New York Court of Appeals Clarifies Important Questions about Tip-sharing Statute

by Proskauer Rose LLP
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On June 26, 2013, New York's highest court for the first time weighed in and ruled on what types of employees are qualified to participate in tip-splitting or tip-pooling arrangements under the New York Labor Law, as well as the extent to which an employer can exclude eligible employees from participating in the tip pool. In a decision that will provide greater clarity to the restaurant and hospitality industries, the court held that tip-sharing should be limited to employees who ordinarily are engaged in personal customer service, and should exclude employees who have meaningful supervisory authority over their subordinates. The court also held that even if certain employees are otherwise eligible to participate in a tip pool, an employer can nonetheless choose to exclude them (within reason), as the law does not create an affirmative right to receive tip distributions.

Background

The Court of Appeals' decision was a consolidated opinion concerning two separate and seemingly contradictory lawsuits, Barenboim, et al. v. Starbucks Corp. and Winans, et al. v. Starbucks Corp., both of which challenged Starbucks' tip-sharing policy and the way it applied to various categories of employees. All Starbucks stores employ four categories of employees: (1) baristas, who take and deliver orders, clean tables, stock product, and work on a part-time, hourly basis; (2) shift supervisors, who primarily perform the same duties and work on the same terms as baristas but have some supervisory authority; (3) assistant store managers, who perform the same duties as baristas and shift supervisors but possess greater supervisory authority, participate in personnel decisions, and work on a full-time, salaried basis; and (4) store managers, who are responsible for the overall operation of the store and make ultimate personnel decisions.

Starbucks' tip policy provides that the tips collected each week are distributed among baristas and shift supervisors only, in proportion to the hours worked by each employee. Based on this policy, Barenboim, a former barista, filed a class action lawsuit in federal court claiming that the inclusion of shift supervisors in the distribution violated the New York Labor Law, which prohibits an employer's "agents" from demanding or accepting any part of tips received by employees. According to Barenboim, the fact that the shift supervisors performed any supervisory duties rendered them ineligible for tips, and therefore, only baristas should partake in the distribution.

Shortly after Barenboim filed her lawsuit, Winans, a former assistant store manager, filed suit in the same court, making the opposite argument:  Whereas Barenboim argued that the tip policy was over-inclusive, Winans argued that it was under-inclusive and also must apply to assistant store managers, who did not qualify as "agents" under the Labor Law and therefore were eligible to receive tips. According to Winans, assistant store managers were not agents because they did not have "full" managerial authority, such as the ability to hire and fire subordinates.

In Barenboim's case, the Southern District of New York sided with Starbucks and held that shift supervisors did not possess the type of broad authority that disqualified them from collecting tips under the Labor Law. In Winans' case, the court again sided with Starbucks, holding that while there were issues of fact regarding whether assistant store managers were eligible to receive tips, Starbucks was not compelled to include them in the tip pool even assuming that they were eligible. Barenboim and Winans appealed.

Recognizing that both cases presented novel questions of state law, the Second Circuit Court of Appeals certified two questions to the New York State Court of Appeals. First, it asked the court to explain the parameters of employee eligibility for participation in a tip-sharing arrangement. Second, it asked the court if an employer could exclude an otherwise-eligible employee from receiving tips from the employer's tip pool.

Question 1: Which Employees Are Eligible To Share in a Tip Pool?

In interpreting the provision of the Labor Law that outlines employee eligibility to share in an employer-mandated tip pool, the court first noted that because the New York State Department of Labor ("DOL") was charged with enforcing the Labor Law, the court should afford deference to that agency's interpretation of the statute.

Accordingly, it looked for guidance in a Hospitality Industry Wage Order ("DOL Wage Order") that the DOL had promulgated in 2011, which stated that tip-pool eligibility should be limited to employees such as waiters and busboys, who perform personal service to patrons as a principal part of their duties and not on an occasional or incidental basis. In addition, the DOL consistently has maintained that employees such as "captains" remain eligible to participate in a tip pool even where they exercise a limited degree of supervisory responsibility.

Relying on the DOL Wage Order, the court concluded that an employee who possesses "meaningful authority" or significant control over subordinates is not eligible to receive tips under the Labor Law. The court then explained that its "meaningful authority" standard "might include" the ability to discipline subordinates, assist in performance evaluations, participate in the hiring or firing process, or give input in the creation of employee work schedules, thereby directly influencing the number and timing of hours worked and overall compensation. The court rejected the position advocated by Barenboim that any supervisory authority would automatically disqualify an employee from participating in a tip pool, and also rejected the position advocated by Winans that only employees with "final authority" or the ability to hire and fire should be excluded.

Having established the standard for eligibility, the court then affirmed that even though the DOL Wage Order that guided its decision was issued after Barenboim and Winans had initiated their lawsuits, the standard should still apply retroactively to their cases. The court did not specifically decide whether supervisors or assistant store managers are eligible to participate in tip pools, and instead directed the federal courts to apply its principles to the facts of the respective cases.

Question 2: Must Employers Include All Eligible Employees in Their Tip Pools?

As to the second question certified by the Second Circuit, the Court of Appeals again agreed with the District Court and held that even if a particular employee is eligible to participate in a tip pool, the Labor Law does not create an affirmative right to tips. As such, employers are not required to include all eligible employees in their tip-sharing arrangements.

But despite this reading of the law, the court also left open the possibility of an "outer limit" to an employer's ability to exclude certain classifications of employees from a tip pool; for example, if an employer sought to give all distributions from a tip-splitting arrangement to a single employee, or only to the highest-ranking employees. Still, as it held that Starbucks had not exceeded this limit in excluding assistant store managers, the court did not expand further on where this "outer limit" lies.

Implications

The Court of Appeals' decision makes clear that in assessing employees' eligibility to participate in tip pools, employers must look beyond job titles and consider the duties that their employees actually perform. Moreover, employers should pay careful attention to the degree of supervisory authority exercised by their employees, including the ability to issue discipline or influence work hours and compensation. But while the court set forth principles that will inform these determinations, it did not apply them to the facts of the case, leaving such analysis to the federal courts in which the cases were filed. Therefore, employers should continue to monitor these and other cases for guidance on how courts will apply the "meaningful authority" standard.

Employers also should take note that while they may mandate tip-sharing arrangements that do not include all tip-eligible employees, certain types of exclusions still may run afoul of the law. Given the lack of clarity on this point, employers may wish to consult with counsel when establishing their tip-sharing policies.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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