Restaurant May Take From Tips on Credit Cards

A Superior Court judge ruled this week that an Orange County-based restaurant company acted within the law when it withheld a portion of credit card tips from food servers and cocktail waitresses in order to pay for service charges on the cards.

Anaheim-based Specialty Restaurants Corp., which runs the Orange Hill restaurant in Orange and approximately 60 high-end restaurants nationwide, was sued by the California Division of Labor Standards Enforcement. The agency argued that the company’s longtime practice violated a state law forbidding an employer from taking any part of an employee’s tip.

But Judge Frederick P. Horn sided with the restaurant company saying there was nothing in the state labor code to convince him that the practice was illegal.

The state, which has issued several citations to the company over the years in an unsuccessful move to halt the practice, is expected to appeal the judge’s decision, which came Thursday during a brief hearing in Orange County Superior Court.

An attorney for the restaurant company said Friday that the practice is legal in other states and predicted that other California restaurants may now follow Specialty’s lead.

“I think some companies may be starting to realize that they may be entitled to do this,” said Ashley Baron, the in-house attorney for Specialty. “I’ve had several companies call me to discuss the rulings.”

But Miles Locker, chief counsel for the state labor commissioner, said an appellate court will likely have the final word.

“I wouldn’t hang my hat on one trial-court decision,” Locker said. “The credit card charges are made by the company against the employer, not the employee.”

Horn must first issue a written ruling in the case before the state can file an appeal.

Locker also said other restaurants in the state rarely take credit card fees out of tips.

The lawsuit, filed in May, was based on approximately $7,300 in credit card fees deducted from employees’ tips at The Castaway restaurant in Burbank over 1 1/2 years.

The lawsuit sought the $7,300 in damages as well as an injunction preventing the restaurant from deducting tip money in the future.

Baron said the credit card fees range from 1.69% to 2.8% of a bill paid by credit card, so a $10 tip would increase the fees by 17 to 28 cents.

She said this ends up costing the company approximately $70,000 a year in fees for their 12 restaurants in California, most of which are in Los Angeles County.

“If we didn’t do it this way, we would take the money out of somewhere else and it would be passed on to the customer,” Baron said. “Unfortunately, the customer already pays enough for a nice meal.”

Baron said the restaurant pays the bulk of the credit card fee and that the employee’s portion only comes out of the tip.

She suggests that diners who pay with a credit card leave a cash tip “so the employee gets everything they intend.”