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Can an employer take credit card usage fees out of an employee’s tip, if their tip was given on a credit card? – Marie

Dear Marie,

Yes, employers are legally allowed to do this. When a tip is placed on a credit card, the Fair Labor Standards Act lets an employer deduct credit card processing fees from the tip, as long as that does not pull the employee’s wages below the minimum wage and the tip is paid by the regular payday.

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Break it down

Let’s say an employer pays 2.5 percent of a transaction in credit card processing fees. The employer would be allowed to pay employees 97.5 percent of the tips that customers paid on their credit cards. An employee who receives $100 in tips in an evening would therefore get to keep $97.50.

Is it a good idea to pass along credit card processing fees to tipped employees? I believe doing so may hurt the relationship between the employer and employee. Employees who work for tips are generally not earning giant incomes, so losing part of their pay to fees can have a significant impact on their household budget. Many employees don’t have much exposure to the financial realities of running a business and will resent having the fee taken out of their pay. It may inadvertently create the impression they are being punished for something they can’t control – whether or not customers use credit cards.

Of course, many small business owners live on tight budgets, too, and may need to do something to keep credit card fees from eroding their profits. Shopping around for a better merchant account when it comes time to renew can help in a big way. The deal you negotiate will affect every one of your credit card transactions, so finding the right one is critically important to keeping fees in check.

Looking for ways to offset credit card processing fees in other areas of your business can also help. Planning workers’ shifts carefully to avoid overstaffing and looking for ways to reduce wasted supplies and energy in a business are ways that owners can save money that can counterbalance credit card fees.

If you are still feeling the pinch of high credit card fees, the simplest method for offsetting them is to offer a discount to customers who pay cash. Some merchants are adding surcharges to credit card purchases, if their state allows it – but I think it can make a negative impression on customers, especially if they are already paying a significant amount for a purchase. When I’ve had to pay a surcharge, my own reaction has been to wonder if the business is really hurting and is about to go under. Given that people tend to spent more, on average, on credit cards than they do when paying cash, finding ways to encourage them to use their cards is often a smarter business decision than discouraging them by passing along surcharges.

But not all customers react the same way. If you are considering adding a surcharge, see our story on merchants who are adding credit card surcharges for recent information about how this is done. It’s very important that merchants proceed carefully if they go this route.

See related: Card acceptance fees too high? Shop for a new merchant processor