Adding a tip onto the bill is a routine occurrence for many folks when charging a meal on their credit card. But what many don’t know is that some restaurants charge their servers a fee every time their patrons tip on a credit card, rather than in cash.
TL;DR (Too Long; Didn't Read)
Some states prohibit restaurant owners from charging their waitresses credit card fees, while others do not.
Credit Card Processing Fees
Every time a merchant processes a credit card, the credit card company assesses a processing fee. This is to pay for the use of their processing equipment and for the privilege of accepting their credit card. It is generally considered a cost of doing business. When a server processes your credit card, the processing fee is assessed, and the restaurant is responsible for paying it. Some restaurants are now passing on a portion of the processing fees to their servers for every credit transaction with a tip. It may be a flat fee or a variable percentage, depending on the tip amount.
Legalities of the Process
In general, it's not illegal in the United States for a restaurant to assess credit card processing fees against their servers. While there are some exceptions as determined by each state, restaurants are free to assess a processing fee for credit card tips against their servers as long as it doesn't reduce their hourly wage below-minimum-wage limits for the state. The fee also cannot be greater than the processing fee accessed by the credit card company. In other words, a restaurant can further profit from collecting extra credit card fees from their servers.
Where it is Prohibited
Some states, such as California, Colorado, Alaska, Montana, Oregon and New Mexico, have statutes prohibiting the practice of passing on credit card processing fees to waitstaff. Washington State has a disclosure statute. While restaurants are not prohibited from the practice, those participating in fee distribution are required to post a notification of such practices in full view of their customers. This allows customers to decide whether to tip their waitstaff with a credit card or cash.
Things to Consider
Servers, many paid only $2.13 per hour without tips, rely on tips to bring their hourly wage up to a livable income. Servers are taxed 15 percent on their tips by the federal government. When tips are left on credit cards, they are 100-percent traceable and auditable by the Internal Revenue Service. Add to that another 1.5 to 3 percent for credit card processing fees and your server takes home $4.10 to $4.17 of your $5 tip. Tipping in cash allows the server to circumvent the processing charge.
Lynn Starner has been writing professionally since 2004, specializing in business-related topics. She holds a both a bachelor's and a master's degree in business. She loves reading, writing, and talking about business with a particular fondness for small businesses.