Article – The Starbucks Litigation: Who Gets to Share in Tip Pools? by James Versocki

Wage practices of restaurants, especially involving the allocation and sharing of gratuities, have become a constant source of litigation due to confusion over who can participate in a tip pool. Tip pooling is the practice where food-service employees pool their tips and then share in the aggregated tips amongst certain tip eligible staff.[i] Current litigation on tip pooling stems from attempts to interpret Labor Law § 196-d, which provides that no employer or their agent may retain any portion of a customer gratuity or a charge purported to be a gratuity. Efforts to delineate which staff may or may not participate in tip pooling and tip sharing arrangements has become a difficult question as the implications to owners (through heightened employee lawsuits and Department of Labor audits) and workers (who receive less income when improper staff members participate in tip pools) have increased dramatically with the explosion of wage-and-hour litigation in the hospitality world.

[i] See 12 NYCRR § 146-2.14(b)

The confusion over who can or cannot participate in a tip pool has received heightened scrutiny after the issuance of the New York State Department of Labor Hospitality Wage Order.[1] The Wage Order re-codified two prior Department of Labor Wage Orders and specifically addressed tip pooling arrangements in the hospitality industry, including a first-time provision that allowed employers to mandate tip pooling in their establishments.[2] The Wage Order specifically stated that any employee’s ability to participate in a tip pool under Labor Law § 196-d would be based on an employee’s duties and not titles.[3]

The first major case to address Labor Law § 196-d – post the issuance of the new Hospitality Wage Order – came from two cases filed in the Southern District of New York against Starbucks.[4] Dubbed the Starbucks litigation in the wage-and-hour world, these closely watched cases stemmed from two separate litigations filed on behalf of two different groups of employees. In the Barenboim litigation, the baristas of Starbucks who challenged the right of shift supervisors to participate in the tip pool. The Winans case involved the claims of assistant store managers – salaried staff who worked side by side with the baristas serving customers but who were salaried employees with supervisory tasks – who wanted to also share in the tip pool. Starbucks policy allowed shift supervisors to share in the tip pool but prohibited assistant store managers from participating in that same pool. The case garnered substantial interest from the hospitality industry as numerous amicus briefs were filed, including briefs from the New York State Restaurant Association and UNITE-HERE 100.

The issue in both cases was how the tip jar at the cash register was to be shared. In Barenboim, the baristas argued assistant shift managers’ participation in the tip pool was not in conformity with Labor Law § 196-d. The baristas argued the assistant shift mangers were akin to supervisors who were ineligible to participate in the tip pool as they exercised too much authority and had to be considered agents of the employer under the mandates of Labor Law 196-d. Conversely, in the Winans case, the assistant store managers argued they could not be excluded from the tip pool and were eligible to participate in it because of the substantial direct service they provided to customers.

Facing these issues, the U.S. Court of Appeals for the Second Circuit certified relevant state law issues to the New York Court of Appeals, to obtain guidance on the interpretation of Labor Law § 196-d.[5]

In June 2013, the New York Court of Appeals allowed assistant shift supervisors to participate in the tip pool finding that “an employee whose personal service to patrons is a principal or regular part of his or her duties may participate in an employer-mandated tip allocation arrangement . . . even if that employee possesses limited supervisory responsibilities.”[6] The Court provided further guidance that access to a tip pool would be denied to employees with “meaningful authority” over subordinates.[7] Meaningful authority would include control over other employees that “might include the ability to discipline subordinates, assist in performance evaluations or participate in the process of hiring or terminating employees, as well as having input in the creation of employee work schedules, thereby directly influencing the number and timing of hours worked by staff as well as their compensation.”[8]

The New York Court of Appeals also held that employers might be able to exclude otherwise eligible employees from a tip pool, but the Court found there would be limits to such exclusion, presumably based on equity arguments where, for example, all tips were given to one employee to the detriment of other tip eligible food service staff.[9]

By decision dated November 21, 2013, the Second Circuit applied the New York Court of Appeals guidance and upheld the District Court’s earlier dismissal of the plaintiffs’ claims in Barenboim.[10] The Second Circuit held that assistant shift supervisors spent the majority of their time performing the same work as baristas and that their supervisory work did not rise to the level of a true supervisor, which would deny them access to customer tips under Labor Law § 196-d.

The Second Circuit’s decision provides a much clearer picture of the types of supervisory functions employees may be tasked with and still participate in a tip pool arrangement. Under the Second Circuit decision, Starbucks shift supervisors could assign baristas to particular positions during their shifts, administer break periods, direct the flow of customers, provide feedback to baristas about their performance, open and close stores, change the cash register tills, and deposit money in the bank.[11]

But the Second Circuit’s decision should not be considered an open door to supervisor participation in tip pools, particularly because it was issued as a “Summary Order” and it therefore carries no mandatory precedential effect. Regardless, the decision provides a relatively easy roadmap for employers and employees to follow when analyzing who should be in a tip pool.

Employees with “limited” supervisory functions who share in tips must have principal responsibilities that involve providing “personal service to patrons” (i.e. they must spend a majority of their time working to earn customer tips).[12] Supervisory functions that would likely remove an employee from a tip pool would include the ability to discipline employees or having input into employee schedules (where employees could presumably impact the tips of other employees by scheduling low-tipping shifts) or break times.

Luckily for Starbucks, they paid all employees an hourly rate at or above the minimum wage and did not take a tip credit for their employees. The stakes of this litigation would have been even higher had the employees been seeking to invalidate the use of the hourly tip credit that many hospitality employers can take against tipped employees’ wages when tipped food service workers receive tips.[13]

Though Starbucks operations may seem far removed from the operation of a typical restaurant, the impact of the Starbucks litigation will be profound on the tip pooling practices for the hospitality industry. For example, many hospitality operations will include service captains in tip pools as they will argue such employees are akin to the Starbucks shift supervisors whose primary responsibilities are food service to patrons.

While the Starbucks litigation has provided helpful guidance to the hospitality industry and employees on tip pooling practices, the highly fact-specific analysis of who can participate in tip pools will undoubtedly keep the litigation pipeline in these cases very full for years to come.

James W. Versocki is a senior associate in the law firm of Archer, Byington, Glennon & Levine, LLP and regularly handles wage and hour litigation matters; he was a public member of the 2009 Wage Board that drafted the current Hospitality Wage Order.

[1] See 12 NYCRR Part 146, effective January 1, 2011.

[2] See 12 NYCRR §§ 146-2.14, 146-2.15 and 146-2.16.

[3] See 12 NYCRR § 146-2.14(e).

[4] See Barenboim et al. vs. Starbucks Corp., Docket No. 08-cv-3318 (S.D.N.Y.) and Winans vs. Starbucks Corp., 08-cv-3734 (S.D.N.Y.).

[5] See Barenboim et al. vs. Starbucks Corp. and Winans et al. vs. Starbucks Corp., 698 F.3d 104 (2d Cir. 2012).

[6] Barenboim v. Starbucks Corp., 21 N.Y.3d 460, 473 (June 26, 2013).

[7] Id.

[8] Id.

[9] Id. at 474.

[10] Barenboim v. Starbucks Corp., No. 10–4912–cv., 2013 WL 6097, 2013 U.S. App. LEXES 23370 (2d Cir. November 21, 2013).

[11] Id., *4-5.

[12] Id., *3.

[13] 12 NYCRR § 146-1.3(b).