Here is something to ponder as you enjoy your next beverage from Starbucks: How many venti, half-caf-half-soy-no-foam-latte-whips does it take to generate $87 million in tips over a seven-year period? It might take more than one refill for you to do that math. But wait, there’s more. Consider that the recent and widely reported $100 million-plus award to about 100,000 Starbucks “baristas” compensates them only for a portion of the total tips customers paid (plus interest). That is, just a fraction of what must have been hundreds of millions in total tips wrongfully distributed to shift supervisors. The award, one of the largest reported employment law verdicts, is striking not only because of its sheer size, but also because it is based on optional “gratuities” that are paid by customers rather than the employer.

Starbucks has vowed to appeal the ruling. So it may be a year or two before an appellate court decides whether the huge verdict is justified. In the meantime, employers and their lawyers probably should consider how California wage-and-hour law could lead to such an extraordinary decision.

Who Owns Tips in California?

Labor Code Section 351 expressly provides that “every gratuity is hereby declared to be the sole property of the employee or employees to whom it was paid, given, or left for.” The definition of “gratuity,” contained in Section 350, is broad: “any tip, gratuity, money, or part thereof, which has been paid or given to or left for an employee by a patron of a business over and above the actual amount due such business for services rendered or for goods, food, drink, or articles sold or served to such patron.”

The Legislature amended the statute in 2001 to specifically provide that employers may not deduct credit card service fees from gratuities paid by credit card. Therefore, tips paid by credit card actually cost the business money, while cash tips do not.

The statutory language regarding the ownership of gratuities appears to be absolute. But, as is the case with many of California’s wage-and-hour laws, the plain text has been “glossed” (like a maple scone) by court decisions and administrative interpretations.

For example, mandatory service charges, not at issue in the Starbucks case, are not considered “gratuities” and, therefore, are not subject to the strict requirements of the Labor Code. Restaurants and hotels may impose these charges for banquets and other large groups. The Division of Labor Standards Enforcement, the agency responsible for administering California’s wage-hour laws, has taken the position that any amount that is required to be paid by the customer as a “service charge” is not a “gratuity.” The house may keep or distribute such sums as it sees fit. However, the division also has opined that if employees tell the customer that a tip is “included” based on the service charge, that could constitute a “fraud” on the customer and result in liability.

Tip Pooling

The Court of Appeal and the Division of Labor Standards Enforcement, under narrow circumstances, have allowed “tip pooling,” the practice by which servers tip other employees in the “chain of service.” The division, in a 2005 “opinion letter,” authorized servers to contribute 15 percent of actual tips received to a “tip pool.” The pool is then distributed to bussers and other employees in the “chain of service” based on hours worked. The practice of “tipping out” bussers and other persons who are responsible for providing the service to the customer is well known to anyone who has toiled in the restaurant business. The court in Leighton v. Old Heidelberg, 219 Cal.App.3d 1062 (1990), recognized the longstanding industry practice in holding that a tip pooling arrangement was consistent with Section 351.

Well, Not Everybody

Jou Chau worked for Starbucks in 2003 and 2004 as a barista, one of the employees who makes and serves beverages. According to reports, Starbucks employed over 100,000 baristas in California between 2000 and 2008. Starbucks apparently allowed its shift supervisors to share in the tips collected near the cash registers.

Although shift supervisors are involved in serving customers, the trial court determined they were not proper recipients of tips, regardless of their involvement in the “chain of service.” As a result, the court held that Starbucks was required to return the wrongfully withheld tips to the baristas. The plaintiffs argued that Starbucks substituted baristas’ tips as compensation to shift supervisors rather than paying them higher wages.

The basis for the court’s ruling was its determination that the shift supervisors are “agents.” Section 351 expressly prohibits employers and their agents from receiving tips. Section 350 defines “agent” broadly to include “every person other than the employer having the authority to hire or discharge any employee or supervise, direct, or control the acts of employees.” The court found that the shift supervisors have the power to supervise and direct baristas, regardless of whether they met the other criteria for “agents.”

Although the trial court found that shift supervisors qualify as “agents” under Sections 350 and 351, they are not managers. The definition of “agent” in Section 350 is far easier to satisfy than the definition of “executive,” which would exempt shift supervisors from overtime pay, meal period requirements and the like.

Tips for Employers

The Starbucks ruling is a reminder to employers in the hospitality industry to carefully review policies regarding the administration of tips. Obviously, employers must ensure that “agents” do not share in employees’ tips. The court’s broad interpretation of who is an “agent” may affect tipping policies throughout the hospitality industry in California. Employers should consider whether maí¬tre d’s, hosts, captains and other service employees who “direct” or “control” the work of others could qualify as “agents.”

It also is important to understand the differences between California law and those of other jurisdictions. For example, unlike other state and federal laws, California does not permit employers to credit tip income toward the minimum wage. Therefore, in California, employers must pay servers at least minimum wage regardless of how high tip income may be. Finally, although service charges are not considered “gratuities,” these charges must be mandatory and not merely “suggested.” Optional service charges will be considered tips and may not be diverted by the employer.

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