Your Business Credit

For tip-earning employees, credit card surcharges may beat alternative


Credit card surcharges are complicated and may irritate customers. While that could hurt the tips of the merchant’s employees, it may be better for them than one alternative

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Dear Your Business Credit,

The company I work for just started charging customers anytime they use a credit card. The employees work for tips. I’m trying to figure out how the company is going to handle tips to the employees without charging that extra credit card fee to the customers and without the customers or the employees getting upset. – Frances

Dear Frances,
Some businesses find that credit card processing fees can really add up, and choose to pass the costs on to their customers. Your employer seems to be among them.

It sounds as if your company has already decided to make customers pay a surcharge when they make a payment, so debating the policy at this point may not be productive. The surcharge could annoy customers and lead them to give lower tips, if they tip via a credit card a sentiment they will probably voice if they are getting irate about it.

But the policy might also inspire more customers to pay their bills in cash or at least to tip in cash to avoid the surcharge on that portion of the bill. If many customers do opt to pay cash, the employees’ tips could easily remain the same.

Nonetheless, I suspect that the policy will be short-lived. Although more merchants are adding credit card surcharges, they’re still uncommon. Passing along a surcharge can be an administrative hassle for merchants. Some states ban surcharges, and credit card companies’ policies around surcharges are complicated. Complying with any complicated policy takes time something most company owners don’t have. Often, giving a discount to customers who pay cash is a simpler solution.

If the policy remains in place, there is one positive side to it, from the employees’ point of view. It’s better than your employer deducting money from your tips to cover credit card processing fees, which is a legal option.

Under the Fair Labor Standards Act, when customers pay tips on a credit card and the employer must pay a percentage of each sale as a credit card processing fee, the employer is allowed to take that percentage out of the tips it passes along to the employee. Let’s say the credit card processing fee is 3 percent. The employer is allowed to pay the employee 97 percent of the tips charged on customers’ credit cards.

If the employer is already passing along the 3 percent fee to customers, then there will no reason to pass it along to the employees, too. That’s good news for your team.

There is a bigger underlying issue in your company that you and your colleagues need to consider. When an employer gets to the point of passing along fees like this to customers, it is usually because the business is losing money on some transactions or losing money in general. Coming up with some money saving or revenue generating ideas for your bosses could help turn that situation around.

Even if you don’t own a piece of the company, your economic future depends on the health of the business. The more you can do to improve the bottom line, the more secure your jobs and your ability to collect tips will be.

See related: Minimize costs of card acceptance without surcharges

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