Running a restaurant can be exciting, but stressful. Margins are tight, costs are high, and every decision impacts your bottom line. But when it comes to payroll, trying to cut corners with credit card tips can cost you much more than it saves—especially if you don’t follow the law to the letter. One pizza restaurant learned this the hard way when it (allegedly) implemented a payroll policy that deducted credit card processing fees from its tipped employees‘ paychecks.
The Tip Withholding Policy That Led to Trouble
The restaurant’s policy—which went viral on social media—was apparently announced on January 18, 2025 and seemed straightforward: tipped employees would be “required to absorb 2% of all credit card sales.” On the surface, this may have sounded like a clever way to offset rising operational costs. After all, many customers pay their tabs and tip on debit or credit cards, and those transactions usually come with processing fees that can add up rather quickly.
But there was just one huge problem: the practice would be illegal if implemented. That’s because the Fair Labor Standards Act (FLSA)—the federal law that applies to nearly every restaurant (big and small)—has strict rules about what can and cannot be deducted or withheld from employees’ wages, especially when those employees receive tips.
While the FLSA allows restaurants to deduct swipe fees from credit card tips, it does not permit employers to pass along credit card fees for “all credit card sales.” For example, if a customer’s tab comes up to $100 and the customer leaves a tip of $15 then it would be illegal if the restaurant required its server to pay a swipe fee on the $115 total. Instead, the restaurant pays the processing fee for the $100; but, when paying the server the restaurant may withhold the swipe fee (and only the swipe fee) on the $15 credit card tip without violating the Fair Labor Standards Act.
When (and How) Deducting Fees from Credit Card Tips Is Legal in Texas
To be clear, passing credit card processing fees onto tipped employees can be legal, but only when you follow very specific guidelines, including:
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Don’t Dip Below the Minimum Wage: The deductions you take for credit card swipe fees cannot bring your tipped employees’ wages below the required minimum wage.
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Limit the Deduction to the Actual Processing Fee: The deduction you take for credit card swipe fees cannot be more than the actual cost of processing the tip portion of the credit card transaction.
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Pay the Tip On Time: You still have to pay your tipped employee the amount due by their regular payday and you cannot hold onto their tip until you get reimbursed from the credit card company or your payment processor.
What Happens If Your Restaurant Gets It Wrong
When restaurants get tip withholding wrong and don’t follow the FLSA rules to a tee, they pay–a lot. For instance, Perry’s Restaurants was ordered to pay $1,078,332.05 for deducting 3.25% from its servers’ credit card tips before paying the tips in cash. The 3.25% may not seem like much, but because it was more than the actual cost of the processing fee that the restaurant’s payment processor charged, the deduction was illegal as it was greater than the fee charged to convert the credit card tips into cash tips.
It’s not uncommon to see huge verdicts like these in credit card tips cases. That’s because the FLSA allows tipped workers to recover the total amount of the earnings they should have been paid had the illegal deduction not been taken from their pay, interest on those earnings, liquidated damages, and any attorney’s fees and court costs should they have no choice but to go to court to collect what is owed to them.
Even If It’s Legal, It’s Probably Not Worth It
Just because you can, doesn’t mean that you should. Even when done correctly, passing credit card fees onto employees can leave a bad taste in the mouths of key stakeholders. Employees may feel undervalued, turnover may increase, and customers—who assume their tips go to staff—might not appreciate knowing that part of their gratuity is getting siphoned off to cover operational costs and may take their business elsewhere, for good. In fact, several patrons review bombed the restaurant on Facebook, Yelp, and other similar sites after learning about the practice.
Although none of the restaurant’s employees have filed a lawsuit yet, the damage was already done and the restaurant had to issue a statement sort of walking back the planned policy.
The precise fee to deduct may also be difficult to determine, especially since credit card fees often vary from card-to-card and change depending on whether the card is presented in person or “swiped” online. Because there is not one uniform fee across the board, restaurants that still decide to withhold swipe fees from servers’ tips should at least work with employment counsel to ensure the amount deducted does not exceed what is legally permitted in Texas.
Besides, just because this practice may be legal (when done correctly) for restaurants in Texas, doesn’t mean that it would be legal elsewhere. If you’re operating a restaurant chain with operations in various states, the laws may differ in those other states. California, for example, prohibits the practice. Other localities may make it illegal to pass along fees associated with converting credit card tips into cash too.
What Restaurants Could Do Instead
Rather than shift credit card fees onto your tipped employees, you should consider alternative cost-shifting strategies that may be more palatable to your tipped employees and customers who frequent your restaurant. Small menu price adjustments can offset costs without directly impacting employee wages. If you don’t want to increase menu prices, you can roll out campaigns that encourage cash tipping to avoid incurring processing fees. Common campaigns include a discount equal to the value of the swipe fee for customers who pay tips in cash rather than credit card tips. Additionally, you may consider treating the swipe fees as a cost of doing business and budget for them as you do with other operational expenses.