The Ninth Circuit Court is sending a Starbucks lawsuit challenging imputed wages and tax withholding on tips for baristas back to state court. That was the ruling earlier this week which found that the Oregon District Court did not have the authority to grant summary judgment dismissing the original lawsuit.
The case, Hannah Frederickson et al. v Starbucks Corp., began in 2012 when three Starbucks baristas, Hannah Frederickson, Ashley Krening, and Maurialee Bracke, sued Starbucks in Multnomah County Court in Oregon. The baristas alleged violations of state wage and hour laws, claiming that Starbucks simply makes up tip numbers “out of thin air” and reports those amounts on paychecks and tax forms, including forms W-2. Specifically, the plaintiffs claimed that Starbucks added a taxable “phantom wage” of 50 cents per hour to account for tips, a number which caused some employees to be paid less than minimum wage. The amount was levied, according to the plaintiffs, without explanation of how that number was determined or why the amount did not vary according to geography or location traffic.
In practice, employees at Starbucks pool tips. Those tips are then distributed among the eligible employees based on the proportion of total hours worked. As a general rule, the amount of tips is not specifically reported to Starbucks by the employees. That kind of pooled tipping practice is common at restaurants and bars.
By law, all tips you receive – even those in a tip-sharing arrangement – are reportable as income and are subject to federal income tax. If employers do not report tips as income on a tax form (which might happen under, say, an autograt arrangement or approved formula), then employees must self-report.
(For more on how to report tips, click here.)
What Starbucks was doing, according to the complaint, is attributing 50 cents per hour as “imputed tips” or “imputed wages” to employees. That amount was then reported on the employees’ pay stubs and eventually, on the employees’ tax forms. The plaintiffs claim that Starbucks improperly withheld tax from those “imputed tips.” While federal tax law allows allocation of tips in some instances, the plaintiffs allege that wasn’t the case here, and instead could have reduced some employee paychecks to less than minimum wage. This practice is, it’s alleged in the original complaint, in violation of state and federal tax laws.
The lawsuit was previously removed to federal court, where it was dismissed. That means that the class action sought by the plaintiffs was never granted. The plaintiffs had initially filed a class action on behalf of all current and former baristas employed at all of the company’s coffee shops in Oregon.
The plaintiffs appealed to the Ninth Circuit, alleging that the Oregon District Court didn’t have the authority to dismiss the suit. The Ninth Circuit agreed, finding that “there is no federal interest involved in the dispute, which Oregon’s courts are better equipped to resolve.” With that, the Ninth Circuit sent the matter back to state court.
Now, according to Jon Egan of The Egan Law Team in Lake Oswego, Oregon, who is representing the plaintiffs, the lawsuit will “start from scratch” in state court. In state court, Egan intends to again seek class-action status for the plaintiffs where, he says, he is confident that status will be granted.
That assumes, of course, that Starbucks does not appeal the Ninth District’s findings. A Starbucks spokesperson said, about the case, “Starbucks is committed to providing a great work environment, and we support partners (employees) ability to earn tips for their great service. We certainly believe we are in full compliance with both state and federal law in how those tips are taxed. We disagree with the claims and will continue to defend the case as it proceeds.”
According to the lawsuit, the plaintiffs do not seek actual legal (meaning compensatory) damages since they have been able to recover any taxes wrongfully withheld by filing their annual tax returns and obtaining any tax refunds due. Instead, the plaintiffs are seeking statutory damages, which can differ depending on the laws involved. For example, under Oregon law, an employee who was not paid the full wages due on time may recover up to 30 days of wages as a penalty. Under another Oregon law, an employee can recover a $200 statutory penalty for any wrongful deduction from wages.
According to the ruling, the three named plaintiffs are no longer employed by Starbucks.
You can read the ruling here (takes you to Scribd).
