California Labor & Employment Law Blog

By Nancy Berner

As has been widely reported in the news, Starbucks’ baristas have scored an apparent victory in California, as a San Diego Superior Court judge recently determined the company violated Business and Professions Code section 17200 (Unfair Competition Law) when it allowed shift supervisors to share the proceeds of the tip jar with the baristas.  (Chou v. Starbucks, GIC 836925.)  Originally pled as a violation of both the Unfair Competition Law and the California Labor Code, the class action plaintiffs made the strategic decision to dismiss their legal Labor Code claims and proceed to trial (without a jury) solely on their equitable unfair competition claim (and its four-year statute of limitations).  Plaintiffs successfully argued that 120,000 California-based baristas are owed restitution in the amount of $86 million dollars plus interest, for a final sum exceeding $100 million.  Plaintiffs will also seek to recover attorneys’ fees.  Starbucks has reported that it intends to “vigorously” appeal the decision, but in the meantime, restaurateurs are well advised to review their own tip pooling policies.

Tip pooling arrangements are not per se illegal.  Indeed, according to California’s Department of Labor Standards Enforcement (DLSE), restaurants can implement mandatory tip pooling policies requiring tips to be shared with employees who provide direct table service, provided that the pooling arrangement is fair and equitable.  Tip pooling policies whereby the servers receive 80% of the tips and the remaining 20% is shared with other direct table service employees, have been found fair and equitable.  The tips may not be shared with employees, such as cooks and dishwashers, who do not provide direct table service. 

The Starbucks case highlights another important limitation on tip pooling policies.  The California Labor Code prohibits employers “or their agents” from sharing in the tips left for employees.  Therefore, owners, managers or supervisors may not share in the tips, even if they share in the table waiting duties.  It is important to note that the DLSE takes a broad view of the range of employees who qualify as “supervisors.”  According to the DLSE, a supervisor is anyone “with the authority to hire or discharge any employee or supervise, direct, or control the acts of employees."  (September 8, 2005 Op. Letter of Donna M. Dell.)  

Tip pooling lawsuits appear to be the flavor of the month.  In fact, in the wake of the recent San Diego Superior Court ruling, Starbucks was hit with similar class action lawsuits in Massachusetts and Minnesota.  All employers who utilize tip pooling should review their policies to ensure compliance with the law.  For further guidance on the legal requirements for tip pooling policies, please see our previous post on this subject.

Posted by  Vanessa W. Whang

Are you one of the 910 businesses that were sued last year in California by someone claiming your restaurant failed to comply with the ADA? If so, you are likely familiar with the perils discussed in this article. If not, read on…

California Law Provides Broad Monetary Remedies for ADA Access Violations
In California, a plaintiff may recover automatic monetary penalties against businesses whose facilities fail to comply with the ADA Access Guidelines ("ADAAG"). Mere technical violations of the ADAAG allow California plaintiffs to sue for penalties of up to "three times the amount of actual damages but in no case less than $1000.00." That means that each technical violation may net a plaintiff a minimum of $1000. A greater automatic penalty of $4000 may also be available in certain cases.

As if these statutory penalties weren't bad enough, if someone sues you for failing to comply with the ADAAG, you may be required you pay his/her attorneys fees for having to sue you. In cases of intentional discrimination, punitive damages may also be available.

As a result of these conditions, a number of serial plaintiffs and their attorneys comb various regions of the state looking for businesses to sue. These “drive-by” lawsuits are now a cottage industry in California. So far, our legislature has refused to pass mandatory notice or other legislation minimizing the damage caused by these plaintiffs and their lawsuits.

Gunther v. Lin, 144 Cal.App.4th 223 (2006) – An Aid from the Courts.
Last fall in Gunther v. Lin, a California Court of Appeal held that the $4000 automatic penalty under Civil Code section 52 is only available in cases of intentional discrimination, not in cases involving inadvertent, technical violations. Although the Court did not give much guidance as to what constitutes "intentional discrimination," it commented that certain ADAAGs are so intuitive and obvious that the failure to have them could lead to a finding of intentional discrimination, but that others may not necessarily give rise to such a finding. In the spectrum of intentional discrimination, the Court specifically mentioned the failure to have at least one bathroom stall wide enough for a wheelchair to pass through. Many experts feel this case could help provide a defense to those truly frivolous drive-by lawsuits. However, the real consequences of this court opinion remain to be seen.

Tips for Restaurant Owners
In order to minimize your risk of being sued and to lessen the impact of ADA access lawsuits, you should:

1. Hire an ADA expert to inspect your restaurant, both inside and out so you know where you are vulnerable.
2. Make renovations to bring your restaurant into ADA compliance. If money is an issue, focus your efforts in two areas: 1) Obvious barriers (handicap parking spaces, handicap seating and proper access for wheelchairs especially in bathrooms); and 2) The exterior, especially the parking lot and entrance ways. Many plaintiffs simply drive by a location to evaluate a target before they sue.
3. Shift ADA access responsibility in leases and real estate contracts. Contracting away the cost or responsibility of making repairs may help reduce your liability or provide another source of settlement funds. Good indemnification clauses in your lease can be invaluable.
4. If you are sued, attempt to convince the plaintiff to waive any and all claims he may have against you and to release other restaurant locations if you have multiple locations.
5. Petition your local legislative representative. Several bills will be introduced this session and need your support as past efforts to change the law have failed. While we expect at least one bill to survive, its ultimate success depends on active support from business owners such as you.

Mark Spring, David Osborne, and Anthony Zaller of Carlton DiSante & Freudenberger will be conducting a presentation on employment law issues in the restaurant industry and how restaurateurs can protect themselves from liability at the 2006 Western Foodservice and Hospitality EXPO. The West Coast food show is being held August 26 through August 28, 2006 at the Los Angeles Convention Center.

The presentation will take place on Sunday, August 27, from 1:00 p.m. to 2:30 p.m. It will cover the latest developments on many issues facing restaurateurs in California, such as: new case developments, tip pooling lawsuits holding employees responsible for shortages in their banks, meal and rest break requirements, an update on the status of meal and rest break proposed regulations, and an update on the minimum wage changes and the implications any changes will have on the restaurant industry.

The Estate Tax and Extension of Tax Relief Act of 2006, H.R. 5970, which passed the House on July 29, 2006 and is now in front of the U.S. Senate, proposes to raise the national minimum wage to $7.25 over a three year period.

The provision of the bill that would permit employers across the country to credit tips earned by employees against the minimum wage requirements is one of the many issues that are being debated currently. Below is an explanation of the tip credit and some possible ramifications for California employers and employees.

All But Seven States Permit Tip Credits
All but seven states currently permit employers to count the amount tipped employees earn in tips towards their minimum wage. The seven states that do not allow tip credits are: Alaska, California, Minnesota, Montana, Nevada, Oregon, and Washington. H.R. 5970 proposes to bring California and the other six states into conformity with the rest of the country by requiring all states to recognize a tip credit.

What Is a Tip Credit?
Under federal law, employers are allowed to pay a lower hourly wage to employees who qualify as a tipped employee so long as the employee’s total wages (the lower minimum wage paid by the employer and the tips received) equal at least the standard federal minimum wage, currently $5.15 per hour. To qualify as a tipped employee, the employee must earn more than $30 per month in tips. Under current federal law, if the employee meets these requirements, then employers may pay them $2.13 per hour, instead of the $5.15 standard minimum wage per hour. Contrary to many politicized statements on this topic, a tipped employee is still guaranteed to make minimum wage.

Many states have different requirements that are more employee-friendly than the federal tip credit law, and therefore the state law is applicable even if the Senate bill is passed. Click here for a chart describing the state requirements.  Click here for a Department of Labor “Fact Sheet” pertaining to tipped employees.

How Would the Senate Bill Impact California Employers and Employees?
Currently in California, employers must pay tipped employees the full state minimum wage of $6.75 per hour, and cannot offset any of this amount by the employee’s tips. If the bill passes, employees will still be guaranteed to earn at least the state minimum wage. The only difference is that the tips earned by employees could then counted towards the $6.75 per hour minimum wage amount. For example, if the bill passes, California employers could pay tipped employees $2.13 per hour so long as the employee earned at least another $4.62 per hour in tips ($2.13 + $4.62= $6.75). If the tipped employee does not earn enough tips to reach the $6.75 minimum wage threshold, then the employer will have to pay the difference to guarantee that the employee makes at least $6.75 per hour.

“Controversy” Surrounding the Tip Credit Provision
Some politicians, mostly Democrats, oppose the tip credit language in the bill because they argue it constitutes a wage reduction for tipped employees in the seven states that do not have a tip credit. However, the rationale for the minimum wage was to set the minimum that workers earn in the United States, and tipped employees are not minimum wage earners. The U.S. Bureau of Labor Statistics report that “Food Preparation and Serving Related Occupations” nationally earn on average $8.55 per hour as of May 2005, as reported here. 

In California, these same employees earn on average $9.17 per hour as of May 2005, as reported here.  On both the national level and in California, tipped employees who work in restaurants are paid well above the applicable minimum wage. Moreover, tipped employee’s “wages” increase each year when restaurants raise their menu prices because tips left are based on a percentage of the total bill, unlike minimum wage earners who do not receive tips.

Furthermore, employers must pay payroll taxes including FICA (social security tax), SUTA (state unemployment taxes) and FUTA (federal unemployment taxes) on employee tips. Since employers must contribute their share of payroll taxes on these amounts, they should get credit for having paid these amounts towards an employee’s minimum wage. This was the rationale for having a tip credit in the 43 states that recognize a tip credit.

Having a tip credit in California could also help equalize the disparity in wages often seen between the tipped employees and the “back of the house” employees. For example, cooks are often paid much less per hour than servers, and, ironically, are prohibited by California law from participating in tip pools (tip pools are different than the topic of tip credits - click here and here for prior posts on tip pools under California law). So unlike servers, they do not have the benefit of receiving additional income from patrons. If permitted to apply a tip credit to a server’s minimum wage, a restaurant owner would have more resources he or she could redistribute to other staff members who are currently prohibited from participating in tip pools under California state law.

It is uncertain whether this bill will pass the Senate, but whether it does or not, the issue of a tip credit for employers in California will be hotly debated for some time to come.

UPDATE:  The Senate failed to pass the minimum wage increase bill on Thursday, August 3, 2006.  Click here for article. 

Diane Pfadenhauer, over at Strategic HR Lawyer, has a great post reminding employers to think twice about deducting business costs from an employee’s pay check. In her post, she refers employers to review the U.S. Department of Labor’s opinion letter regarding these types of deductions. Click here to read her post.

In California, state courts have clearly held that employers cannot legally deduct costs that result from simple employee negligence, such as shortages and other losses occurring without the fault on the part of the employee. Business must simply write these losses off as business expenses. However, businesses may deduct an employee’s wages for losses that resulted from a dishonest or willful act or through the gross negligence of the employee. The California Division of Labor Standards and Enforcement’s (DLSE) explanation of what types of deductions are permissible under California law can be found here.

Do you have a tip pooling arrangement that includes tipping out your kitchen employees? Do you have supervisory employees who get tipped out when they perform busser, host, server, kitchen or bartender duties? If you answer "yes" to either one of these questions, your restaurant could have an unlawful tip pooling arrangement, and you could be exposed to a class action lawsuit.

Tip Pooling Lawsuits Are On the Rise
Wage and hour class actions being filed against California restaurants are nothing new. First, it was claims for overtime pay made by assistant managers. Then, meal and rest break penalties became the most popular class action claim to file against restaurants. Most recently, California restaurants are being inundated with a wave of class action tip pooling lawsuits. The recent San Diego Superior Court case involving Starbucks' tip pooling arrangement will only add more fuel to the fire.

On Thursday, June 22, 2006, Judge Patricia Cowett ruled that a lawsuit filed by former Starbuck's barista Jou Chou on behalf of as many as 100,000 Starbucks baristas (counter workers) could proceed to trial as a class action. Chou's lawsuit alleges that Starbucks improperly required its baristas to share their tips with their shift supervisors. With potentially millions of dollars at stake, Chou's case against Starbucks will continue to garner attention in legal circles, obtain the attention of plaintiffs' attorneys, and highlight this area of potential liability for California's restaurants.
It is essential that you review your tip pooling policy and make sure it complies with the law.

A San Diego Superior Court is expected to hear oral argument this week in a tip-pooling class action filed against Starbucks. At issue in Starbucks' Motion for Summary Judgment is whether or not its practice of permitting shift supervisors to share in the tips left in jars next to the cash registers violates the Labor Code. Starbucks argues that its shift supervisors perform essentially the same work as the baristas and are entitled to share in the tips.

Cal Labor Law will report on the outcome of the arguments once known.

The immigration debate and our nation's struggle with our complex and difficult border enforcement and labor supply needs are gripping headlines with massive immigration reform bills in the House and the Senate, huge protest rallies by immigrant groups, and aggressive worksite raids by the Department of Homeland Security ("DHS"). Garnering much less attention, but maybe more far-reaching is the United States Supreme Court's forthcoming decision on whether to allow class action lawsuits under the RICO Act against businesses accused of hiring unauthorized immigrants. This article reviews the most important developments and recommends some cost-effective solutions.

California law treats "tips" (defined as any discretionary gratuity left by a customer for a server) as a strange kind of compensation -- which may belong to the employee who initially received the tip, other employees involved or, for certain purposes, even the employer itself. Given the confused property rights involved, businesses are often unsure how tips should be handled.

The Legal Status of Tips.
The Labor Code states unequivocally that "Every gratuity is hereby declared to be the sole property of the employee or employees for whom it was paid, given or left for." (Lab. Code § 350). Yet, California courts have also reached the seemingly contradictory conclusion that employers may lawfully require that this "sole property" of the employee must be shared with other employees. Moreover, the federal Fair Labor Standards Act ("FLSA") and state and federal tax withholding rules treat tips not as direct payments from customers to servers, but rather as a form of "wages" paid by the employer.

California restaurateurs are currently experiencing a wave of class action lawsuits seeking damages for illegal "tip pooling." These lawsuits usually allege that the employer has violated the law by permitting ineligible employees to participate in the tip pool. According to these lawsuits, employees are ineligible for tip pooling where they were either not directly involved in providing any service to the customer who left the tip or they are "agents" of the employer.

Labor Commissioner's Position On Tip Pooling.
According to the most recent non-binding opinion letter issued by the California Labor Commissioner on the subject, a tip pooling arrangement is permissible so long as it is a "fair and equitable" system that has "a correlation with prevailing industry practice." (September 8, 2005 Op. Letter of Donna M. Dell). But the Labor Commissioner further opines that any tip-pooling policy must also comply with the following requirements:

(1) The tip pool should include only "those employees who contribute in the chain of the service bargained by the patron;" and
(2) The tip pool should exclude any supervisory employee "with the authority to hire or discharge any employee or supervise, direct, or control the acts of employees."

For the California's Division of Labor Standards Enforcement position on tip pooling, visit their website here.

Avoiding Liability From Tip Pooling Lawsuits.
Employers can take steps to prevent and/or minimize liability for tip pooling claims. Here are a few items that employers can consider in order to minimize the liability regarding tip pooling.

• Employers should consider implementing a policy stating that all tips are the sole property of the waiters, and employees are free to enter into any voluntary tip pooling arrangements with co-workers on their own.
• Employers should consider notifying patrons on the menu or on the receipt that any tip left may be distributed according to a tip pooling arrangement, unless the patron affirmatively indicates that his or her tip should only go to one person.

• Regardless of the employer's policy on tip pooling, the employer should implement and enforce a policy that the employer's supervisory employees are always prohibited from sharing in tip pools. For purposes of this policy the operative definition of a supervisor is any "person other than the employer having the authority to hire or discharge any employee or supervise, direct, or control the acts of the employee."

As a general caveat, however, each case has unique facts and may present issues not addressed in this article. As a result, employers should seek competent legal advice before implementing a new policy regarding tip pooling policies.