$100 million Starbucks verdict shows danger of ‘tip pools’

A recent $100 million verdict against Starbucks for the way it required employees to participate in “tip pools” should jolt employers with all the force of a Venti extra-shot Caramel Macchiato. Tip-pool lawsuits have been filed recently not only against restaurants, but also against hotels, transportation companies, delivery services, casinos and sports facilities.

Recently, many companies have been tempted to expand the number of employees who participate in tip pools. This can seem like a good way to save money, because the employer gets a tip credit against the minimum-wage requirements. But there is a complex set of legal rules for who can participate in a tip pool. There are both federal and state laws, and often multiple laws overlap so the requirements are hard to follow. These rules cover who can participate (hosts and hostesses, greeters, drink servers, kitchen staff, shift supervisors, etc.) as well as how much can be pooled.

Common mistakes include having employees participate in tip pools when they spend more than a certain percentage of their time performing tasks other than customer service, or when they exercise certain management or supervisory responsibilities.

A mistake can leave an employer on the hook under a variety of laws, including:

  • Failure to pay minimum wage, where an employee shouldn’t have been subject to a tip credit;
  • Failure to pay overtime, where employees’ participation affects their exempt status; and
  • Failure to make proper contributions to Social Security, Medicare, unemployment and retirement plans.

In some cases, managers can be personally liable for mistakes.

Another issue is whether a “service charge” or a “percentage sales charge” at an entertainment or function facility can be considered a tip. The federal Fair Labor Standards Act doesn’t assume that a service charge is a tip, but some state laws are different. Also, while companies are not liable for sales tax on tips, in some cases they may be liable for sales tax on a service charge.

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