Say a restaurant patron pays with a credit card for an $8 meal and leaves a $2 tip. If the restaurant’s cost of processing credit card payments is 3% and the waiter receives the full $2 tip, the restaurant’s actual credit card processing cost for the transaction is 3.75%. Can the restaurant deduct the 3% processing fees from the $2 tip? The answer depends on state labor laws.

The majority of states allow employers to deduct credit card processing fees from tips. I say this because 35 states (and D.C.) have implemented the federal Fair Labor Standards Act (FLSA) with respect to tipped wages. Two recent federal court decisions have determined that section 3(m) of FLSA, governing tipped wages, does not prohibit employers from deducting processing fees from tips. These courts both relied on a 1977 opinion letter from the Department of Labor, which reaches the same conclusion.

However, some states did not implement FLSA with respect to tipped wages, choosing instead to write their own laws. Some state laws clearly prohibit employers from deducting processing fees from tips, including those of Alaska, California, Colorado, Montana, Nevada, Oregon and Washington. Other states law differ from FLSA and do not clearly deal with the question, including Delaware, Hawaii, Idaho, Minnesota, New Jersey, New Mexico, North Dakota, and Wisconsin.

Of course, whether the cost of processing credit card tips falls on employers or employees, it is in everybody’s interest to find lower credit card processing fees. A number of food service businesses have been able to do just that, by starting an auction  on feefighters, and getting credit card processors to compete for their business. Here’s how it works.

* Note: This blog post is a brief survey of an interesting legal issue, and is obviously not intended to be relied on as legal advice.

 ** Photo by Juntos http://www.flickr.com/photos/31343451@N00/2789856763