Island, Vermont and Washington have all increased their minimum wage rates. There are also five additional states, California, Delaware, Michigan, Minnesota, West Virginia, plus the District of Columbia, which have passed legislation for future minimum wage increases that will take effect in 2014.

Employers, especially ones which operate in multiple states, must be vigilant in monitoring and planning for future state minimum wages increases. What is more, employers in specific industries, such as hospitality, must consider additional compliance measures, including changes in the maximum tip credit an employer may take against its tipped employees’ hourly wages.

The chart below provides each state’s previous and current minimum wage and maximum tip credit rates, as well as scheduled future increases through the end of 2014.

State

Previous Minimum Wage

Current Minimum Wage

Future Minimum Wage Increases in 2014

Previous Tip Credit

Current Tip Credit

Arizona

$7.80

$7.90

(effective 1/1/14)

$4.80

$4.90

(eff. 1/1/14)

California

$8.00

$9.00

(eff. 7/1/14)

No tip credit permitted

Colorado

$7.78

$8.00

(eff. 1/1/14)

$4.76

$4.98

(eff. 1/1/14)

Connecticut

$8.25

$8.70

(eff. 1/1/14)

$7.34 for bartenders; $5.69 all other tipped employees

Delaware

$7.25

$7.75

(eff. 6/1/14)

$2.23

D.C.

$8.25

$9.50

(eff. 7/1/14)

$2.77

Florida

$7.79

$7.93

(eff. 1/1/14)

$4.77

$4.91

(eff. 1/1/14)

Michigan

$7.40

$8.15

(eff. 9/1/14)

$2.65

Minnesota

$6.15 for employers w/ annual sales >$625,000; $5.25 for employers w/ < $625,000

$8.00 for employers w/ annual sales >$500,000; $6.50 for employers w/ < $500,000

(eff. 8/1/14)

$6.15 for employers w/ annual sales >$625,000; $5.25 for employers w/ < $625,000

Missouri

$7.35

$7.50

(eff. 1/1/14)

$3.68

$3.75

(eff. 1/1/14)

Montana

$7.80

$7.90

(eff. 1/1/14)

No tip credit permitted

New Jersey

$7.25

$8.25

(eff. 1/1/14)

$2.13

No change in tip credit

New York

$7.25

$8.00

(eff.12/31/13)

$8.75

(eff.12/31/14)

$5.00 for food service employees; $5.65 for service employees (delivery and coat check)

No change in tip credit

Ohio

$7.85

$7.95

(eff. 1/1/14)

$3.93

$3.98

(eff. 1/1/14)

Oregon

$8.95

$9.10

(eff. 1/1/14)

No tip credit permitted

Rhode Island

$7.75

$8.00

(eff. 1/1/14)

$2.89

No change in tip credit

Vermont

$8.60

$8.73

(eff. 1/1/14)

$4.17

$4.23

(eff. 1/1/14)

Washington

$9.19

$9.32

(eff. 1/1/14)

No tip credit permitted

West Virginia

$7.25

$8.00

(eff.12/31/14)

$5.80

By Kara Maciel

Our national hospitality practice frequently advises restaurant owners and operators on whether it is legal for employers to pass credit card swipe fees onto employees or even to guests, and the short answer is, yes, in most states.  But whether an employer wants to actually pass along this charge and risk alienating their staff or their customers is another question.

With respect to consumers, in the majority of states, passing credit card swipe fees along in a customer surcharge became lawful in 2013.  Only ten states prohibit it:  California, Colorado, Connecticut, Florida, Kansas, Maine, Massachusetts, Oklahoma, Texas and Utah.  If a restaurant decides to add a surcharge to the bill to recoup the credit card swipe fee, it is important the that the fee not exceed the percentage charged by the credit card company, the fee is posted clearly on the guest check prior to paying the bill, and it cannot be used for debit card purchases.

With respect to employees, the credit card swipe fee may only be passed along to servers and applied to the tipped portion of the bill.  For example, if a bill is $100 plus a $20 tip, the swipe fee on the $100 (e.g., 3 percent or $3) must be paid by the restaurant.  However, when paying out the server, you can allocate $19.40 since you can charge the server 3 percent or 60 cents to recover the swipe fee on the gratuity.  As with guests, an employer may not charge the server more than credit card swipe fee, and the reduced amount in tips cannot cause the employee to earn less than the minimum wage.  And again, you must always check state and local law as some states prohibit deductions from credit card tips for processing fees, such as California, Colorado, Nevada, New Mexico, Oregon, and Washington, among others.

But even if legal, is it practical or good business sense to pass along processing fees to employees and customers?  Is it industry practice in your market to pass along these fees, or do you risk angering an important stakeholder in your profit margin – your employees and customers?  Surcharges could be perceived as owners taking more money out of the pockets of employees and customers and companies could risk losing the business to another restaurant down the street.  Unless the practice becomes an industry standard, it is likely that adding a surcharge or deducting the swipe fee from tips could do more harm than good.