July 30, 2013

N.Y. Court of Appeals Allows Hospitality Industry Employer Broad Discretion in Mandatory Tip Pooling

Ruling Could Have Nationwide Implications
Holland & Knight Alert
Loren Lee Forrest Jr.

In decision that is helpful to hospitality industry employers, the New York State Court of Appeals has given restaurants and other food outlets considerable flexibility in establishing mandatory tip pooling for service staff. In Barenboim v. Starbucks Corporation, __ N.E.2d ___, 2013 WL 3197602 (2013), the court sided with the employer, ruling that the inclusion of all shift supervisors in the employer-mandated tip-allocation arrangement or "tip pool" was lawful under New York's wage-payment statute. See N.Y. Labor Law §196-d. In reaching this decision, the court held that employees who provide direct service to patrons as a regular part of their duties may participate in an employer-established tip pool, even if "they exercise a limited degree of supervisory responsibility" over their co-workers. Since the New York statute parallels similar wage-payment laws in other states, the decision is likely to have nationwide implications.

Supervisors Versus Managers

Like most other states, a New York statute forbids employers or their "agents" from "accepting directly or indirectly" any portion of gratuities received by tipped employees. The same statute, however, expressly permits sharing of tips by a waiter with a "busboy or similar employee." The issue in Barenboim was whether the Starbucks shift supervisors were "similar" to the baristas who were required to pool their tips or if they were "agents" of management, who are prohibited from taking any portion of employee gratuities. The court of appeals ruled that only employees who have "meaningful or significant authority" over other employees are ineligible to participate in tip pools under New York's statute. The court defined "meaningful or significant authority" as the ability to discipline subordinates, assist in performance evaluations, participate in the hiring and firing of employees, having input into scheduling or otherwise being able to affect or influence the hours and compensation of co-workers. Although the power to hire and fire is important, the court found that it was not dispositive.

The Starbucks shift supervisors were hourly employees who assigned baristas to particular tasks during the shift, directed the flow of customers and gave feedback to baristas about their job performance and who sometimes performed management functions (like opening or closing the store or making bank deposits) but who otherwise performed the same customer service duties as baristas. The court ruled that the shift supervisors could lawfully participate in the employer-mandate tip pool even though they engaged to some extent in managerial functions because their primary duty was to serve patrons, just like ordinary baristas.

The court also ruled that an employer's policy of excluding some otherwise eligible employees from the tip pool is not subject to challenge under the New York statute. Rejecting the claims of Starbucks' assistant store managers, the court held that these managers were permissibly excluded from the tip pool because Section 196-d merely defines who is "eligible or ineligible" to join a tip pool and does not grant eligible employees affirmative rights to receive tip-pool distributions. It should be noted, however, that the court qualified its answer on this issue, reasoning that employers should not be allowed to exclude all but the highest-ranking eligible employees from tip pools. Indeed, the court emphasized that while excluded employees may not have an affirmative right to participate in the tip pool, there may be an "outer limit" to an employer's practice of improperly excluding employees from the tip pool.

Conflicting Cases in Other States

Courts in other states have reached conflicting results on this question, but the New York approach is likely to prevail. An intermediate appellate court in California had previously ruled on the same facts that even if Starbucks shift supervisors were "agents" of the employer in some sense, it was still lawful to include them in a collective tip box under that state's analogue to Section 196-d. See Jou Chau v. Starbucks Corp., 94 Cal. Rptr 3d 593 (Ct. App. 2009). In contrast, the U.S. Court of Appeals for the First Circuit recently ruled against inclusion of Starbucks shift supervisors in tip pools. See Matamoros v. Starbucks Corp., 699 F.3d 129 (1st Cir. 2012). As the Barenboim count noted, however, the Matamoros decision was based on the precise wording of the Massachusetts statute, which permitted tip-sharing only among employees who had "no managerial responsibility," with emphasis on the word "no." Because other wage-payment statues are closer to New York's, the Barenboim decision can be a useful precedent in other states.

Considerations for Employers Based on Barenboim

After the Barenboim decision, restaurants and banquet halls can feel confident in requiring that wait staff share tips with captains, maître d's and sommeliers — which is good news because that is such a prevalent practice. That said, hospitality employers would be wise to review the exact duties and authority of such personnel to determine whether they exercise "meaningful authority or control" over their co-workers, as that could render their participation in tip pools unlawful.

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