Using tips for credit-card-service fees may be legal, but it's bad PR for restaurateurs

Nation's Restaurant News, August 30, 1999

A California judge recently ruled in favor of a restaurant company hauled into court by state regulators who charged that the operator was breaking the law by making employees pay credit card company service fees for tips left to them by charge card users.

We can't help feeling that the restaurant company's policy and the fallout from the ruling might do irreparable harm to the image of the foodservice industry and exacerbate its growing human resources crisis.

Specialty Restaurants Corp. of Anaheim, Calif., 10 years ago began deducting from tips paid out on charge slips a pro-rated share of credit card company fees. These typically range from 2 percent to 4 percent of the transaction total. Though the practice provoked outrage from some employees and threats of legal action from the California Division of Labor Standards Enforcement, the 60-unit dinner-house company continued deducting the fees, arguing that a 1981 court ruling held the practice to be legal.

Recently, DLSE attorneys carried through on vows to take the restaurant company to court for violating an often-upheld section of the labor code prohibiting employers from taking any part of a worker's tips. State attorneys also argued that Specialty Restaurants was violating a section of the labor code forbidding employers from trying to recover from employees normal costs associated with doing business.

The result of the legal wrangling: Orange County Superior Court Judge Frederick P Horn ruled that Specialty Restaurants' tip-handling practice was legal. The judge agreed with Specialty Restaurants' attorneys that the company was passing along a fee, not taking part of a gratuity.

State attorneys said they were "very, very likely" to appeal Horn's ruling.

The ruling was a victory for Specialty Restaurants, though possibly only a temporary one if the finding is overturned on appeal. And now we hear from some operators following the case that they, too, are interested in passing on to employees tip-related credit card fees.

We view the court ruling as anything but a victory for California foodservice operators and would not hold up as a model for others Specialty Restaurants' tip-handling practices.

Specialty Restaurants contends that employees should help offset credit card fees on tips because they benefit from the higher levels of patronage and higher per-capita spending fostered by the acceptance of credit cards. State regulators counter that credit card fees are a "cost of doing business" and that restaurateurs, not their employees, decide whether or not to accept credit cards.

We find Specialty Restaurants' argument to be a stretch, at best, and wonder if the company, emboldened by its lower-court victory, next will try to deduct from tips a portion of marketing and advertising costs or even architectural fees, because those expenditures, too, help boost customer traffic and, presumably, tips.

If the response by some consumers we told of the decision is any indication, then restaurateurs who follow Specialty Restaurants' lead could be in for a public-relations problem, as some diners remarked, "I leave a tip for the server, not the owner or credit card company."

Apart from the fairness and PR issues, what really concerns us is that the court ruling may result in an increase in the number of tip-siphoning restaurateurs and the implications that has for the industry's ongoing struggle to attract workers. At a time when foodservice operations -- big and small, publicly owned and privately held, are fretting about their inability to fill shifts -- a movement to collect credit card service fees from employees would do little to enhance the image of the industry as a good place to work.

If the practice of taking service fee deductions from tips grows in popularity, it may further confuse and alienate would-be foodservice workers and members of the general public. Both groups have witnessed industry attempts to recruit workers with promises of fair compensation and opportunities for advancement. But they also have seen industry leaders and lobbyists oppose increases in the minimum wage, daily overtime, minimum-benefits packages and other worker-friendly proposals.

Although many of the industry's positions against proposed workplace legislation and regulations are based on the belief that such changes will harm businesses and, ultimately, the very employees the measures aim to aid, the public may have a different view. They may only remember a pattern of what appears to be anti-worker stands.

We think deducting credit card company service fees from tips is a bad idea. However, we must acknowledge that it might prove irresistible to operators struggling to protect their margins as costs rise. After all, those service fees can add up; aggregate annual service fees on credit card tips throughout California are likely to total several million dollars.

Operators who believe such tip deductions to be fair and proper should, at the very least, make it clear to new employees and customers -- in writing -- how credit card gratuities will be handled. We believe such operators also should prepare for the defection of their tipped employees to a competitor who can figure out a more worker-friendly approach to defending the bottom line.