Employers in New York with tipped employees know that often the service that led to the tip is a combined effort. Restaurant employers in particular have long recognized this fact and created tip splitting policies that provide for the tip to be split with other employees who assisted the guest. But federal law and some state laws place restrictions on such "tip splitting." Now, employers in New York have specific guidance regarding those restrictions under state law as a result of New York's highest court responding to questions from a federal appeals court.

On June 26, 2013, the New York Court of Appeals (the state's highest court, akin to supreme courts in other states) issued Barenboim v. Starbucks Corp., which clarifies the extent to which supervisors can share in tips left by customers as part of an employer-mandated tip pool. Employers with tipped employees working in New York should consider this opinion in determining whether their tip splitting arrangement complies with state law.

The court's advisory opinion was issued in response to questions from the U.S. Court of Appeals for the Second Circuit regarding two class action cases that were pending in that court: Barenboim, and Winans v. Starbucks Corp. In both cases, the Second Circuit (which hears appeals from federal courts in Connecticut, New York, and Vermont) asked the New York Court of Appeals for its interpretation of its state Labor Law § 196-d, which addresses the sharing of gratuities.

Background

The Barenboim and Winans cases involve different categories of Starbucks employees fighting over who is eligible to share in customer tips. In ascending order of authority, Starbucks employs four categories of employees: baristas, shift supervisors, assistant managers and store managers. Baristas are part-time hourly paid employees responsible for serving customers and filling their food and beverage orders. Shift supervisors, who are also paid by the hour and work part time, spend most of their time performing the same tasks as baristas. However, shift supervisors also have some managerial responsibility in terms of assigning baristas to particular tasks during a shift, directing the flow of customers, and providing baristas with feedback on their performance. Assistant managers, in contrast to baristas and shift supervisors, are full-time employees who receive a salary if they work at least 37 hours a week. Assistant managers, although spending the majority of their time serving customers, have greater managerial and supervisory responsibility than shift supervisors. Assistant managers assist store managers in interviewing applicants, assign shifts to baristas and shift supervisors, and evaluate employee performance. Assistant managers also participate in hiring and firing decisions, recommend corrective action and process payroll. Above the assistant managers are store managers, who are full-time salaried employees responsible for the overall operation of the location, with the power to hire and fire, and impose discipline on subordinates.

During the relevant time for both lawsuits, customers at a Starbucks location would place tips in a container on the front counter. At the end of each week, the accumulated tips would be split among baristas and shift supervisors in shares corresponding to the number of hours that each employee worked. Assistant managers and store managers were not allowed to participate in the tip pool. Unfortunately for Starbucks, this practice spawned two class action lawsuits under New York law, as well as suits under Massachusetts and California law. In Barenboim, a group of baristas claim their pay was unlawfully reduced because shift supervisors were improperly included in the tip pool. Meanwhile, in Winans, a group of assistant managers claim they were improperly excluded from the tip pool.

Analysis

In both Barenboim and Winans, the claims depend on the application of New York Labor Law § 196-d, regarding the sharing of gratuities. The statute provides, in pertinent part, as follows:

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 charge 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 baristas' position in Barenboim is that any employee with supervisory responsibility – such as a shift supervisor – is an "agent" of the employer under the statute, and therefore not eligible for sharing in tips. In contrast, the assistant managers in Winans argue that any employees who serve customers, as long as they don't have ultimate responsibility for hiring and firing, are "similar employees" to baristas under the last sentence of § 196-d and are therefore eligible to participate in the tip pool. They also contend that the tips are their property under state law, just as the tips are the property of the baristas and shift supervisors.

In providing guidance to the Second Circuit to resolve these seemingly conflicting arguments, the state Court of Appeals set forth three principles to aid courts and employers in applying § 196-d to tip-splitting arrangements:
 

  1.  Employees with limited supervisory responsibilities can participate in tip splitting if they regularly serve customers.


The New York Court of Appeals held that "an employee whose personal service to patrons is a principal or regular part of his or her duties may participate in an employer-mandated tip allocation" even if he or she possesses limited supervisory duties. As support for its conclusion, the court cited the New York State Department of Labor's Hospitality Industry Wage Order, codified at 12 NYCRR part 146, promulgated in January 2011. The Wage Order clarified and unified the NY DOL's tip-splitting policies previously found in a patchwork of opinion letters and a set of written guidelines dating back to 1972. The Wage Order also codified the DOL's longstanding construction of § 196-d as limiting tip-pool eligibility to workers who "perform, or assist in performing, personal service to patrons at a level that is a principal and regular part of their duties and is not merely occasional or incidental."
 

  1.  Employees with "meaningful authority or control over subordinates" cannot participate in tip splitting.


The New York Court of Appeals made it clear that even if an employee regularly serves customers, that employee may not participate in tip splitting if he or she possesses "meaningful authority or control over subordinates." According to the court, an employee who possesses that type of authority simply cannot be considered similar enough to wait staff under § 196-d to share in tips. The court stated that "meaningful authority or control might" include the power to do the following:
 

  • discipline subordinates;
  • assist in performance evaluations;
  • participate in the hiring or termination process; and
  • provide input into the creation of employee work schedules, thereby directly influencing the number and timing of hours worked by staff, as well as their compensation.

Significantly, there will be supervisory employees who lack the ultimate power to hire and fire but still cannot participate in tip splitting because they possess the types of duties listed above.
 

  1. Even if a category of employees is eligible to participate in a tip pool, the employer is not required to include those employees in the tip-splitting arrangement.


Aside from tip pool eligibility, a second question faced by the assistant managers in Winans was this: even if they are not disqualified from participating in the tip pool under § 196-d, was Starbucks required to let them participate in the pool? The court's answer is no. Aside from some extreme situations which may warrant scrutiny (such as an arrangement where all tips are distributed to only the highest-ranking eligible employee), Starbucks and other employers are not restricted under New York law from excluding eligible employees from participation in an employer-mandated tip-splitting arrangement.

The New York court left it to the Second Circuit to apply these principles to the specific facts of the Barenboim and Winans cases, but the court's discussion certainly appears to put the claims of the baristas and assistant managers in jeopardy. More importantly, all companies that employ tipped workers in New York can review the New York court's opinion to help determine whether they are still in compliance with Labor Law § 196-d.

It should be noted that the New York court's analysis was limited to New York state law, and therefore the court's reasoning may not be applicable in other states where a different standard governs. In Massachusetts, for example, state law provides that wait staff employees can share tips only with fellow wait staff who have "no managerial responsibility."