The Fifth Circuit recently decided how much a restaurant employer could deduct from an employee’s tips received by credit card to offset the costs associated with collecting and distributing the tips. In Steele v. Leasing Enterprises, Limited, the Fifth Circuit concluded the employer can only deduct the direct costs associated with paying out the tips. Because the restaurant deducted more than the fees and costs relating to the credit transactions, it lost the benefit of the statutory tip credit. All restaurant employers should take notice of this expensive lesson.

A class of servers sued Leasing Enterprises, Limited, which operates the Perry’s restaurant chain in Texas, for deducting 3.25% of the tips customers leave for them via credit card. Perry’s conceded that the chargeback exceeded the fees charged by the credit card issuer, but contended that the expenses related to obtaining the cash to pay out the servers were also properly deducted from the tips. Specifically, Perry’s explained that because the servers wanted to be paid out daily in cash rather than having their tips be included in their regular paychecks, it was required to have an armored truck deliver cash to the restaurants three times per week. This additional cost was included in the deduction from the servers’ tip amounts.

The Fifth Circuit held that it was lawful to deduct the cost of fees charged by the credit card issuer from the tips, but it was improper to deduct other expenses relating to the tip payments. The court noted that the decision to hire an armored truck for frequent cash deliveries was a business decision relating to employee satisfaction, not a fee attributable to dealing with the credit card companies. As a result of the overcharge, Perry’s lost the benefit of the statutory tip credit for the class of employees for the relevant time period.

Ensuring compliance with the Fair Labor Standards Act has always been complicated for restaurants with tipped employees; this decision adds another factor restaurants must be aware of to ensure the statutory tip credit is not inadvertently forfeited.