A California court has awarded more than $105 million in restitution to a class of Starbucks coffee baristas as a result of the company's practice of permitting supervisors to share in customer tips. Chou v. Starbucks Corp., No. GIC 836925 (Cal. Super. Ct. Mar. 19, 2008). The case is significant to all California employers that have tip-sharing arrangements between supervisors and their subordinate employees.
San Diego area barista Jou Chou filed the class action on behalf of all California baristas, alleging that Starbucks was impermissibly allowing shift supervisors to share in employee tips. Although Starbucks classified shift supervisors as non-exempt customer service employees and paid them on an hourly basis, Chou argued shift supervisors were in fact misclassified management employees who should not be allowed to participate in employee tip pools, which are reserved for non-management employees under California law. Starbucks countered that shift supervisors were properly classified as non-exempt employees because they spend more than 50 percent of their working time serving customers and thus should be able to participate in the tip-pooling arrangement. After nearly four years of litigation, San Diego Superior Court Judge Patricia Cowett ruled in Chou's favor, ordering the company to pay $86.7 million (plus 7 percent interest) in back tips and enjoining Starbucks from allowing its shift supervisors to continue sharing in the tips. The judgment covers approximately 100,000 current and former Starbucks employees who worked as baristas in California since October of 2000.
Under California law, employers are allowed to create "tip pools" in which employees share and divide customer gratuities among themselves so long as employers and their agents do not receive any portion of the tips. Specifically, California Labor Code § 351, which was enacted in 1937, prohibits an employer and its agents from collecting any part of a gratuity that a patron leaves for an employee. The question before the Chou court was whether Starbucks' shift supervisors, who were responsible for assigning tasks to other employees as well as preparing and serving coffee and waiting on customers, were "agents" of Starbucks. In a similar case, Jameson v. Five Feet Restaurant, Inc., 107 Cal. App. 4th 138 (2003), the California Court of Appeal held that the performance of both customer service and supervisory duties by restaurant floor managers did not prevent the floor managers from being considered "agents" of the employer within the meaning of the law. Consistent with the holding in Jameson, Judge Cowett found that the shift supervisors were Starbucks' agents because they supervised and directed the baristas.
Implications for Employers
This case illustrates just a few of the many challenging issues that employers face in complying with individual states' unique and complicated wage and hour laws. Employers must continue to exercise caution in distinguishing between managerial and non-managerial employees. As the Chou case demonstrates, even classifying employees as non-exempt employees and paying them overtime compensation does not necessarily insulate an employer from other potential wage and hour liabilities. Good employment practices require employers to take note of the wage and hour laws of each state in which they have facilities or employees. Employers also should be aware of the differences in the statutes of limitations for federal and state claims. While the federal Fair Labor Standards Act generally entitles employees to a two-year statute of limitations on wage claims, many states have enacted laws that provide longer limitation periods. For example, current and former Starbucks employees in Chou were able to recover four years' worth of unpaid tips under California's Unfair Competition Law, thus exposing the company to significant liability. In assessing potential exposure, employers should take into consideration potential claims from both current and former employees, even if such individuals left employment years ago.
While litigation often forces employers to reexamine their practices, employers should not wait until they are hit with a lawsuit to discover they have inadvertently misclassified employees. At a minimum, employers should seek to decrease potential liability with regular self-audits of their payroll practices and employee classifications to ensure compliance with both federal and state laws. Especially at risk are those workplaces where employees receive gratuities, as well as those employers that have not conducted self-audits for several years or have since changed or failed to update employee job duties and descriptions. Self-audits that are conducted with the aid of counsel may have the added benefit of being protected by the attorney-client privilege in connection with any legal conclusions drawn and legal advice given.
The Proskauer Wage-Hour Practice Group has expertise regarding the myriad issues facing employers across the country today, and its members are available to assist you with wage and hour classification self-audits and other employment law issues that may be of concern to you. Your Proskauer relationship attorney or any of the attorneys listed in this Alert is available at your convenience to discuss these important issues and their possible ramifications for your workplace.
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