
Article contributed by Caitlin Breen, Ellenoff Grossman & Schole LLP
As restaurant owners and managers are well aware, accepting credit card payments from customers involves costs for the restaurant, including the credit card companies charging service fees for the use of their cards.
These service fees, also known as transaction fees or interchange fees, are a standard part of processing customer payments.
However, when it comes to the processing of employees’ tips on those same credit cards, there is an ongoing debate about who should absorb these credit card fees – the restaurant or the worker?
The answer to this question varies significantly depending on what state your restaurant is located in.
Currently, under federal law, employers are in fact permitted to deduct credit card transaction fees from an employee’s tips, when the tip is paid to the employee via a credit card transaction. There are restrictions to this practice, however. For example, an employer may not deduct in a manner that reduces an employee’s pay below minimum wage.
Further, an employer may not deduct more than the value of the credit card transaction fee. In other words, if a credit card company charges a fee of 2% for any credit card transaction at a restaurant, federal law allows the restaurant to provide the employee 98% of the credit card tips and stay compliant with federal law.
Though federal law allows this practice, some states have passed prohibitions on this practice, e.g., California, Maine, New Jersey and Pennsylvania, making it unlawful for an employer to take deductions from an employee’s tips for credit card transaction fees.
The group of states that prohibit this practice of tip deduction for transaction fees is growing. Recently, in August 2024, Minnesota joined the list of states that prohibit any deduction of interchange fees from employees’ tips.
In contrast, there are states that protect the employer’s ability to make tip deductions for the credit card transaction fees. These states include Alaska, Illinois, Maryland, New York, North Carolina, Rhode Island, Washington state, and Washington D.C.
Further, there are many states that have not passed their own laws regarding deducting credit card transaction fees and currently follow the federal rules.
As these rules vary state by state, restaurant owners need to be well versed in the rules of the states they conduct business in to avoid engaging in an improper business practice.
Even when a restaurant operates in a state that allows tip deductions based on transaction fees, employers must still be cautious when implementing this practice. From a practical perspective, determining the amount of fees to deduct from tips is complex and can lead to legal complications.
For instance, credit card companies charge varying transaction fees; the fees can be different from card to card. As there is not one uniform fee across the board, restaurants should work with employment counsel to confirm that the amount they are deducting does not exceed what is legally permitted.
Further, even in states where the tip deduction is allowed, restaurants have faced lawsuits alleging that they deducted more from their employees’ tips than the actual transaction fees incurred or for extraneous fees outside the credit card transaction fee.
These legal challenges make clear that restaurant owners must ensure they are not deducting in excess to avoid facing allegations that they are improperly deducting from employees’ tips and maintain proper recordkeeping practices to ensure compliance.
This landscape is further complicated by third-party food delivery services and their associated fees. There have been multiple lawsuits addressing the transaction fees charged by these third-party delivery services and the deductions of these transaction fees from the tips of their delivery workers.
The outcomes of these cases have varied. Some courts have found that the transaction fees charged by the third-party delivery companies are similar to credit card transaction fees and can be properly deducted from tips of delivery workers. Other courts have found that the third-party delivery transaction fees encompass extraneous costs beyond what can be deducted from a worker’s tips.
As third-party delivery services are now an integral part of the hospitality industry, employers should be focused on and aware of future developments in this area.
The proper handling of credit card transaction fees and deductions from an employee’s tips is a complex issue that continues to change both in the legislature and the courts. Restaurant owners must be proactive in adapting to these changes to avoid liability.
Restaurant owners should work closely with employment counsel to navigate this changing landscape, keep up to date with state and local laws, and regularly ensure their business practices are compliant.
Legal counsel can assist with managing tip policies and transaction fee deductions, making sure that employers do not improperly deduct tips from employees.

Caitlin Breen is an Associate in the Labor & Employment Group at Ellenoff Grossman & Schole LLP. Her practice spans a broad range of employment matters throughout all phases of litigation, including wage and hour matters, employment discrimination, retaliation, and other employment related claims.
Ms. Breen assists clients with employment issues, including drafting workplace policies and handbooks and advising regarding compliance with federal and state employment laws.
In addition to her practice, Ms. Breen serves as an adjunct professor at Cardozo School of Law where she teaches a course on lawyering and legal writing. Ms. Breen can be reached at (212) 370-1300 or cbreen@egsllp.com.