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A Tipping Point for Starbucks

March 28, 2008
Related Topics: Miscellaneous Legal Issues, Corporate Culture, Wages and Hours, Featured Article
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After being hit with a $100 million-plus California state court judgment, coffee giant Starbucks is expected to soon clarify which of its employees can get a share of tip jar cash—and which can’t. Starbucks is also expected to revisit its legal position on tip-sharing in the other 49 states where it pours coffee.

    California has the strictest laws in the nation on who is entitled to share in tips, but the company, which has 7,000 stores in the U.S., could make policy adjustments in other states where it may be open to similar legal action. One tip-sharing suit already has been filed in Massachusetts.

    The California ruling came down March 20 in a class-action lawsuit brought by former Starbucks baristas who alleged that tips were wrongly shared by shift supervisors. The judge ruled in their favor and ordered Starbucks to pay its California counter employees for back tips, which will total more than $100 million, including interest. Starbucks is appealing the California decision, claiming that shift supervisors are not managers and so are entitled to a share of tips. The company says the case abuses the state’s class-action procedures.

    The ruling has riled Starbucks, not only because of the amount of money at stake, but because it carries the message that the company is dealing unfairly with its baristas, who are supposed to be a daily manifestation of Starbucks’ happy, cooperative and egalitarian culture. That’s not a perception Starbucks is letting go unchallenged.

    On Wednesday, March 26, CEO Howard Schultz sent out avoice mail to employees, defending tip-sharing for shift supervisors.

    "The reason I am calling is that I want you to really understand the truth," Schultz said, according to a transcript Starbucks published on its corporate Web site. "I promise you that we will vigorously defend ourselves and appeal the recent California ruling as well as any other lawsuits that we believe are unjust."

    "When I read these headlines about Starbucks skimming or stealing from our partners it’s just beyond my comprehension how irresponsible it is," Schultz said. "To the contrary, we put the highest priority for 35+ years on treating our partners with respect and dignity, and we do our best never to jeopardize the trust we have with one another. Are we a perfect company? Absolutely not. Do we make mistakes? Yes. But our heart has always been in the right place."

    If Starbucks ultimately does decide to block supervisors from collecting tips, it could offer them a bump in pay to make up for it, analysts say. Experts doubt the legal skirmish will tarnish the company’s reputation as a progressive employer.

    "Starbucks isn’t accused of cheating or mistreating anyone," says John Pearce, professor of management and operations at Villanova University. "They’re accused of allowing someone labeled supervisor to share in tips."

    Nevertheless, notes Pearce, California’s Labor Code, Section 351, says supervisors cannot have a share of tips.

    "They do exactly the same job as the baristas," Pearce says. "We’re not talking about an egregious violation of the law. It’s the tiniest difference in labeling. If Starbucks had been more careful about how they labeled a shift supervisor, they wouldn’t have this problem."

    While supervisors in most companies are considered managers, Pearce says that’s not the case at Starbucks. Still, he expects Starbucks to rename the job or possibly pay shift supervisors a higher rate to make up for lost tips.

    If it does not, he says, there will be less incentive for hourly workers to become shift supervisors. "Progression in the company becomes less attractive to you, in some sense," Pearce says.

    If supervisors are cut out of tip sharing, they will definitely want someone—namely Starbucks—to step up, says David Lagasse, a New York-based employment law attorney and partner with the firm Dreier LLP.

    "In theory the supervisor gets paid by the employer, not the customer," Lagasse says. "You can expect they’ll be asking Starbucks to make up the difference."

    Lagasse figures the appeal of the case could take a year. In the meantime, he expects that Starbucks will make changes to comply with the California law.

    If the company eventually has to dole out more than $100 million, it would be "an interesting math problem," likely requiring baristas statewide to fill out claims as to how much tip money they’re entitled to.

    "It’s money that never went to Starbucks—they never saw it," Lagasse says. "So it would be like Starbuck’s refilling the tip jar and redistributing that money. It’s a lot of money, no matter how big a company you are."

    Like Pearce, Lagasse sees the supervisors’ jobs at Starbucks more like that of hourly employees than managers.

    "It’s more analogous to a lead person than a true supervisor," he says. "It’s got to be frustrating for Starbucks. All they did was give people a way to make a little bit more money. They’re getting chipped for what in essence is a technical foul."

    Meanwhile, Lagasse suspects other companies that have tip jars in their stores—such as Peet’s Coffee, Dunkin’ Donuts, ice cream stores and sandwich shops like Subway—will look at their tip sharing policies to keep from getting hit by a similar class-action suit in California.

    "One wonders if there is a tip sharing policy or not in these stores," Lagasse says. "What if employees do it [put out a tip jar] and never asked anyone?"

    Lagasse also anticipates that Starbucks will take steps to protect itself in other states, particularly Iowa, where the law is similar to California’s. That’s because other Starbucks employees around the country—such as the newest plaintiff in Massachusetts—are bound to ask themselves whether they have a suit, Lagasse says.

    Villanova professor Pearce doesn’t see the issue as any sort of management breakdown by Starbucks, which recently closed its stores for three hours for employee training. In light of the Starbucks’ loss last year of 46 percent in its stock value, Pearce applauded the training day as among things the company is doing to increase its competitiveness in the retail coffee market.

    Mark Mehler, co-founder of New Jersey-based staffing firm CareerXRoads, also says he doubts whether the tip jar case will hurt Starbucks’ chances for attracting employees, since it has a reputation for offering employees a handsome benefits package, even for part-timers. The retailer is among CareerXRoads’ clients.

    "The question is whether it’s a fair practice or not," Mehler says. "They’re a great employer."

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