Fredrickson v. Starbucks – 9th Circuit Sends Barista Tips Tax Lawsuit Back to State Court

Starbucks Corp. baristas objecting to company policy to withhold taxes from their pay based on estimated tips – rather than actual tips – will have to take their dispute to state court. tipjar

The U.S. Court of Appeals for the Ninth Circuit decided in Fredrickson v. Starbucks Corp. that it lacked subject matter jurisdictions over plaintiff’s claims. Specifically, the federal-state comity doctrine – which is the idea that courts shouldn’t act in a way that demeans the jurisdiction, laws or judicial decisions of another jurisdiction – would prohibit the federal court from awarding any type of damages on the state-tax component of these claims. The federal tax component of the claim couldn’t be severed, justices ruled, so the entire action had to be decided in state court.

It’s a set back for the three plaintiffs, who filed the class action wage dispute lawsuit in Oregon. 

Almost anyone who walks into a Starbucks or similar coffee shop will note there is a jar near the register that invites customers to leave barista tips if they are so inclined. According to the plaintiffs, the baristas pool the tips they have gathered at the end of each week and then divvy them up evenly. The general practice is that baristas don’t report how much they bring home in tips. Instead, for purposes of tax withholding, the company simply assumes a 50-cent-per-hour tip rate per employee. It withholds state and federal taxes from the workers’ paycheck based on this figure.

The three baristas filing this lawsuit say that neither state nor federal tax laws will allow Starbucks to withhold taxes this way.

The complaint alleges five state law allegations, each rooted in the violation of state wage-and-hour laws. By taking out taxes in a manner that isn’t legally allowed, the baristas say they are being denied their full wages. In essence, they say, it is a form of wage theft because they are being taxed for more wages than they earn.

Plaintiffs aren’t seeking any actual damages, as they were able to recover taxes wrongfully withheld from their filing by obtaining refunds from the federal government. Instead, they are pursuing statutory damages, which are allowed when workers aren’t paid full wages. State law allows each worker to collect up to 30 days worth of wages on those claims. For wrongful deduction of wages, they can collect $200 each per paycheck/ wrongful deduction.

The complaint further seeks injunctive relief that will stop the coffee chain from continuing to withhold worker taxes based on that 50-cents-an-hour estimation.

Claimants filed their action in state court on behalf of all current and former baristas employed at the company’s Oregon locations. However, Starbucks removed the case to federal court and shortly thereafter filed a motion to dismiss with prejudice (meaning it couldn’t be re-filed) on the grounds each of plaintiff’s claims were barred under state law or preempted by federal tax law. Plaintiffs responded with an opposition motion and filed another to ask the matter be remanded back to state court.

The federal district court denied plaintiffs’ motion and granted defendant’s, dismissing the case with prejudice.

The federal appeals court reversed and remanded back to state court. The appellate panel ruled the district court should never have decided on these wage-and-hour law issues because it either did not have jurisdiction or federalism principles necessitated the matter be weighed by a state court.

Contact the employment attorneys at Nassiri Law Group, practicing in Orange County, Riverside and Los Angeles. Call 714-937-2020.

Additional Resources:

Starbucks Barista Tips Tax Issues Sent to State Court, Nov. 4, 2016, By Kevin McGowan, Bloomberg BNA

More Blog Entries:

Smiley v. El DuPont de Nemours & Co. – Company Can’t Use Paid Meal Breaks to Offset Other Compensation, Oct. 29, 2016, Orange County Employee Lawyer Blog