Fifth Circuit Finds Employer Violated FLSA through Unlawful Credit Card Tip Deductions

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Most hospitality employers that take the tip credit and accept credit card payments for tips for tipped employees offset a particular amount, usually a percentage, to recover direct fees charged by the credit card companies.  These direct fees, referred to as  "credit card issuer fees," include swipe fees, charge backs, void fees, and manual-entry fees.
 
In a 2006 Wage and Hour Division Opinion Letter, the United States Department of Labor opined that employers are permitted to deduct an average offset for credit card issuer fees as long as "the employer reduces the amount of credit card tips paid to the employee by an amount no greater than the amount charged to the employer by the credit card company."
 
In a decision issued yesterday, the Fifth Circuit agreed that a restaurant employer violated the Fair Labor Standards Act (FLSA) when it deducted and retained 3.25% of its tipped employees' credit card tips because the deduction exceeded the direct costs of collecting credit card tips for those employees.  Steele v. Leasing Enterprises, Ltd., No. 15-20139 (5th Cir. June 14, 2016).   http://www.ca5.uscourts.gov/electronic-case-filing/case-information/current-opinions.
 
In Steele, the employer chose to pay its servers their charged tips in cash on a daily basis, and arranged for armored vehicles to deliver cash to its restaurants three times per week.  The employer's 3.25% deduction from the tipped employees' credit card tips included deductions for the credit card issuer fees, as well as for the cash delivery expenses. 
 
Pursuant to the FLSA, an employer can only claim a tip credit if all tips received by a tipped employee are retained by the tipped employee, with an exception that is not relevant to the case.  The issue in Steele was whether the employer violated the tip retention requirement when it offset credit card tips to recover costs that exceeded the credit card issuer fees.
 
The employer claimed the credit card issuer fees and expenses for cash delivery services always exceeded the 3.25% offset amount, although in nine individual restaurant years, the offset did not exceed these costs.  It also claimed it could maintain the offset and still retain the tip credit.
 
Agreeing with the District Court that the employer violated the FLSA, the Fifth Circuit noted that credit card fees are a compulsory cost of collecting credit card tips, and as a result, an employer may offset credit card tips for credit card issuer fees without running afoul of the employee tip retention requirement. 
 
In contrast, the employer's cash delivery system was a business decision, and not a fee directly attributable to its cost of dealing in credit, and was therefore unlawful.  Put succinctly, "an employer only has a legal right to deduct those costs that are required to make such a collection."   Allowing the employer to offset employees' tips to cover discretionary costs of cash delivery would conflict with the requirement that all tips received by such employees must be maintained by the employees for the employer to retain the tip credit.
 
Interestingly, the Court left some ambiguity because it determined it was unnecessary to opine whether any costs, other than the credit card issuer fees, associated with collecting credit card tips could ever be deducted by an employer.
 
 

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