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Starbucks Steamed Over $100M Verdict

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in Compensation and Benefits,Human Resources,Leaders & Managers,Management Training

A California Superior Court judge has ordered coffee giant Starbucks to pay its baristas $100 million in lost tips resulting from the company’s tip jar policy. Additionally, the court issued an injunction barring shift supervisors and managers from receiving tips.

The situation has been brewing since October 2004, when one disgruntled barista filed a complaint arguing that management personnel weren’t entitled to tips under California state law. In 2006, the case boiled over when a California judge granted it class-action status.

Advice: Although this case relates directly to California employers, it carries a lesson that’s applicable everywhere. Always check state laws before establishing compensation policies. Knowing federal laws—such as the Fair Labor Standards Act (FLSA)—won’t always be enough. Workplaces in which employees commonly receive tips pose special challenges. Make sure your compensation system accounts for employee tips, and be clear whether they can be credited against minimum wage requirements. It’s always better to have your bean counters check things out before  state regulators send in theirs.

A latte of money

Unlike the FLSA and many state laws, California’s minimum wage law allows no tip credit. That means employers may not count employees' tips as a credit toward their obligation to pay the minimum wage. Employers must pay workers at least minimum wage, and employees can keep all tips they receive.  California’s minimum wage law prohibits “owner(s), manager(s), or supervisor(s) of the business” from receiving tips even if they provide the service for which the customer is tipping.

Starbucks’ policy was to share the tips among all workers—including supervisors and managers. In fact, the company sought to have attorneys represent the managers’ interests during the class-action proceedings. That request was denied and will no doubt form the basis of Starbuck’s percolating appeal.

Starbucks argues that the tips help supervisors and managers make it through the daily grind in their stores, and this ruling essentially cuts their pay. Critics argue Starbucks should pay management personnel enough that tip income isn’t necessary.

A breve, not a longo

The ruling comes at a bad time for Starbucks. Economic conditions have put the company in a French press of sorts. Company stock sold for close to $40 per share in 2006, but now trades below $20. Increased dairy and energy costs have eroded profits, and cheaper local competition in many areas has cut the company’s customer base.

A Starbucks spokesperson called the judge's decision “an extreme example of an abuse of the class-action procedures in California courts.” Additionally, the company was disappointed in the brief four-paragraph ruling. Specifically, the decision failed to address the ruling’s impact on supervisors and managers whose pay the court effectively cut.

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