Starbucks Challenged for Withholding Taxes for Tips

Overview: Starbucks was sued in a class action (Fredrickson v. Starbucks) filed by three of its former baristas (you will soon know where that term comes from), for withholding federal and state taxes from tips received by the coffee servers.  The baristas claimed such tax withholding violated the law; the federal Court of Appeals overturned the federal trial court, read all about it in this weeks Law Review.

A class action was filed against Starbucks by three baristas who used to work at the company’s coffee shops in Oregon.  Where does the word “barista” come from anyway?  “Bartender” in Italian, says Wikipedia.

Starbucks’ Tip Jar

“A familiar sight at any neighborhood Starbucks is the tip jar near the cash register inviting customers to leave tips for the baristas.” Thus began this federal Court of Appeals Opinion.

The baristas pool tips left by customers and divide them up at the end of each week.  Generally, they do not report to Starbucks how much they receive in tips.

The company imputes 50 cents per hour in estimated tip income to each barista and then withholds state and federal taxes from their paychecks based on that amount.

Class Action

The three baristas filed the class action against Starbucks in Oregon state court on behalf of all current and former baristas employed in Oregon.  They argued that Starbucks violated state wage-and-hour-laws by deducting taxes from paychecks in a manner not authorized by state or federal law, i.e., Starbucks is not paying the baristas full wages.

Here’s what I find the most bizarre part of this case.  Starbucks removed the plaintiffs’ case to federal court from state court where it had been filed.

After removing the case, Starbucks moved to have the case dismissed on the grounds the federal court did not have jurisdiction.  Huh?  The federal trial court agreed with Starbucks and dismissed the case — rather than order it moved back to state court.  What am I missing here?

The baristas appealed.

No Jurisdiction

The applicable federal law cited by the Court of Appeals is the Tax Injunction Act which reads:  “The (federal) district courts shall not enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State.”

The Court went on, “No one disputes that a plain, speedy and efficient remedy is available to the plaintiffs in Oregon’s courts. . . .”

To me this case should have ended right there — with the Court of Appeals sending the case back to state court, but lawyers and judges like to argue and opine.

Ruling

Twelve pages later, the federal Court of Appeals ruled that Oregon is best suited to handle Oregon tax issues.  Duh.

In the end, the Court of Appeals overturned the federal trial court and sent the case back to Oregon state court where it had originally been filed before it was removed by Starbucks.  Talk about circular and a waste of court resources.

This is a case to watch if your employer withholds part of your tip income.

 

Jim Porter is an attorney with Porter Simon licensed in California and Nevada, with offices in Truckee and Tahoe City, California, and Reno, Nevada.  Jim’s practice areas include:  real estate, development, construction, business, HOA’s, contracts, personal injury, accidents, mediation and other transactional matters.  He may be reached at porter@portersimon.com or www.portersimon.com.  

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The content contained and opinions expressed in this blog are solely those of the author. This blog contains content and opinions concerning the law generally, and is not intended to constitute legal advice or to create any attorney‑client relationship with the reader. The reader should consult with an attorney about any specific legal issues prior to embarking on any course of action or inaction involving legal matters.