Starbucks Buries Its Head In The Sand And Gets Kicked In The Rear As A Result

May 2008

By Randall Leff

Under California law, tip-pooling arrangements are legal so long as no owners, managers or other “agents” of the owner share in the tips. An employer“agent” is every person having authority to hire or discharge any employee or supervise,direct or control the acts of employees. The California Division of Labor Standards Enforcement, the agency authorized to enforce California wage and hour laws, has determined that, in the tip-pooling context, an agentincludes “any managers or supervisors who have the authority to either hire, fire, discipline, assign work, schedule shifts, set wages, or adjust employee grievances.” No doubt a company the size of Starbucks would know this, right? If it did, it kept its head in the sand about it and got kicked in the rear as a result.

Under Starbucks’ system, there is a tip jar at each of its locations and, at the end of each shift, all of the employees, including the shift supervisors, split up the money in the jar. This is a classic tip-pooling arrangement. Jou Chou, a Starbucks barista from 2003-2004, filed a lawsuit complaining that he did not think it was fair to have to share tips with shift supervisors, stating “Tips really help those receiving the lowest wages. I think Starbucks should pay shift supervisors higher wages instead of making money from the tip-pool.” Mr. Chou claimed that supervisors should not be allowed to share in the tip-pool because they have the authority to hire, fire, supervise or direct other workers and have an impact on compensation decisions, and sought an order requiring Starbucks to repay to California baristas all of the money that was removed from their tip jars to pay the shift supervisors. At trial, the plaintiff ’s experts presented evidence that Starbucks’ shift supervisors received an average of $1.71 per hour from the tip jars and that they worked more than 50 million hours during the time period covered by the lawsuit.

The primary issue in the Starbucks case was whether shift supervisors are considered Starbucks’ “agents” for the purpose of sharing in tip-pool revenues. Starbucks argued that its shift supervisors were not really managers or supervisors under the law, since they performed many of the same tasks as the baristas. However, in the 2003 case of Jamson v. Five Feet Rest, the California Court of Appeal held that the tippooling laws do not require that the individuals spend all, or even the majority, of their time performing managerial or supervisorial duties to be considered agents. The Jamson court held that if the individual performs these functions on behalf of the employer, his/her other duties are “irrelevant”.

It is therefore not surprising that the judge in the Starbucks case found that the shift supervisors were “agents” of the Company and that they were not allowed to share in tips. The Judge ordered that the Company pay $86.6 million in back tips plus interest (plaintiff ’s estimate is that interest will be in excess of $19.1 million). What is surprising is Starbucks’ reaction to this ruling, which labeled the ruling as “not only contrary to law, it is fundamentally unfair and beyond all common sense and reason.” While the fairness or reasonableness of California wage and hour laws is debatable, these are issues that are beside the point—it is more important for California restaurant owners and other employers to understand the current state of the law so that they can make appropriate business decisions. The lessons to be learned from the Starbucks case are clear. First, California employers cannot afford to ignore California wage and hour laws. They must be concerned about the potential of wage and hour claims long before an employee submits a complaint. Second, if you own and operate a restaurant, you must reexamine your tip-pooling arrangement. We believe that this ruling will spawn a whole new wave of tip-pooling cases throughout the State of California and potentially throughout the United States. When examining your tip-pooling arrangement, you will want to consider the following:

1. No one should be allowed to participate in the tip-pooling arrangement who has the authority to hire, fire, discipline, assign work, schedule shifts, set wages or adjust employee grievances;
2. The only individuals who should be allowed to participate in the arrangement should be those employees who customarily and regularly receive tips pursuant to industry custom (these individuals do not include employees such as kitchen workers who do not have direct contact with guests);
3. Make sure that tips are distributed to participating employees in a manner which is consistent with their contribution to the guests’ service; and
4. If you have any questions regarding the legality of the tip-pooling agreement, discuss them with your legal counsel.

2008 Seminars at ECJ

May 21:          Managing Medical Leaves for CA Employers
May 21:          Sexual Harassment and Prevention Training
August 20:      Successful Terminations
December 3:    Creative Dispute Resolution
December 3:    Sexual Harassment and Prevention Training

Did you know . . .

California has updated two pamphlets that employers are required to distribute to employees? The Employment
Development Department’s Paid Family Leave (DE 2511) and State Disability Insurance (DE 2515) pamphlets
have been updated for 2008!
Both documents are available from the EDD website in various languages at www.edd.ca.gov.

If you have any questions regarding this bulletin, please contact Kelly O. Scott, Editor of this publication and Head of ECJ’s Employment Law Department at (310) 281-6348 or kscott@ecjlaw.com ; or Randall S. Leff at (310) 281-6336 or rleff@ecjlaw.com. If one of your colleagues would like to be a part of the Employment Law Reporter mailing list, or if you would like to receive copies electronically, please contact Brandi Franzman at (310) 273-6333 x570 or bfranzman@ecjlaw.com.