Credit-card users may be shortchanging waiters

Some restaurants make staff pay part of processing fee

Should the restaurant wait staff have to pay its share of the processing fee when the tip is put on a credit card bill? Some restaurants have been reducing tips for years by assessing the fee, but the practice is attracting new interest as processing fees rise and profit margins tighten.

On one side are the waiters, waitresses and others who serve food and clear tables. They count on tips to supplement sub-minimum wages.

On the other side are restaurant owners trying to remain profitable in the current economic downturn.

They're asking employees to share the cost of the credit-card processing fee, normally around 2 percent. This is not a cost the business should pay, they say.

The practice, allowed in most states, has been in place for at least 10 years, said Deborah Dowdell, president of the New Jersey Restaurant Association.

"Some members charge it, some don't," Dowell said. "It's not a consistent practice. And it's not relegated to fine dining or casual dining. It's done in a myriad of different segments."

The average processing fee is just under 2 percent, but it can be higher for low-volume restaurants. The National Restaurant Association does not keep records on how widespread the practice is, officials said.

The specific amount is at the option of the restaurants. Polices vary widely within the industry, Dowdell said.

The Stony Hill Inn, a popular local restaurant in Hackensack, N.J., and T.G.I. Friday's, a major national chain, are among those that eat the fee.

"We would not charge them," said Eric Betley, general manger of the Stony Hill Inn. "We believe that the banking industry is taking advantage of the situation, and I don't feel that I should punish my waiters with another fee, even if the banks charge us."

But other major chains deduct the fee from staff tips, including Landry's Restaurants Inc., a Houston-based chain that operates more than 180 restaurants under 28 different banners, including Rainforest Cafe.

"Federal law expressly allows for the practice of deducting the credit-card charge for tips left on a credit card," said Steven Scheinthal, an executive vice president at Landry's. "Where allowed by state law, this is our practice."

Media pressure led another big chain, Tampa, Fla.-based OSI Restaurant Partners LLC, to do a 180 this month within weeks of starting to deduct the card fees. OSI operates 1,356 restaurants nationwide under eight different brands, including Outback Steakhouse.

"It is no secret that all casual dining restaurant companies are facing unprecedented cost increases and substantial declines in profitability," said Joseph Kadow, an OSI executive vice president, in a statement released Feb. 8.

"It is our responsibility to adjust to this environment and take appropriate action to protect the business. The recent decision to ask our servers to share in the cost of processing their credit-card tips was made in this environment."

Upon reflection, OSI "realized this decision is inconsistent with our principles and beliefs," so it was rescinding that policy and returning money withheld from its servers, Kadow said.

Federal law states that "a tip is the sole property of the tipped employee" and it "forbids any arrangement between the employer and the tipped employee whereby any part of the tip received becomes the property of the employer."

But it allows two exceptions. One is participation in a pooling arrangement in which tips are shared among employees who "customarily and regularly receive tips," such as waiters, waitresses, bellhops, counter personnel (who serve customers), busboys/girls and service bartenders. The other exception is for credit-card processing fees.

On its Web site, the U.S. Department of Labor says that when tips are charged on a credit card and the employer pays the card company a percentage on each sale, "the employer may pay the employee the tip, less that percentage."

Even so, that charge may not reduce the employee's wage below the required minimum wage, and the employer may not withhold payment while awaiting reimbursement from the credit card company.

Some restaurants get around the problem by suggesting that patrons pay their tips in cash, but making that suggestion is a violation of their agreements with the card issuer, Dowdell said.

Still, paying the tip in cash is the only way a customer can be sure that the money is going to the waiter, not a bank or credit card company.