Request By:
Carol M. Palmore
Deputy Secretary
Labor Cabinet
Frankfort, Kentucky 40601
Opinion
Opinion By: David L. Armstrong, Attorney General; By: Martin Glazer, Assistant Attorney General
You seek a formal opinion from this office regarding the application of KRS 337.065 to a practice encountered by the Labor Cabinet in numerous food establishments in Central Kentucky.
The practice involves the method of determining tips placed on credit cards. You cite an example of a customer's bill totaling $20. The customer charges this on his major credit card and adds a gratuity of $3 for a total credit charge of $23. The credit card company charges the restaurant 4.5% for administrative costs. The employer pays his tipped employee $2.86 in cash [$3 minus 4.5% of $3 equals $ .13 1/2 or $ .14].
The Labor Cabinet has taken the position that such practice violates KRS 337.065 which provides:
(1) No employer shall require an employe to remit to the employer any gratuity, or any portion thereof, except for the purpose of withholding amounts required by federal or state law. The amount withheld from such gratuity shall not exceed the amount required by federal or state law.
(2) As used in this section "gratuity" means voluntary monetary contribution received by an employe from a guest, patron, or customer for services rendered.
You point out that the Federal Labor Standards Administrator has permitted such practice as not being a violation of federal labor law, but that the federal law has no counterpoint to KRS 337.065.
Certain employees have taken the position that they are due the full amount of the tip with no deduction or "discount" equal to the sum paid by the employer to the credit card company.
We have requested and received comments on this procedure from the Kentucky Retail Federation and the Kentucky Restaurant Association before considering the legal question involved.
In sum, they point out that such practice is not uniform throughout the restaurant industry and that credit card discount rates vary from employer to employer based upon volume of credit sales and negotiated rates.
The Federation and Association maintain that the practice is not a violation of KRS 337.065 because no "money" is withheld and the restaurant does not receive the full amount of the tip listed on the credit sale by the customer but only the amount actually received after the credit card company sends the net sum [less discount] to the restaurant.
Further, they assert the restaurant is not requiring the employee to "remit" any money because no money is initially received. The employee is paid the monetary value of the indicated charged tip.
Similarly, they assert as an example that a restaurant should not have to exchange a Canadian dollar inadvertently left as a tip for a United States dollar. The Canadian dollar has a U.S. monetary value discounted to approximately $ .71. [This last example is not apropos. The restaurant owner would not, necessarily, handle the Canadian dollar, only the employee who was tipped. In the credit card situation, the employer is involved.]
Thus, the lines are drawn and we are called upon to perform the Solomonesque task of refereeing this dispute.
We have done extensive research, looking at statutes and decisions of other states dealing with "tipped" employees. We have not found that such states have answered this exact question with the same or similar types of statutes.
The question boils down to whether the tip designation on a credit card is a "voluntary monetary contribution received by an employe from a guest, patron, or customer for services rendered" at the time the customer so designates or whether that sum does not become cash or a monetary contribution until the employer actually receives a sum from the credit card company. In actuality, the sum so received is by check or by electronic transfer from the bank-sponsoring credit card company, rather than the mailing of U.S. currency to the employer. Yet, that is considered "cash."
This office has previously considered the nature of credit cards in other areas. For example, in OAG 85-48, we concluded that credit card payments for taxes, automobile registration, and license plates, fines, court costs, child support, bail bonds, and other governmental items of expense were, for all intents and purposes, the payment of cash and, therefore, met statutory requirements for the payment of such items in cash.
In the recent case (December 10, 1986) of Liquor Outlet, Inc., v. Department of Alcoholic Beverage Control, (Jefferson Circuit Court, 9th Division, No. 86-CI-08096), the Circuit Court cited OAG 85-48 and determined that the use of credit cards for liquor purchases was a cash sale at the time of purchase rather than a credit purchase and, thus, was permissible. While that case is pending on appeal to the Kentucky Court of Appeals, it does point the way to how a court might interpret the present question before us.
In Melton v. Round Table Restaurants, Inc., 67 Labor Cases, par. 32,630 [U.S. District Court, North District Georgia, 1971], the Court was called upon to consider what portion of credit card tips could be credited against the required federal minimum wage. While the Court was not considering the rate of discount question, there appears this language:
The mere fact that the credit card tips passed through the hands of the employer did not change their characteristic as property already belonging to the employee. (Emphasis supplied.)
Of course, under federal law, where the tipped employee has been paid his tip in cash by the employer and the credit card company has refused to honor the credit card, the employer can recover the prepaid tip from the employee. But, Kentucky law forbids such recoupment.
KRS 337.060(2) forbids the employer from deducting fines, cash shortages in a common till, etc., used by two or more persons, breakages, or losses due to acceptance by an employee of dishonored checks (if the employee is given discretion to accept or reject any check), or losses due to "default of customer credit," unless such is the result of the employee's willful disregard of his employer's interest.
The relationship of the credit card company or bank and the restaurant owner is a contractual one in which the tipped employee is not a contracting party. The employee has no "say-so" or control over its terms or conditions.
When the customer writes on a credit card form a tip for $3, he intends to give that employee $3, not $3 less a discount rate for which the employee did not contract. The fact that the tip is allowed to be placed on the credit card form, again, is a contractual agreement between two parties -- the credit card company and the restaurant owner. The tip belongs to the tipped employee at the moment the customer assigns that portion of the credit card purchase to a tip. The restaurant owner does not have a right to it, pursuant to KRS 337.065 and pursuant to KRS 337.060, even if the credit card company refuses to honor the entire specific credit card purchase, including tip, that loss must ultimately be borne by the restaurant owner, and not his employee, in the absence of the employee's "willful or intentional disregard of [the] employer's interest." (KRS 337.060(2)(e)). By allowing the tip to be charged on the credit card, the employer becomes a bailee to the employee of the tip assigned by the customer. He cannot reduce the amount of the tip because the employer has chosen to allow the payment of discount on credit card transactions in return for more certain recovery of charge transactions.
If the restaurant owner wishes to reduce that part of the expense of credit card discount assignable to tips, he should inform the customer that tips cannot be charged on the credit card.
CONCLUSION
Reducing the amount of tip charged on a credit card by the discount rate which a restaurant owner and a credit card company have negotiated is a violation of KRS 337.065 and, in effect, is remittance of a portion of a gratuity to the employer, even though the employer may assign that portion to a credit card company to cover part of his expense of discounting credit card transactions.