In the employment law wage and hour niche, there are few actions more risky than the tip credit system. If you are unfamiliar with the tip credit system, the general rule is that tips do not belong to employers, they are the personal property of the employee. According to the Fair Labor Standards Act, employers can legally pay an employee that receives tips less than minimum wage, provided the employee receives enough in tips to account for the difference.

The tip credit system is loaded with potential legal issues for employers. For example, if employees do not receive sufficient tips to accommodate the difference between his or her direct wage and the minimum wage, the employer is required to pay the employee the difference. Further, when an employer requires a tipped employee to contribute his or her tips to a “tip pool” that includes employees who do not typically receive tips, the employer owes all the tips the employee submitted to the “tip pool” and the full minimum wage compensation.

The Fifth Circuit Court of Appeals recently affirmed another legal issue for employers that use the tip credit system. In Steele v. Leasing Enterprises, Ltd., Case No. 15-20139 (5th Cir. 2016), Perry’s restaurant in Texas compensated the wait staff that received tips from customers $2.13 per hour base pay, which is allowable under 29 U.S.C. § 203(m) and C.F.R. §§ 531.52, 531.59. When customers used a credit card to pay and tip, Perry’s restaurant kept 3.25 percent of the tip to make up for the credit card transaction fee and the costs of collecting and disbursing tips. This practice is not unusual; credit card processing companies charge businesses for the ability to allow customers to pay using their credit cards. Perry’s attempt to offset the cost of the fee by retaining 3.25 percent of all tips paid by credit card.

Unfortunately for Perry’s, the offset was always more than the direct expense of converting tips paid by credit to cash. The district court certified a class of wait staff that were employed from 2007 through October of 2010. The lower court also certified a second class of employees that receive tips as part of their compensation from December 2010 through January of 2013.

The opinion of the court stated, “Perry’s has not pointed to any additional expenses that are the direct and unavoidable consequence of accepting credit card tips,” and since the offset “always exceeded the direct costs required to convert credit card tips to cash,” the court found that the 3.25 percent offset was in violation of section 203(m) of the Fair Labor Standards Act. The punishment for such a violation is severe, and as such Perry’s restaurant chain “must be divested of its statutory tip credit for the relevant time period.”

Under the law, employers are not permitted to offset their obligations. The punishment for doing so can be costly. If you work as a tipped employee and you believe your employer is unlawfully taking part the tips you rightfully earn, it is wise to contact an employment law attorney that is familiar with such practices. You may be entitled to compensation.

Aiman-Smith & Marcy is a class action employment law firm located in Oakland, California that provides free consultations to employees that have been subjected to unlawful employment practices.