The Treatment of Tips under the FLSA: Importance of State Law

The analysis of tip issues does not end with the FLSA.  Practitioners need to research applicable state law.  This portion of this paper is not intended to be exhaustive regarding state rules pertaining to tips, but rather to underscore the admonition that there may be an applicable state law that needs to be considered.

California, as early as 1917, enacted legislation prohibiting employers from taking any portion of an employee’s tips.  That 1917 law was declared unconstitutional, and it was not until 1975, after repeated unsuccessful attempts, that the California legislature enacted legislation prohibiting the practice of “tip credits.”  The California Labor Code § 351 offers greater employee protections than the FLSA, and the courts have ruled so far that the FLSA does not “preempt” the California rules.  See, e.g., Tidewater Marine Western, Inc. v. Bradshaw, 14 Cal. 4^th 557, 567 (1996); Skyline Homes, Inc. v. Dep’t of Indus. Relations, 165 Cal. App. 3d 329, 250-251 (1985).

California has held that “tip pooling,” so long as it is “fair and reasonable,” is not an illegal “taking” of the employee’s “sole property.”  Leighton v. Old Heidelberg, Ltd., 219 Cal. App. 3d 1062 (1990).

The California Supreme Court is considering whether there is a private right of action under § 351.  Lu (Louie Hung Kwei) v. Hawaiian Gardens Casino, Inc., 170 Cal. App. 4th 466 (Cal. Jan 22, 2009).

In a California case against Starbucks, the California court overturned the trial court’s ruling that the company pay nearly $106 million to some 120,000 baristas because supervisors were unlawfully allowed to share tips.  See Chau v. Starbucks Corp., 174 Cal. App. 4th 688, 2009 Cal. App. LEXIS 870 (Cal. Ct. App. June 2, 2009).

In New York, no portion of a mandatory service charge may be distributed outside of the non-supervisory wait staff if the customer reasonably believed that the charge constituted a gratuity.  See, e.g., Samiento v. World Yacht, Inc., 10 N.Y.3d 70 (N.Y. Feb. 14, 2008).  In New York, Judge Swain of the Southern District granted summary judgment to Starbucks in an action similar to the Chau case from California.  In re Starbucks Employee Gratuity Litig., 264 F.R.D. 67 (S.D.N.Y. Dec. 16, 2009).  In this case, the plaintiff baristas contended that Starbucks had violated the New York state wage and hour statutes by splitting tips intended for baristas with shift supervisors, handing out tips on a weekly basis instead of a per-shift basis, and failing to distribute tips to baristas-in-training.

The Connecticut Supreme Court, in a case involving class certification, had as the substantive basis a dispute involving “tip credit” under the Connecticut wage statute.  See Palmer v. Friendly Ice Cream Corp., 285 Conn. 462 (Feb. 12, 2008).

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