READ THIS FIRST! Fact Sheet #15: Tipped Employees -FLSA

Tip Credit is a federal law that allows employers to take a 'credit' against the minimum wage, and pay lower wages to employees who earn tips.
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PostPosted: Sat Sep 18, 2010 4:52 am
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http://www.dol.gov/whd/regs/compliance/whdfs15.htm

Fact Sheet #15: Tipped Employees Under the Fair Labor Standards Act (FLSA)

This fact sheet provides general information concerning the application of the FLSA to employees who receive tips.

Characteristics

Tipped employees are those who customarily and regularly receive more than $30 a month in tips. Tips actually received by tipped employees may be counted as wages for purposes of the FLSA, but the employer must pay not less than $2.13 an hour in direct wages.

Requirements

If an employer elects to use the tip credit provision the employer must:

1) Inform each tipped employee about the tip credit allowance (including amount to be credited) before the credit is utilized.

2) Be able to show that the employee receives at least the minimum wage when direct wages and the tip credit allowance are combined.

3) Allow the tipped employee to retain all tips, whether or not the employer elects to take a tip credit for tips received, except to the extent the employee participates in a valid tip pooling arrangement.

If an employee's tips combined with the employer's direct wages of at least $2.13 an hour do not equal the minimum hourly wage of $7.25 per hour effective July 24, 2009; the employer must make up the difference.

Youth Minimum Wage: The 1996 Amendments to the FLSA allow employers to pay a youth minimum wage of not less that $4.25 an hour to employees who are under 20 years of age during the first 90 consecutive calendar days after initial employment by their employer. The law contains certain protections for employees that prohibit employers from displacing any employee in order to hire someone at the youth minimum wage.

Dual Jobs: When an employee is employed concurrently in both a tipped and a non-tipped occupation, the tip credit is available only for the hours spent in the tipped occupation. The Act permits an employer to take the tip credit for time spent in duties related to the tipped occupation, even though such duties are not by themselves directed toward producing tips, provided such duties are incidental to the regular duties and are generally assigned to such occupations. Where tipped employees are routinely assigned to maintenance, or where tipped employees spend a substantial amount of time (in excess of 20 percent) performing general preparation work or maintenance, no tip credit may be taken for the time spent in such duties.

Retention of Tips: The law forbids any arrangement between the employer and the tipped employee whereby any part of the tip received becomes the property of the employer. A tip is the sole property of the tipped employee. Where an employer does not strictly observe the tip credit provisions of the Act, no tip credit may be claimed and the employees are entitled to receive the full cash minimum wage, in addition to retaining tips they may\should have received.

Service Charges: A compulsory charge for service, for example, 15 percent of the bill, is not a tip. Such charges are part of the employer's gross receipts. Where service charges are imposed and the employee receives no tips, the employer must pay the entire minimum wage and overtime required by the Act.

Tip Pooling: The requirement that an employee must retain all tips does not preclude a valid tip pooling or sharing arrangement among employees who customarily and regularly receive tips, such as waiters, waitresses, bellhops, counter personnel (who serve customers), busboys/girls and service bartenders. Tipped employees may not be required to share their tips with employees who have not customarily and regularly participated in tip pooling arrangements, such as dishwashers, cooks, chefs, and janitors. Only those tips that are in excess of tips used for the tip credit may be taken for a pool. Tipped employees cannot be required to contribute a greater percentage of their tips than is customary and reasonable.

Credit Cards: Where tips are charged on a credit card and the employer must pay the credit card company a percentage on each sale, then the employer may pay the employee the tip, less that percentage. This charge on the tip may not reduce the employee's wage below the required minimum wage. The amount due the employee must be paid no later than the regular pay day and may not be held while the employer is awaiting reimbursement from the credit card company.

Typical Problems

Minimum Wage Problems: Employee does not qualify as a "tipped employee", tips are not sufficient to make up difference between employer's direct wage obligation and the minimum wage; employee receives tips only -- so the full minimum wage is owed; illegal deductions for walk-outs, breakages and cash register shortages; and invalid tip pools.

Overtime Problems: Failure to pay overtime on the full minimum wage; failure to pay overtime on the regular rate including all service charges, commissions, bonuses and other remuneration.


Where to Obtain Additional Information

For additional information, visit our Wage and Hour Division Website: http://www.wagehour.dol.gov and/or call our toll-free information and helpline, available 8 a.m. to 5 p.m. in your time zone, 1-866-4USWAGE (1-866-487-9243).

This publication is for general information and is not to be considered in the same light as official statements of position contained in the regulations.
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PostPosted: Sun Mar 11, 2012 11:39 pm
This fact sheet has been revised:

http://www.dol.gov/whd/regs/compliance/whdfs15.htm

Wage and Hour Division (WHD)

(Revised March 2011) (PDF)

Fact Sheet #15: Tipped Employees Under the Fair Labor Standards Act (FLSA)

This fact sheet provides general information concerning the application of the FLSA to employees who receive tips.

Characteristics

Tipped employees are those who customarily and regularly receive more than $30 per month in tips. Tips are the property of the employee. The employer is prohibited from using an employee’s tips for any reason other than as a credit against its minimum wage obligation to the employee (“tip credit”) or in furtherance of a valid tip pool. Only tips actually received by the employee may be counted in determining whether the employee is a tipped employee and in applying the tip credit.

Tip Credit: Section 3(m) of the FLSA permits an employer to take a tip credit toward its minimum wage obligation for tipped employees equal to the difference between the required cash wage (which must be at least $2.13) and the federal minimum wage. Thus, the maximum tip credit that an employer can currently claim under the FLSA is $5.12 per hour (the minimum wage of $7.25 minus the minimum required cash wage of $2.13).

Tip Pool: The requirement that an employee must retain all tips does not preclude a valid tip pooling or sharing arrangement among employees who customarily and regularly receive tips, such as waiters, waitresses, bellhops, counter personnel (who serve customers), bussers, and service bartenders. A valid tip pool may not include employees who do not customarily and regularly received tips, such as dishwashers, cooks, chefs, and janitors.

Requirements

The employer must provide the following information to a tipped employee before the employer may use the tip credit:

1) the amount of cash wage the employer is paying a tipped employee, which must be at least $2.13 per hour;

2) the additional amount claimed by the employer as a tip credit, which cannot exceed $5.12 (the difference between the minimum required cash wage of $2.13 and the current minimum wage of $7.25);

3) that the tip credit claimed by the employer cannot exceed the amount of tips actually received by the tipped employee;

4) that all tips received by the tipped employee are to be retained by the employee except for a valid tip pooling arrangement limited to employees who customarily and regularly receive tips; and

5) that the tip credit will not apply to any tipped employee unless the employee has been informed of these tip credit provisions.

The employer may provide oral or written notice to its tipped employees informing them of items 1-5 above. An employer who fails to provide the required information cannot use the tip credit provisions and therefore must pay the tipped employee at least $7.25 per hour in wages and allow the tipped employee to keep all tips received.

Employers electing to use the tip credit provision must be able to show that tipped employees receive at least the minimum wage when direct (or cash) wages and the tip credit amount are combined. If an employee's tips combined with the employer's direct (or cash) wages of at least $2.13 per hour do not equal the minimum hourly wage of $7.25 per hour, the employer must make up the difference.

Retention of Tips: A tip is the sole property of the tipped employee regardless of whether the employer takes a tip credit. The FLSA prohibits any arrangement between the employer and the tipped employee whereby any part of the tip received becomes the property of the employer. For example, even where a tipped employee receives at least $7.25 per hour in wages directly from the employer, the employee may not be required to turn over his or her tips to the employer.

Tip Pooling: As noted above, the requirement that an employee must retain all tips does not preclude a valid tip pooling or sharing arrangement among employees who customarily and regularly receive tips. The FLSA does not impose a maximum contribution amount or percentage on valid mandatory tip pools. The employer, however, must notify tipped employees of any required tip pool contribution amount, may only take a tip credit for the amount of tips each tipped employee ultimately receives, and may not retain any of the employees' tips for any other purpose.

Dual Jobs: When an employee is employed by one employer in both a tipped and a non-tipped occupation, such as an employee employed both as a maintenance person and a waitperson, the tip credit is available only for the hours spent by the employee in the tipped occupation. The FLSA permits an employer to take the tip credit for some time that the tipped employee spends in duties related to the tipped occupation, even though such duties are not by themselves directed toward producing tips. For example, a waitperson who spends some time cleaning and setting tables, making coffee, and occasionally washing dishes or glasses is considered to be engaged in a tipped occupation even though these duties are not tip producing. However, where a tipped employee spends a substantial amount of time (in excess of 20 percent in the workweek) performing related duties, no tip credit may be taken for the time spent in such duties. .

Service Charges: A compulsory charge for service, for example, 15 percent of the bill, is not a tip. Such charges are part of the employer's gross receipts. Sums distributed to employees from service charges cannot be counted as tips received, but may be used to satisfy the employer's minimum wage and overtime obligations under the FLSA. If an employee receives tips in addition to the compulsory service charge, those tips may be considered in determining whether the employee is a tipped employee and in the application of the tip credit.

Credit Cards: Where tips are charged on a credit card and the employer must pay the credit card company a percentage on each sale, the employer may pay the employee the tip, less that percentage. For example, where a credit card company charges an employer 3 percent on all sales charged to its credit service, the employer may pay the tipped employee 97 percent of the tips without violating the FLSA. However, this charge on the tip may not reduce the employee's wage below the required minimum wage. The amount due the employee must be paid no later than the regular pay day and may not be held while the employer is awaiting reimbursement from the credit card company.

Youth Minimum Wage: The 1996 Amendments to the FLSA allow employers to pay a youth minimum wage of not less than $4.25 per hour to employees who are under 20 years of age during the first 90 consecutive calendar days after initial employment by their employer. The law contains certain protections for employees that prohibit employers from displacing any employee in order to hire someone at the youth minimum wage.

Typical Problems

Minimum Wage Problems:

Where an employee does not receive sufficient tips to make up the difference between the direct (or cash) wage payment (which must be at least $2.13 per hour) and the minimum wage, the employer must make up the difference.
Where an employee receives tips only and is paid no cash wage, the full minimum wage is owed.
Where deductions for walk-outs, breakage, or cash register shortages reduce the employee’s wages below the minimum wage, such deductions are illegal. Where a tipped employee is paid $2.13 per hour in direct (or cash) wages and the employer claims the maximum tip credit of $5.12 per hour, no such deductions can be made without reducing the employee below the minimum wage (even where the employee receives more than $5.12 per hour in tips).
Where a tipped employee is required to contribute to a tip pool that includes employees who do not customarily and regularly receive tips, the employee is owed all tips he or she contributed to the pool and the full $7.25 minimum wage.

Overtime Problems:

Where the employer takes the tip credit, overtime is calculated on the full minimum wage, not the lower direct (or cash) wage payment. The employer may not take a larger tip credit for an overtime hour than for a straight time hour (i.e., $4.00 tip credit per hour for the nonovertime hours and $5.12 tip credit per hour for overtime hours).
Where overtime is not paid based on the regular rate including all service charges, commissions, bonuses, and other remuneration.

Where to Obtain Additional Information

For additional information, visit our Wage and Hour Division Website: http://www.wagehour.dol.gov and/or call our toll-free information and helpline, available 8 a.m. to 5 p.m. in your time zone, 1-866-4USWAGE (1-866-487-9243).

This publication is for general information and is not to be considered in the same light as official statements of position contained in the regulations.
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PostPosted: Mon Dec 10, 2012 5:47 pm
States that prohibit deductions from Credit Card tips for processing Fees

http://wiserwaitress.com/states-that-pr ... sing-fees/

The following states do not allow employers to deduct a certain percentage from a server’s credit card tips for processing fees.

Alaska
California
Colorado
Montana
Nevada
Oregon
Washington*
New Mexico and Idaho * Employer may take the deduction only if the employee agrees to the deduction and signs a written waiver

Published by Gina Deluca, May 17th, 2010 11:32 am


EDIT:
*The state of Washington allows the practice but enforces a disclosure law. In Washington, restaurant owners who deduct tip processing fees from employee wages are required by law to disclose this information to patrons, giving them the option to tip in cash. However, servers are not allowed to suggest or solicit cash tips.
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PostPosted: Tue Dec 11, 2012 5:04 am
WOW, thanks Gregster. I had asked a Denny's server about that once, and she told me that the employer does deduct from Credit card tips.
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PostPosted: Tue Dec 11, 2012 5:10 am
gregster wrote:States that prohibit deductions from Credit Card tips for processing Fees

http://wiserwaitress.com/states-that-pr ... sing-fees/

The following states do not allow employers to deduct a certain percentage from a server’s credit card tips for processing fees.

Alaska
California
Colorado
Montana
Nevada
Oregon
Washington
New Mexico and Idaho * Employer may take the deduction only if the employee agrees to the deduction and signs a written waiver

Published by Gina Deluca, May 17th, 2010 11:32 am


How do I say.... "Just because it's posted on the Internet does not make it true." without ruffling your feathers? The link you provided does not reference any actual laws that I can find.

I mention this because I have spoken with a couple waitresses in Washington State and they all have told me that their employer does in fact make the deduct the service fee.
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PostPosted: Tue Dec 11, 2012 3:49 pm
elric92 wrote:How do I say.... "Just because it's posted on the Internet does not make it true." without ruffling your feathers? The link you provided does not reference any actual laws that I can find.

I mention this because I have spoken with a couple waitresses in Washington State and they all have told me that their employer does in fact make the deduct the service fee.


Now you get a glimpse of what my world is like! You need to look up the particular law of the state you are interested in. It's not as hard as you think, but it can be time consuming. Have fun! 8-)

If however those waitresses want to ask about their problem here, that I would be happy to take the time to look it up myself. :D
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PostPosted: Tue Dec 11, 2012 6:22 pm
gregster wrote:
elric92 wrote:How do I say.... "Just because it's posted on the Internet does not make it true." without ruffling your feathers? The link you provided does not reference any actual laws that I can find.

I mention this because I have spoken with a couple waitresses in Washington State and they all have told me that their employer does in fact make the deduct the service fee.


Now you get a glimpse of what my world is like! You need to look up the particular law of the state you are interested in. It's not as hard as you think, but it can be time consuming. Have fun! 8-)

If however those waitresses want to ask about their problem here, that I would be happy to take the time to look it up myself. :D


I've already started looking for the answer Greg. I've emailed those waitresses, googled, and I am about to mention this to my attorneys. My franchise does not deduct, but like I mentioned, I know some waitresses that work for employers that do deduct.
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PostPosted: Wed Dec 12, 2012 12:05 am
Here is what seems to be a better answer:

State Variances

In 2011, only a few states in the country prohibit restaurant owners from charging their serving staff for processing fees on credit or debit card tips. Some that do are Oregon, Colorado, Montana, Nevada, Alaska and California. The state of Washington allows the practice but enforces a disclosure law. In Washington, restaurant owners who deduct tip processing fees from employee wages are required by law to disclose this information to patrons, giving them the option to tip in cash. However, servers are not allowed to suggest or solicit cash tips.


Read more: Can a Restaurant Owner Charge a Waitress Credit Card Fees? | eHow.com http://www.ehow.com/info_8291852_can-wa ... z2Eo3zNZnY
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PostPosted: Wed Dec 12, 2012 12:12 am
Found another great article about these issues:

Tips: Paper or Plastic?

http://wiserwaitress.com/the-menu/tips- ... r-plastic/

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States that prohibit Employers from deducting Credit Card processing fees from a server’s credit card tips include: California CA Labor Code Section 351, Colorado (Wage Order 28 -Practice invalidates the employers right to take a tip credit), & New Mexico statute 50-4-22

*New Mexico -Statute 50-4-22 Section 3, Part A may prohibit this practice. Due to the ambiquity of the statute, credit card processing fee deduction from tips are subject to a Wage administrator’s interpretation- which may vary. Director of Wage and hour has refused to commet or issue a standard intrepretation.

    Plastic vs Paper

    + Restaurants that use credit cards are engaged in INTERSTATE COMMERCE. This means the workers are protected under the Fair Standards Labor Act regardless if the restaurant generates $500,000 or more per year.

    -Employers have more control over credit card tips. They may impose an automatic deduction from tips or a processing fee

    -Restaurants that are “cash only” may be exempt from FLSA regulations and workers may have less protection from wage theft.

    +Tipped employees may have more control over cash tips and how they are distributed than credit card tips.

Why cash rules.

In 1977, a server could expect to receive at least half of their tips in the form of cash. Although credit cards were used, they were not the main form of payment.

Back then, it was unlikely that separate checks meant 6 or 7 different credit cards for the same table. Today, most people pay with plastic, even for a cup of coffee, and a cash payment is becoming a rare, infrequent event.

But a cash tip will always be the best form of payment for a server. It is the only way a diner can be sure that the money is going to the server, and not to a bank or credit card company. Today, when a server receives a credit card tip, they may have to pay for the processing fees to receive that tip. Some restaurants deduct 3 percent out of a servers credit card tips to cover processing fees.

And the policy where practiced means a server may only collect $19.40 out of each $20 in tips. Some states have stepped in and have created laws that prohibit the practice of deducting credit card processing fees from a server’s tips, but most states simple follow federal DOL guidelines and allow the practice.

But for many servers faced with the highest tip credit in history, this deduction on top of a tip-out (tips shared with bartenders, hosts, and busboys,) can make a significant impact. “Its just kind of disheartening. Its doesn’t seem like a lot of money, but over time it does add up,” said Andrews, a waiter at Grandy Dancer (who charges it servers 1.5 percent of the tips diners leave on credit cards) estimated the charge could cost him $50 a month.
One waitress decided to challenge the practice and asked the court to allow her lawsuit to proceed as a class action suit for all servers.

Lisa Gullis filed suit in the United States District Court for the Northern District of Illinois complaining that the practice of deducting the service fee from her tips (and other servers’ tips) was illegal.

The court untimely ruled in favor of the restaurant, based on two informal pronouncements by the DOL. One was the opinion letter (Opinion WH-410) issued by the DOL in 1977) stating that the department did not question the practice of deducting tips. “an amount no greater than that charged {the employer} by the credit card company”. The other a subsequent opinion letter (January 13, 2006) in the DOL field operation Handbook (Section 30d05(a)), and in its “fact sheet #15, entitled “Tipped Employees under the Fair Labor Standards Act”, reaffirmed the DOL’s position and interpretation of the FLSA. The court found the DOL’s reasoning to be logical and to have persuasive authority since it had been consistent in its interpretation for nearly 30 years.

The court failed to recognize however, that in 1977 the tip credit for servers was only 50% and that only half of their tips received were credit card tips.

In fact today the federal tip credit exceeds 70% , almost two thirds of all tips received are credit card tip and the federal sub- minimum cash wage for servers is still $2.13.

It hasn’t been raised in over 17 years. If the tip credit was restored to 50%, the same as it was in 1977, then servers today would earn $3.63 per hour.

When you consider these factors, the court’s ruling may be consistent, but not logical when applied to a changing economic climate. It now allows employers to take a substantial higher tip credit, in addition to being allowed to deduct credit card processing fees. The opinion letter, issued in 1977, was released when the working environment of servers was much different than the one they face today. It is disappointing that the Federal DOL failed to consider how the role of credit card transactions in service sector work has changed drastically when it reasserted its opinion in 2006.

Despite the ruling, the practice remains controversial, and some restaurant operators do not agree with the practice. “I think any restaurant would do what it could to get back some of that cost because it’s really significant,” said Julie Stanely, executive chef and owner of Food Dance Café in downtown Kalamazoo. “Two -thirds of our business is credit cards, and it’s incredibly expensive, but I would not take that from my staff. The world uses credit cards for everything, Its just the cost of doing business,” she said.

Tim Fox, A Denver attorney challenged the U.S. Department of Labor’s interpretation and believes the fee deduction is illegal under the Fair Labor Standards Act, which reads in part:” Whether a tip is to be given, and its amounts, are matters determined solely by the customer, and generally he has the right to determine who shall be the recipient.” “Credit Card processing fees are a cost of doing business, and the act prohibits employers from shifting costs of business to employees.” Fox Says.

But Steven Scheintal, former executive vice president of Landry’s Restaurants Inc. disagrees and says, “It’s not a cost that business should pay. We do this basically for every restaurant and every jurisdiction where it is allowed.” Landry’s is a Texas-based chain that operates a casino, five hotels, and more than 180 restaurants in 30 states.

Media pressure led another big chain, OSI Restaurant Partners LLC, to reverse a similar policy within weeks of starting to deduct the card fees. OSI operates 1,356 restaurants nationwide under eight different banners, including Outback Steakhouse. Joseph Kadow, an OSI executive vice president said, “Upon reflection, OSI realized this decision is inconsistent with our principles and beliefs,” so it rescinded that policy and returned money withheld from its servers.

But what is also interesting is while some states like Washington have passed laws that require employers to inform diners the percentage of a service charge a server may receive, no such transparency is required of credit card deductions.

A diner should have the right to know that when they write down a tip amount for the server, a portion of that tip may go to the bank or a credit card company. And if waitstaff tries to suggest to diners they pay their tip in cash, their suggestion is a violation of the restaurants agreement with the card issuer. Still, the diner should have the right to know where their tip is going regardless of whether they decide to leave cash or not.

Credit cards and the I.R.S

Since the amount of credit card transactions has risen steadily during the last 40 years, the IRS has been able to effectively trace the tipping habits of the dining public. Credit card tips have essentially given the IRS a marketing tool to measure and gauge. Credit Card tips are 100 percent traceable and must be documented. Like a black cat strutting out on a snowy white winter day, a credit card tip is impossible to hide. Cash, on the other hand, is still not 100 percent traceable. The IRS can only make guesses, and they have. The heavy use of credit cards in restaurants has changed both the way a server receives a tip and also how a server reports their tips.

When Plastic finally sent one famous San Francisco restaurant to the Supreme court, the culture of reporting tips was drastically changed.

During an audit, the IRS found a 14.49 percent tip rate on a California restaurant: Fior d’Italia’s 1991 credit card sales and a tip rate of 14.29 percent for the following year. The servers, however, only reported a 10 percent tip rate for their cash sales for the same years. The IRS compared the two and decided, based on estimations, that these cash tips were inaccurate, thus charged the restaurant an additional $23,000 in taxes. Bob Lavirve, co owner of the Italian restaurant spent about $500,00 battling the IRS, an agency he said was practicing “thuggery”. The restaurant ultimely lost the battle in the supreme court, and the court ruled on June 17th, 2002 in the United States vs Fior d’ Italia, that the IRS had authority to base its audits on assumptions and credit card sales. Solicitor General Theodore Olsen also told justices that, if the IRS were to audit individual tip earners from an eating establishment, its audits would be based on assumptions as well.

What this means for you, the server, is that your employer, understandably, will want you to report cash tips that are similar to your credit card tips in order to avoid an audit and penalties. Especially since it seems that the IRS prefers to treat a restaurant as one unit rather than audit individual servers.

The IRS is essentially using credit card tips as a mirror, to compare and assess cash tips. Anything less than 15% declared on cash tips may provoke an audit, especially if you’re working in an establishment that exceeds a million or more in revenue a year. More and more restaurants are requiring wait- staff to agree to certain tip reporting agreements as a result of this ruling, so don’t be surprised if you may be required to sign a tip reporting agreement before working in an establishment.

Gone are the days when you only had to claim 8 percent. The new informal industrial standard has risen to 15%. Plastic has changed the rules forever. It’s a new era and cash tips are more than ever greatly appreciated.

Notes:

Gastronomica. June, 24,2005, “When the IRS came to Dinner”, Elizabeth Williams
Hotel online,July 26,2004 “Class Action Suit initiated over controversial practice of deducting Credit-card processing fees from food servers tips”Kelly pate Dwyer, the Denver Post,Knight Ridder/Tribune Business News.
“Fior d’ Italia leads battle on tip tax”Kravels, David Associated Press, April 23,2002
A.S.A.P. April 2006, Federal Court Affirms Legality of deducting Credit Card Processing fees from Servers’ tips. Laurent R.G. Badoux, William Weissment.
“Lawyer to file class-action against tip sharing. Sept 11, 2007. Kendra Mendez http://www.News.8.austin.com
“Patrons who use credit cards may shortchanging waiter. “Kevin G. Demarrais Mcclatchy newspapers, Sun Feb 17,2008
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PostPosted: Wed Dec 12, 2012 4:23 am
Thank whatever diety that my franchise does not charge me for a customer using a CC. I think my CC to cash ratio is cash - 60% and CC - 40% (and yes the percentage does vary). The ratio varies depending on many many factors such as the time of year, football, big other event with a lot of out-of-towners, time of the month, weather, etc.

Who knows what the future holds.
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