Tipping the Balance

As a barista at a Starbucks in La Jolla, Calif., Jou Chou counted on tips as a vital part of his compensation. But every time a customer put his change in the tip jar, Chou felt he was getting shortchanged. The coffee giant has a companywide policy of pooling tips between service employees. That means the money customers put in tip jars doesn't go directly into workers' pockets at the end of their shifts, but rather gets put away and distributed proportionally to store employees based on the number of hours they worked in a given week.

Among the employees included in Starbucks' tip pools are shift supervisors--a category of employees who make and serve coffee, but also manage the store and assign tasks to other workers. Chou sued Starbucks in 2006, alleging that the policy violated California law. In March, a California Superior Court Judge ordered the coffee chain to pay a class of 120,000 former baristas $105 million in withheld tips and interest.

In a matter of weeks, baristas in Massachusetts, Minnesota and New York filed proposed class actions against Starbucks arguing that the tip-sharing policies violated laws in those states as well.

The suits highlight a vulnerability that any company whose employees are partially compensated by tips faces. State wage-and-hour laws present a minefield of different regulations about how employers compensate tipped employees. And the huge Starbucks judgment will likely spur the plaintiffs' bar to look for deep-pocket violators.

"We saw a sudden uptick in tip-pooling lawsuits when the Starbucks class was certified in 2006, and it wouldn't surprise me to see another one now," says Nancy Berner, an attorney at Carlton DiSante & Freudenberger in San Francisco.


Pooling Problems
California's Labor Code provides that all gratuities are the sole property of employees and prohibits owners or agents of the company from participating in tip pools. In Chou, the California court found that although the shift managers also act as baristas--serving coffee to customers along with regular employees--because they have some managerial authority, they are "agents" of the company under California law. Starbucks takes serious issue with that interpretation and, in a press release that vows a vigorous appeal, calls the decision "beyond all common sense and reason."

The reading of the California statute will likely take many employers off guard. The perceived purpose of laws regulating tip pooling is to prevent company owners or managerial employees from taking tips away from the people engaged in customer service. But the California court's decision that shift supervisors are "agents" creates a whole new gray area of semimanagerial workers who regularly receive tips.

Adding to the difficulty is the fact that more than 15 states have different laws that regulate whether and how employers operate tip pools.

Most of these laws include a provision similar to the one that ensnared Starbucks--the employer can't take tip money intended for employees.

But some states, such as Minnesota, New Hampshire and Kentucky, go a step further, prohibiting mandatory tip pools. A class action filed March 26 in Minnesota state court accuses Starbucks of violating that provision.

"In Minnesota, if employees decide to share tips with each other, that
decision must be made independently of the employer's influence," says E. Michelle Drake, who represents Minnesota baristas in their proposed class action.

Other state laws offer variations on these themes. Several states, such as Delaware and Massachusetts, prohibit employers from requiring tipped employees to share their tips with staff who do not customarily receive tips, including cooks, busboys or sometimes bartenders.


Federal Perspective
Federal law also regulates how employers compensate tipped employees. In general, federal law is friendlier to employers than state regulations.

For example, one benefit bestowed by federal law is that employers can credit some of the tips employees receive against the minimum wages they are required to pay. (Albeit certain states, such as Alaska and Minnesota, prohibit that practice.) But federal law can be a sword for plaintiffs as well.

On April 22, yet another group of Starbucks employees filed a proposed federal class action in the Southern District of New York alleging that the company's policy of withholding tips until the end of the workweek violates the Fair Labor Standards Act by denying employees the benefit of money that is rightfully theirs. A federal suit about tip credits brought by an Applebees' bartender is also pending in Missouri.

"It's becoming an increasingly difficult risk for employers to manage," says Alan Pittler, a partner at Buchanan Ingersoll & Rooney. "Employees can fall on both sides of the line--nonexempt under the FLSA, an agent of the company under California law. It forces employers to look at each worker case-by-case, law-by-law."

Still, despite the emergence of some federal suits by service workers, experts expect most tip-pooling suits to arise under state laws because they generally provide harsher penalties and have somewhat more lenient rules for certifying class actions.


Avoiding Trouble
In light of the growth in tip-pooling lawsuits, many employers are reconsidering whether it makes sense to have tip pools at all. At the very least, employers should take the litigation as a sign that it's time to audit their practices and re-evaluate their liabilities under the laws of each state in which they operate.

"Employers have to balance the litigation risks with what makes good business sense," Berner says.

For those employers who do continue to operate tip pools for service employees, employment attorneys point to a few vital steps that can go a long way toward preventing suits: ensuring that no employee is ever required to give up more than 15 percent of the tips he earns; preventing anyone who is even arguably a supervisor from sharing in a tip pool; and ensuring that only those employees who regularly and customarily receive tips share in gratuities.

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