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Class-action Suit Inititated Over Controversial Practice
 of Deducting Credit-card Processing Fees
 from Food Servers' Tips
By Kelly Pate Dwyer, The Denver Post
Knight Ridder/Tribune Business News

Jul.y 26, 2004--A Denver lawyer is leading a class-action fight that ultimately could affect the way restaurants do business here and across the country.

Tim Fox of Denver's Fox & Robertson is one of two attorneys battling a Houston restaurant chain, Landry's Restaurants Inc., over a controversial business practice -- deducting credit-card processing fees from food servers' tips.

"The business owner has decided to accept credit cards," Fox says. "-- That ought to be a cost of doing business." The Denver Post in a July 14 story documented the controversial practice at several local restaurants.

Some states, including Colorado, make it illegal for companies to take a portion of servers' tips, usually 2 percent to 3 percent, to cover the cost of processing those tips.

Officials with the Colorado Department of Labor and Employment say they are studying tip-related cases such as Fox's with an eye toward amending the interpretation of state laws.

They'll either more clearly state that the practice is illegal or interpret the law in such a way as to make it legal.

Fox and Illinois attorney Steven Greenberger base their argument in federal law, so the outcome could have nationwide implications.

They filed a lawsuit in 2002 in Illinois after one of Greenberger's students at DePaul University questioned why her managers at Joe's Crab Shack in Chicago, owned by Landry's, deducted a fee from her tips.

The class-action suit, which names six Joe's servers, alleges that the parent company -- in about 150 of its restaurants -- deducts at least 3 percent of the servers' tips to cover credit- card processing fees.

The case has since moved to the U.S. District Court for the Southern District of Texas, where it has been in front of a judge since March 2003.

The servers' attorneys argue the fee deduction is illegal under the Fair Labor Standards Act, which reads, in part: "Whether a tip is to be given, and its amount, are matters determined solely by the customer, and generally he has the right to determine who shall be the recipient. Only tips actually received by an employee as money belonging to him which he may use as he chooses free of any control by the employer, may be counted in determining whether he is a 'tipped employee'."

Credit-card processing fees are a cost of doing business, and the act prohibits employers from shifting costs of business to employees, Fox says.

However, laws and interpretations of laws collide.

The U.S. Department of Labor has written a fact sheet for employers about tipped employees that says, explicitly, that credit-card processing fees can be deducted from servers' tips.

Fox disagrees with the department's interpretation.

"Our view is that it's wrong," he says.

In response to the suit, Landry's has argued that a tip isn't a tip until it's converted into cash and that there's a cost to the restaurant to do that, which the tipped employees should bear.

The restaurant chain cites a 1999 6th Circuit Court of Appeals case ruling in favor of a restaurant.

Fox says that's one of only two cases nationwide he has uncovered on this issue. The other, a 1995 federal suit against a Texas strip club, found in favor of the club's waitresses.

A win in the Texas case could result in millions of dollars of back wages for servers across Landry's chain, Fox says.

Waiters and waitresses generally make less than half of the minimum wage under what's called a tip credit.

Restaurants qualify for the credit if their servers' wages plus tips exceed the minimum wage -- $5.15 nationally and more in some states.

By deducting credit-card processing fees, Landry's loses its right to the tip credit, Fox argues.

Historically, courts have required that restaurants in violation of "tip credit" rules have to pay those servers the difference between their lower wage and the minimum wage, Fox says.

That would amount to about $6,300 a year for a full-time server in Colorado.

Mike McArdle, director of the Colorado labor department's Labor Standards Division, affirmed that the practice is illegal in Colorado.

Since the issue was publicized in The Denver Post, one restaurant owner -- Kevin Taylor -- said he has quit deducting fees from servers' tips.

But the change could be short-lived.

McArdle said he and the department's executive director will review and update the state wage order this fall.

A wage order provides more detail on state wage laws, many of which were written before things such as credit- card processing were in place.

The labor officials will consider whether card processing fees can be deducted from servers' tips, based on a new federal wage order coming out in August, legal proceedings such as the one in Texas, and comments taken at a public hearing this fall.

-----To see more of The Denver Post, or to subscribe to the newspaper, go to

(c) 2004, The Denver Post. Distributed by Knight Ridder/Tribune Business News. For information on republishing this content, contact us at (800) 661-2511 (U.S.), (213) 237-4914 (worldwide), fax (213) 237-6515, or e-mail LNY,

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