It's the end of the day. You've gone out to a nice restaurant and had a good meal with wonderful service. You're planning to leave a big tip, but you'll be paying by credit card. Suddenly you stop and wonder to yourself how a tip you leave on your credit card makes its way to the restaurant employees. Maybe they don't even get their tips when you leave them electronically. Well, here's the scoop on how it works.
How It Works
When you pay a tip by credit card, your bank pays out the full amount of your charge—bill, tax and tip—to the company that gave you service. That company's accountant will note the tip amount, which is recorded on the receipt, and will pass it along to the employee you tipped in her next paycheck. Depending on the company's policy, the accountant may also distribute the tip among other employees who provide service but are not able to be tipped so readily—such as restaurant chefs. The bank may not keep any of the tips, although it may charge a service fee for processing the credit card transaction. The employer and the account also may not keep any of the tips for themselves. Except for tip pools, employees will always see the vast majority of their tip when you pay by credit, if their employers are law-abiding.
Many states have labor laws pertaining to electronic gratuities. The laws are particularly clear in the State of California, declaring that an employee is entitled to all of the tips she earns through an electronic payment, except those that are paid into an employee pool to be shared by others such as the busboy and the bartender. Employers must pay the rest of the tip to the employee by their next payday following the credit card authorization, and may not deduct a credit card processing fee from the tip. This isn't so in other states, such as North Carolina or Illinois, where employers are allowed to pass credit card processing fees along to their employees.
When Tips Cost Workers
Federal law, and the laws of most states, allow for tipped employees to earn less than the minimum wage if they can make up the difference in tips. When you pay in cash, employees sometimes have the option of not reporting those tips. When you pay electronically, they almost never do. The difference in their income can be considerable. Some citizens feel that paying tips in cash gives low-wage workers a leg up. Some states mandate that tipped workers earn the full minimum wage irrespective of tips. These states are Washington, California, Alaska, Minnesota, Oregon, Nevada and Montana.
Tips are taxable income, and so technically an employee will not necessarily get to keep all of his tip money even if it is paid out to him at first. When you pay a tip in cash, the recipient gets to decide whether or not to report that tip on his tax returns. If he earns more than $20 a month in tips, excluding tip payouts to other employees, it is illegal for him not to report tips earned in that month.