Second Circuit Defers to New York Court of Appeals on Starbucks’ Tip Policy

In a case involving a question of great importance to New York’s hospitality industry, the United States Court of Appeals for the Second Circuit found New York law is unclear as to (1) what degree of supervisory responsibility renders an employee an “agent” of an employer ineligible for tips under New York Labor Law § 196-d (“Section 196-d”); and (2) whether employers can fashion tip policies to exclude certain tip-eligible employees.  Accordingly, the Second Circuit deferred decision on those questions, and certified them to New York State’s highest court, the Court of Appeals.  The Second Circuit’s October 23, 2012 decision is Barenboim v. Starbucks Corporation and Winans v. Starbucks Corporation, Nos. 10-4912 and 11-3199, ___ F.3d ___, 2012 WL 5200210 (Oct. 23, 2012).

Under review was Starbucks’ policy of pooling customer tips left in Plexiglas tip boxes placed on Starbucks’ counters and distributing them among baristas and shift supervisors, but not store managers or assistant store managers (“ASMs”).  Starbucks’ store employees fall into one of four levels of in-store hierarchy:  baristas – employees principally responsible for serving customers; shift supervisors – who perform limited supervisory duties, along with barista duties; ASMs – employees responsible for some managerial tasks, but who wear the same uniform as baristas and shift supervisors and spend the majority of their time performing tip-generating customer service; and store managers.

In the Barenboim action, baristas argued that Section 196-d prohibits Starbucks from distributing pooled tips to shift supervisors, because the supervisors purportedly are Starbucks’ “agents” prohibited from sharing in tips by virtue of their ability to supervise and coordinate baristas, open and close the store, deposit money into the safe and oversee the store in the absence of a store manager or assistant store manager.  Section 196-d prohibits any “employer or his agent” from “demand[ing] or accept[ing], directly or indirectly, any part of the gratuities, received by an employee, or retain[ing] any part of a gratuity or of any charge purported to be a gratuity for an employee.”   New York Labor Law defines an “agent” to include “a manager, superintendent, foreman, supervisor or any other person employed acting in such capacity.”  The federal trial court had ruled that shift supervisors are not Starbucks’ agents under Section 196-d, and therefore they could receive tips.  See In re Starbucks Emp. Gratuity Litig., 264 F.R.D. 67 (S.D.N.Y. 2009).

In Winans, ASMs sought to require Starbucks to include ASMs in its tip pools.  The ASMs argued that they are not Starbuck’s agents ineligible to receive tips pursuant to Section 196-d and therefore Starbucks cannot exclude them from sharing in a tip pool.  The district court concluded that even if ASMs were eligible employees (which it did not decide) Section 196-d does not afford ASMs a statutory right to receive distributions from Starbucks’ tip pools, does not compel an employer to include any specific eligible employees in tips pools and allows employers discretion to decide what eligible employees to include.  See Winans v. Starbucks Corp., 796 F. Supp. 2d 5125 (S.D.N.Y. 2011).

In January 2011, while the Second Circuit appeal was pending, the New York Department of Labor (“DOL”) promulgated the New York State Hospitality Wage Order (“Hospitality Wage Order,” available here), which recognizes that hospitality industry employers “may require food service workers to participate in a tip pool and may set the percentage to be distributed to each occupation from the tip pool.”  The order limits distributions from the pool only to “food services workers,” defined as employees “primarily engaged in the serving of food or beverages to guests, patrons or customers,” including wait staff, bartenders, captains who provide direct customer food service and busing personnel, as well as employees “regularly receiv[ing] tips.”  The Hospitality Wage Order’s inclusion “captains” within eligible employees signals that the department believes that performance of some supervisory functions does not render an employee ineligible to participate in a tip pool, so long as that employee is “primarily engaged in the serving of food or beverages to … customers.”  While the Second Circuit found that the DOL’s interpretation, if permissible, would be dispositive, because no court had construed or applied the Hospitality Wage Order, the Second Circuit was reluctant to take the lead in doing so.

Ultimately, because the sparse authority under Section 196-d was insufficient to allow the Second Circuit to predict how the Court of Appeals would construe it; and because the case involved a basic rule of law governing how New York’s vital hospitality industry must pay its many employees,” the Second Circuit certified the case to New York’s highest court for guidance.  Such direction will greatly assist employers in fashioning and implementing tip policies involving its food service employees.

This article is intended only as a general discussion of these issues.  It is not considered to be legal advice or relied upon.  We would be pleased to consider providing additional details or advice about specific situations.  For additional information on this topic, please feel free to call the author, Lawrence Brocchini, who regularly counsels clients on labor and employment matters, or any RPL attorney.