April 16, 2008

Recent Cases Highlight Risks Associated With Running Afoul of Tip Pooling Statutes

Holland & Knight Alert
Gordon P. Katz

In a recent case that has garnered national attention and directly impacts the hospitality industry, a California court has ordered Starbucks Corporation to pay over $100 million in damages for violating California’s “tip pooling” statute.

In Chau v. Starbucks, a San Diego Superior Court ruled that Starbucks violated §351 of the California Labor Code when it required its coffee servers (a/k/a “baristas”) to pool and share customer gratuities with their shift supervisors. Section 351 prohibits supervisors from “collect[ing], tak[ing], or receiv[ing] any gratuity.”
According to the decision, Starbucks’ past and present California coffee servers – a class of well over 100,000 employees – are entitled to restitution “in an amount equal to the amount paid out of the pooled tips to shift supervisors.” The court also issued an injunction that prevents Starbucks’ California shift supervisors from sharing in future tips.

There are class actions currently pending before courts around the country that challenge the tip pooling practices of hospitality and service employers. These cases demonstrate the risks that such employers face for non-compliance with tip pooling regulations.

Unknown Rules for a Common Practice

In restaurants and hotels across the country, it is a common practice for servers to share gratuities with others in the service chain. Some employers have specific policies requiring servers to “tip out” colleagues. Others leave it up to the servers to decide whether and how they want to divide their tips.

Unknown to many of these employers, however, is the existence of strict federal and state laws that regulate tip pooling and the sharing of gratuities among employees. These laws often provide for stiff penalties for non-compliance. As the Starbucks case shows, violating the tip-pooling rules can be a costly mistake.

Tip Pooling Regulations

The federal Fair Labor Standard Act permits tip pooling or sharing arrangements between employees who “customarily and regularly” receive tips, such as waiters, waitresses, bellhops and service bartenders. 29 U.S.C. §203. By virtue of the Act, tipped employees, however, may not be required to share their tips with employees who do not customarily and regularly participate in tip pooling arrangements, such as dishwashers, cooks, chefs and janitors. Id.

Several states, in addition to California, have specific laws that regulate the pooling of employee tips.

For example, under the Massachusetts tip pooling statute, Mass. Gen. Law ch. 149, §152A, Massachusetts employers may implement and administer a tip pool, provided that only “wait staff employees,” “service employees” and “service bartenders” participate and share in the gratuities. Under the Mass statute, employees with managerial responsibilities of any kind are expressly prohibited from sharing in tips. Further, employees not involved in the direct service of customers, such as cooks or cleaning staff, may not share gratuities.
The Mass statute also regulates the pooling of “administrative fees” or “house fees.” Under the statute, Massachusetts employers may charge patrons house or administrative fees for services rendered. These amounts are not considered tips and may be distributed to managerial and non-service staff, but only if “the employer provides a designation or written description of that house or administrative fee, which informs the patron that the fee does not represent a tip or service charge for wait staff employees, service employees, or service bartenders.” Distributing administrative or house fees to non-service staff without providing such patron notice is, however, a violation of ch. 149, §152A and subjects the employer to liability.

Moreover, under Mass. Gen. Law. ch. 149, §148A, it is unlawful for an employer to terminate or otherwise retaliate against any employee who complains about violations of the tip pooling statute.

Under New York’s tip pooling statute, N.Y. Labor Law, §196-d, tip pooling arrangements are permitted between wait staff and “busboys and similar employees.” Employers and/or their managerial agents, however, may not share in pooled tips

Further in a recent decision, the New York Court of Appeals concluded that automatic “service fees” charged to customers are gratuities within §196-d of the New York statute, are reserved for service employees and may not be distributed to employers or managerial employees.

Expect Greater Scrutiny of Tip Pooling Rules

A general understanding of these tip pooling rules is essential for all hospitality and service providers.
As awards in such cases are reported in the press, one can expect to see increasing complaints and greater scrutiny of employer tip pooling practices. You may wish to evaluate your tip practices or, worse, need to defend tip related investigations or litigations.

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