New York Court of Appeals Clarifies Tip-Sharing Rules in Starbucks Case

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On June 26, 2013, the New York Court of Appeals issued an advisory opinion clarifying which employees may share in tip pools under New York Labor Law. The case arrived at the Court of Appeals after two federal court rulings regarding the legality of Starbucks' tip-sharing policy. Under Starbucks' policy, baristas and shift supervisors were eligible for tip sharing, but assistant store managers and store managers were not. In one case, former baristas brought a putative class action, alleging that Starbucks' policy of including shift supervisors in the tip pools was unlawful. In the other case, former assistant store managers alleged that Starbucks' policy of excluding them from the tip pools was unlawful.

The Second Circuit requested the New York Court of Appeals to interpret which employees may be eligible for sharing from a tip pool under Section 196-d of the New York Labor Law, which in relevant part states:

"No employer or his agent or an officer or agent of any corporation, or any other person shall demand or accept, directly or indirectly, any part of the gratuities, received by an employee, or retain any part of a gratuity or of any charged purported to be a gratuity for an employee. . . . Nothing in this subdivision shall be construed as affecting the . . . sharing of tips by a waiter with a busboy or similar employee."

The Court of Appeals was first tasked with analyzing what factors determine whether an employee is eligible or ineligible to receive distributions from an employer-mandated tip-splitting arrangement. Plaintiffs in one case contended that shift supervisors should not be able to receive distributions from a store's tip pool because they are Starbucks' agents and, thus, not eligible for a tip pool under Section 196-d. Plaintiffs in the other case contended that assistant store managers should be eligible to share in tips, as long as they do not have full or final authority to terminate subordinates. The Court of Appeals initially gave deference to the Department of Labor's interpretation of the statute promulgated in the Hospitality Industry Wage Order. The court held that an employee who regularly provides direct service to patrons may participate in a tip pool, even if that employee possesses limited supervisory responsibilities. However, an employee with meaningful authority or control over subordinates is not similar to waiters and busboys within the meaning of Section 196-d and is not eligible to participate in a tip pool.

The Court of Appeals next analyzed whether an employer may deny tip-pool distributions to an employee who is eligible to split tips under Section 196-d. The court generally agreed with the district court's decision that Section 196-d excludes certain people from employer-mandated tip pools, but does not require the inclusion of all employees that are eligible for participation in a tip pool. However, the Appeals Court limited the district court's decision, leaving open the possibility that there may be an "outer limit" to an employer's ability to remove certain classifications of employees from a tip pool. The Court of Appeals' possible limitation was in response to the Department of Labor's hypothetical scenario that an employer should not be permitted to give all of the distributions from a tip-splitting arrangement to only the highest-ranking eligible employee. The Appeals Court did not resolve the hypothetical because it found Starbucks' decision to exclude assistant store managers from the tip pool was lawful under Section 196-d.

The Court of Appeals left it to the federal courts to determine whether Starbucks' tip-sharing policy was lawful, but based on the decision, it is likely that the policy will be upheld.

What This Means for New York Employers

The Court of Appeals decision clarifies that employees who regularly serve patrons may, but are not required to, participate in a tip pool, even if they possess limited supervisory responsibilities. However, employees with meaningful authority over subordinates are not eligible to participate in a tip pool. Employers with tip-sharing arrangements should review their policy to ensure it is in compliance with the holdings of this decision.

Topics:  Restaurant Industry, Starbucks, Supervisors, Tip-Pooling, Wages

Published In: Labor & Employment Updates

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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