If you own a restaurant, salon, or bar in California and you've ever knocked a few cents off a server's credit card tip to cover the swipe fee, you need to stop — and you need to fix your books before January 1, 2026. That's when Senate Bill 648 hands the California Labor Commissioner direct authority to cite and fine employers over exactly this practice.
Here's the twist that catches most owners off guard: deducting credit card processing fees from tips was never actually legal in California. Labor Code Section 351 has banned it for years. What changes on January 1 isn't the rule — it's who enforces it, and how fast. Before SB 648, an employee who got shorted had to file a civil lawsuit or a wage claim and wait. Now the Labor Commissioner can investigate on their own initiative, issue citations, and levy civil penalties using the same streamlined process already used for wage-and-hour violations. For a small business, that's the difference between a slow-moving lawsuit you might never see and a labor department auditor showing up with a checklist.
What SB 648 Actually Changes
Governor Newsom signed SB 648 on July 30, 2025, and it takes effect January 1, 2026. The bill amends the Labor Code to strengthen — not create — the existing prohibition on tip skimming. Three things are new:
- Direct enforcement authority. The Labor Commissioner can now investigate gratuity violations and issue citations and civil penalties without the employee needing to sue first.
- Explicit civil penalties. Employers who withhold or deduct from tips face fines of $250 per violation, rising to $1,000 for willful violations — on top of repaying the withheld gratuities, plus possible interest and attorney's fees.
- Mandatory recordkeeping. Employers must maintain accurate records of all gratuities received and make them available to the Department of Industrial Relations on request.
The underlying rule stays the same as it's always been: if a customer tips on a credit card, the employee gets the full amount shown on the slip — no deduction for the 2–3% the card network charges the business to process that transaction. And the tip has to hit the employee's pay no later than the next regular payday after the customer authorized the charge. You can't hold it for a "settlement period" that stretches past that.
Why So Many Businesses Got This Wrong
The processing-fee deduction is one of the most common tip-handling mistakes in the industry, and it usually isn't malicious — it's a spreadsheet habit. A restaurant processes $10,000 in card tips for a pay period, the merchant statement shows a 2.9% blended processing rate, and someone in the back office nets that fee out before splitting tips among the floor staff. It "feels" fair, since the business really is paying that fee to Visa or Square. But California law has always treated the tip as the employee's property in full, the moment the customer authorizes it — the processing cost is a cost of doing business, not a cost you're allowed to pass through to the person who earned the tip.
This is exactly the kind of rule that hides inside payroll and POS settings rather than in your accounting software, which is why it slips through. Your point-of-sale system nets out fees before the tip pool report ever reaches whoever runs payroll, and nobody downstream sees the raw, pre-fee number to double-check it.
What to Fix Before January 1
1. Audit your current tip-out calculation. Pull your POS settlement reports and your payroll tip disbursements side by side for the last two or three pay periods. If the total tips paid to employees is less than the total tips authorized on credit card slips, you have a problem — and, under SB 648, a paper trail the Labor Commissioner can request.
2. Check your POS and merchant processor configuration. Many systems (Toast, Square, Clover) have a setting that automatically nets a "service fee" or "processing fee" out of tip totals before they land in reporting. Turn it off, or if it can't be turned off at the settlement level, make sure it's reversed before payroll calculates tip-outs.
3. Separate the processing fee as its own bookkeeping line. Don't net it against tips at all. In a plain-text or double-entry ledger, that looks like:
2026-01-15 * "Credit card tips - Friday dinner service"
Liabilities:TipsPayable:Staff -450.00 USD
Assets:Checking:MerchantSettlement 450.00 USD
2026-01-15 * "Card processing fee - dinner batch"
Expenses:MerchantFees 13.05 USD
Assets:Checking:MerchantSettlement -13.05 USDThe processing fee is a business expense, full stop — it never touches the tips-payable liability. Structuring your chart of accounts this way makes the separation self-enforcing: there's no account where a bookkeeper could plausibly net one against the other, because they're different transactions on different lines.
4. Confirm payday timing. "Next regular payday after authorization" is the standard — not "next payday after the batch settles" or "next payday after the credit card company deposits funds." If your merchant processor takes three business days to fund your account and your pay period cuts off before that, you need a tip accrual, not a wait-and-see approach.
5. Retain records. Keep gratuity records — POS reports, tip pool calculations, payroll registers — for at least the period the Labor Commissioner could reasonably audit. Three years is a safe baseline for California wage-and-hour records generally.
Who This Applies To
SB 648 covers any California business where employees receive tips: restaurants, bars, coffee shops, salons and spas, valet services, and the wage orders specifically call out establishments employing dancers. If your business model includes a tip line on the receipt or a tip jar by the register, this law reaches you — regardless of whether you're a five-location group or a single storefront.
Three Scenarios That Now Carry Real Risk
The "gross-up" spreadsheet. A salon owner tallies weekly card tips, subtracts the merchant statement's processing total, and divides the remainder among stylists. Even if every stylist agrees it "seems fair," this is a per-paycheck violation — $250 the first time, $1,000 if the Labor Commissioner decides it was willful (and a documented, repeated pattern across pay periods reads as willful).
The delayed settlement. A bar's payment processor batches and funds three business days after a Friday night shift. If payroll waits for that cash to land before including it in the next paycheck, and the next regular payday falls before the funds settle, the bar has still missed the "next regular payday after authorization" deadline — the fix is to accrue the liability the night the tip is authorized, not the day the merchant account is funded.
The "we'll true it up later" habit. A multi-location restaurant group nets processing fees out of tips at the location level, then reconciles at month-end to make sure the totals look right on paper. SB 648's recordkeeping requirement means the Labor Commissioner isn't just checking your final numbers — they can ask for the underlying gratuity records, and a month of interim under-payment is itself the violation, regardless of a later true-up.
Frequently Asked Questions
Does SB 648 apply to cash tips too? The processing-fee ban is specific to card-based gratuities, since cash tips have no processing cost to deduct. But the recordkeeping requirement covers all gratuities received, cash included, so your tip records should track both.
Can we still charge customers a card-processing surcharge? Yes — surcharging customers for using a card (subject to California's separate surcharge disclosure rules) is a different question from whether you can deduct fees from employee tips. Don't conflate the two: a customer-facing surcharge is allowed if disclosed properly; taking it out of the tip pool is not.
What if our POS vendor's default settings caused the deduction? The law doesn't carve out an exception for vendor defaults. If your Toast, Square, or Clover configuration has been netting fees out of tip totals without your knowledge, that's still a violation once discovered — which is exactly why the audit step above matters before January 1, not after a citation arrives.
Does this only apply to large chains? No. SB 648 and the underlying Labor Code 351 protections apply to any California employer with tipped staff, from a single-owner nail salon to a multi-state restaurant group. Enforcement resources tend to focus where complaints originate, but the obligation is universal.
Getting the Bookkeeping Right From the Start
Tip handling is one of those areas where sloppy records don't just create a compliance risk — they make it hard to answer basic questions about your own labor costs, like whether your effective service charge is competitive or whether a location's tip pool structure is actually working for retention. Clean, auditable records solve both problems at once: they're the same records that satisfy a Labor Commissioner request and the same records that tell you whether your tip-out policy is fair.
This is where plain-text accounting has a real edge over black-box POS reporting. When every dollar of tips and every processing fee is a line in a version-controlled ledger, "did we ever deduct a fee from an employee's tip" isn't a mystery you have to reconstruct from settlement PDFs — it's a query. Beancount.io gives small businesses that same plain-text, fully auditable structure, so a payroll audit — whether from a curious owner or the Labor Commissioner — takes minutes instead of days. Get started for free and see how much easier tip compliance gets when your books are transparent by design.