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April 23, 2014

New York State Court of Appeals Backs Starbucks Policy on Tip-Pooling

Starbucks shift supervisors can legally participate in tip-sharing with other store employees, but the coffee chain’s assistant managers have enough managerial responsibility to disqualify them from sharing in customer tips, according to the New York State Court of Appeals.

Starbucks’ policy provides for weekly distribution of gratuities to the company’s two lower ranking categories of employees, baristas and shift supervisors, but not to its two higher ranking categories of employees, assistant managers and store managers. In addressing questions certified by the Second Circuit regarding the validity this policy, the Court of Appeals concluded that since shift supervisors, like baristas, directly serve patrons, they remain tip-pool eligible even if their role also involves some supervisory responsibility. But assistant managers, because they are granted “meaningful authority” over subordinates, are not eligible to participate in the tip pool.

The decision provides guidance to the Second Circuit as it hears appeals of two suits, Barenboim et al. v. Starbucks Corporation, No. 10–4912–cv, and Winans et al. v. Starbucks Corporation, No. 11–3199–cv, each brought by a different putative class of Starbucks workers. The plaintiffs in Barenboimare Starbucks baristas who argue that only baristas, and not shift supervisors, are entitled to participate in tip-sharing. The Winans plaintiffs are assistant managers who claim that they should be allowed a share of the tips. In both cases, the Southern District of New York awarded summary judgment to Starbucks, and the plaintiffs appealed. The Second Circuit certified questions to the New York Court of Appeals regarding the interpretation of New York Labor Law §196-d, which governs tip-pooling.

Shift Supervisors Are Not Company “Agents”

New York Labor Law §196-d prohibits an “employer or his agent or an officer or agent of any corporation, or any other person” from accepting or retaining any part of the gratuities received by an employee. It also states, “Nothing in this subdivision shall be construed as affecting the… sharing of tips by a waiter with a busboy or similar employee.”

According to the plaintiff baristas in Barenboim, Starbucks’ policy of including shift supervisors in the stores’ tip pools violates §196-d because the shift supervisors are company “agents” and therefore not permitted to “demand or accept, directly or indirectly, any part of the gratuities, received by an employee.” Starbucks argues that shift supervisors are sufficiently analogous to waiters, busboys and similar employees, and should therefore be permitted to share in the gratuities pursuant to §196-d.

The Court of Appeals, in deciding that shift supervisors are entitled to share in the tip pool, deferred to the New York State Department of Labor’s (“DOL”) long-standing view that “employees who regularly provide direct service to patrons remain tip-pool eligible even if they exercise a limited degree of supervisory responsibility.” The Court compared the shift supervisors to restaurant captains who have some authority over wait staff, but are nonetheless eligible to participate in tip pools pursuant to the DOL’s Hospitality Industry Wage Order and DOL guidelines dating back to 1972.

“Meaningful Authority” Standard

In Winans, the Starbucks assistant store managers argue that they should be deemed similar to waiters and busboys under §196-d (and therefore eligible for tip-sharing) because they do not have full or final authority to terminate subordinates. The Court of Appeals disagreed: “[W]e believe that there comes a point at which the degree of managerial responsibility becomes so substantial that the individual can no longer fairly be characterized as an employee similar to general wait staff within the meaning of Labor Law §196-d.” That line is drawn, according to the decision, at “meaningful or significant authority or control over subordinates.”

Examples of meaningful authority, according to the decision, are the ability to discipline subordinates, the authority to hire and terminate employees, and input into the creation of employee work schedules. Contrary to the plaintiffs’ claim, authority to hire and fire is not the exclusive test for determining whether an employee is similar to wait staff for the purposes of §196-d.

Tip-Sharing Required?

In addition to the question of which employees are eligible for tip-sharing, the Second Circuit asked the Court of Appeals to consider whether an employer may deny tip pool distributions to an employee who is eligible to split tips under §196-d. The Court held that §196-d excludes certain employees from tip pools, but does not require employers to include all employees who are not legally barred from participating.

Conclusion

The Court of Appeals decision provides specific guidance to the Second Circuit Court of Appeals in connection with the two Starbucks cases pending on appeal, but it also provides helpful clarity to any employers with tip-sharing policies. In particular, the decision confirms that employees who regularly provide direct service to patrons may still participate in tip-sharing, but are not required to do so, even if they exercise a limited degree of supervisory responsibility. On the other hand, employees with meaningful authority over subordinates are not eligible to participate in tip-sharing. Employers should carefully review their tip-sharing policies in light of this guidance from the Court of Appeals.

Copyright © 2014, Sheppard Mullin Richter & Hampton LLP.

About the Author

Shira Forman, Labor Law Attorney, Sheppard Mullin Law Firm
Associate

Shira Forman is an associate in the Labor and Employment Practice Group in the firm's New York office.

Ms. Forman focuses her practice on the full spectrum of labor and employment disputes in areas including breach of contract, breach of fiduciary duty, wrongful termination, retaliation, wage and hour claims, and claims of discrimination based on disability, sex, pregnancy, age, race, and national origin.

She also advises employers on day-to-day personnel matters, including hiring and separations, performance management, wage and hour compliance, drafting employee...

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