California Court of Appeal: Starbucks Supervisors Allowed to Share in Employees' Tips
Employment Law Alert
In a significant victory for the hospitality industry, a California Court of Appeal, in Chau v. Starbucks Corporation, reversed last year's $104 million class action judgment against Starbucks, concluding that shift supervisors are as entitled as entry-level baristas to share in collective tip jars. Because shift supervisors primarily perform the same tasks as entry-level baristas and often work in teams, their additional managerial duties do not preclude supervisors from being included in tip-pooling arrangements. Other California employers with similar tip-sharing agreements should look to this decision for guidance but remain cognizant that the California Supreme Court has not yet ruled on this issue.
California Labor Code section 351 prohibits employers and their "agents" from collecting, appropriating or receiving any portion of gratuities intended for employees. Section 350(d) of the Labor Code defines "agent" as any person other than the employer having the authority to hire or fire, supervise, direct or control the acts of employees. Additionally, California Business & Professions Code section 17200 of California's Unfair Competition Law prohibits business practices that are "unlawful," "unfair" and "fraudulent" while also outlawing "unfair, deceptive, untrue or misleading advertising."
In March 2004, former Starbucks barista Jou Chau filed a class action in San Diego Superior Court against the national coffee shop chain. The initial suit alleged that shift supervisors -- responsible for performing all the duties of baristas in addition to supervisory tasks such as opening and closing the store, depositing money into the safe and operating the register -- should be classified as "agents" of Starbucks. Plaintiffs alleged that Starbucks' policy and practice of calculating and distributing portions of the tips collected in tip boxes to both baristas and shift supervisors constituted a prima facie violation of the California Labor Code and the California Unfair Competition Law.
In March 2008, the lower court concluded after trial that despite shift supervisors' typical presence behind the counter, shift supervisors were indeed "agents" of their employer and therefore prohibited from receiving a share of tips from the tip pool. In addition to granting the requested injunction halting the tip-sharing practice, the lower court also awarded the class of current and former baristas $86 million in restitution of all tips paid to shift supervisors since October 2000, plus 7 percent prejudgment interest, amounting to more than $104 million. During the recent economic downturn, this substantial damages award could have significantly weakened the already struggling coffee chain, and was encouraging similar claims against other Californian companies.
However, on June 2, 2009, the Court of Appeal, District Four, reversed the trial court's decision on several important grounds:
Mandatory Tip-Pooling v. Equitable Allocation of Collective Tips. The Court of Appeal ruled that the trial court erred in finding that Starbucks' equitable tip-allocation policy violated California law. While the Court recognized that it is unlawful for employers to require that tips given directly to an individual service employee be shared with shift supervisors, the Court asserted that Starbucks' policy merely concerned the distribution of collective funds intended for the entire team of service providers, including shift supervisors. Because neither the California Labor Code nor the Unfair Competition Law explicitly bar the equitable distribution of earned gratuities among all service providers, no valid section 351 violation existed.
Section 351 Does Not Bar Employee-Agents from Tip-Sharing Arrangements. The Court also expressed some disagreement with the lower court's finding that shift supervisors were actually "agents" rather than merely service employees like baristas, or at best, some hybrid of both. The Court considered testimony by Starbucks executives showing that supervisors spend 90 percent-95 percent of their time performing the same jobs as entry-level baristas, lack any authority to hire/fire, and are not officially considered part of "management."
Leaving the "agent"/ "employee" distinction aside, the Court noted that the express language of the statute fails to dictate that an employee, regardless of whether he/she is also an agent, cannot keep his/her own tip. There is no legal authority prohibiting an employer from allowing a service employee to keep a portion of the collective tip, in proportion to the amount of hours worked, merely because the employee also has limited supervisory duties, the Court concluded.
Instead, the Court recognized that emphasis should be upon the legislative intent and public policy rationales underlying the California labor statutes. Specifically, the intentions of the tipping public must be respected and all employees must be allowed to retain their rightful earnings. The Court reasoned that by placing a tip in a collective tipping-box, the public intended that the funds be distributed to all service providers involved in the preceding transaction, including shift supervisors.
Bottom Line: Employers Must Still Guard Against Improper Tip-Pooling
Employers are increasingly subject to litigation under the wage and hour provisions of both federal and state law, including minimum wage, overtime pay, and equal pay requirements. The initial Chau judgment called into question many traditional food service and hospitality industry practices, involved several years of litigation, and put a considerable amount of Starbucks' capital at risk. Chau has now vowed to seek review from the California Supreme Court. Starbucks will face this appeal as well as public relations challenges and the threat of similar litigation in other states. In the meantime, other California employers with tip-sharing arrangements should review their compensation policies to ensure that, as at Starbucks, all employees understand and consent to both the method and justification for distributing collective tips among all service providers.