Oregon Employees Lead Starbucks Class Action Suit
Three former Starbucks employees in Oregon recently filed a class action lawsuit in Oregon federal court against the coffee giant, claiming they made less than minimum wage because of the way the company dealt with tips on paystubs. According to the complaint, employees divide tips proportionally to the hours worked once per week. Like most tipped employees, the employees then have the option of reporting those tips back to the company to be included and taxed on paystubs. Companies have a responsibility under the law to withhold taxes on all tips that have been reported by employees.
However, the complaint states that Starbucks allegedly discourages its employees from reporting tips and instead adds a “phantom wage” of $0.50 per hour to every paycheck. This phantom wage is then taxed, a deduction which brings some employees’ pay below the legal minimum wage. The Fair Labor Standards Act (FLSA) specifically prohibits any deductions from a paycheck that causes the pay to fall below the minimum wage requirement.
Starbucks refers to the additional phantom wage as “imputed tips.” However, neither federal nor state law requires Starbucks to pay taxes on unreported tips. Instead, this is the responsibility of the employees come tax time each spring. Therefore, employees argue that this extra phantom wage and resulting deduction are completely unnecessary for the company to be in compliance with the law. Furthermore, they claim the phantom wage and deductions violate FLSA by reducing their pay below minimum standards. The plaintiffs claim that because Starbucks pulls the $0.50 figure “out of thin air,” the company is actually committing fraud to Internal Revenue Service. They state that Starbucks violates federal tax laws by willfully filing fraudulent information. Therefore, the plaintiffs seek certification for a class action lawsuit, an injunction to stop the practice of adding the phantom wage, and damages for the FLSA wage and hour violations.
Tip Income in the Spotlight
Tips have been a hot topic as of late in the employment realm. As previously discussed on this blog, a new regulation starting January 1, 2014 will require employers to report all mandatory gratuities as wage income instead of tips, and to subsequently withhold and report taxes on that income. Because the mandatory gratuity is a fixed and required amount, the IRS will begin treating it as a service charge instead of a tip, which means that income should be included in the wage category. In response to the new law, restaurants are largely expected to eliminate mandatory gratuities on bills altogether.
If the Starbucks employees are successful in their claim, the corporation could face penalties for violation of FLSA and for possible fraud against the IRS, in addition to damages owed to any plaintiffs. If you have experienced any wage or hour violations at your workplace, call HKM Employment Attorneys for help today.