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Once, I was traveling out of New Orleans on business and stopped at an airport restaurant before boarding my flight. The server provided excellent customer service so I decided to leave a large credit card tip. The server informed me that unfortunately they would not see any of the tip because their employer withheld credit card tips. The server’s employers’ actions could be in violation of the Fair Labor Standards Act (“FLSA”) under a recently decided Fifth Circuit case, Stelle, et al v. Leasing Enterprises, Ltd.

The Fifth Circuit recently held in Stelle, et al v. Leasing Enterprises, Ltd., that employers may only retain from employee’s the direct costs of collecting credit card tips. Any amount employers retain in excess is in violation of the FLSA.

In this case, one of Leasing Enterprises, Limited’s restaurant chains (Perry’s) retained 3.25% of its employees tips when customers tipped with credit cards. Under § 203(m) of the FLSA, an employer my only claim a tip credit if “all tips received by [a tipped] employee have been retained by the employee.” Credit card fees are a compulsory cost of collecting credit card tips, and as a result, an employer may offset credit card tips for a credit card issuer fees and satisfy the requirements of the FLSA.

Perry’s conceded that its 3.25% offset always exceeded the total credit card insurer fees. Perry’s justified its 3.25% based on the credit card issuer fees and cash-delivery expenses. The Fifth Circuit noted that allowing Perry’s to offset employee’s tips to cover discretionary costs of cash delivery would conflict with § 203(m)’s requirement that “all tips received by such employees have been retained by the employee” for employers to maintain a statutory tip credit. Because Perry’s offset always exceeded the direct costs required to convert credit card tips to cash, the Fifth Circuit held that Perry’s 3.25% offset violated § 203(m) of the FLSA.