Starbucks Barista Tips Tax Issues Sent to State Court

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By Kevin McGowan

Nov. 3 — Starbucks Corp. baristas objecting to the company withholding taxes from their pay based on estimated tips must litigate those issues in state court, the U.S. Court of Appeals for the Ninth Circuit said ( Fredrickson v. Starbucks Corp. , 2016 BL 367194, 9th Cir., No. 13-36067, 11/3/16 ).

The baristas contend Starbucks’ practice of estimating baristas’ tips at 50 cents an hour and then deducting taxes from their paychecks based on that estimate violates Oregon wage and hour laws as well as federal tax law.

A federal district court dismissed three former Starbucks employees’ class claims on behalf of current and former employees working in Oregon. It agreed with Starbucks that the employees’ claims either are preempted by federal tax or barred by state law.

The district court never should have decided those issues because it either lacked subject-matter jurisdiction or federalism principles required state court consideration, the Ninth Circuit said Nov. 3.

The Starbucks baristas’ claims therefore must be returned to an Oregon state court, which can determine the legality of the withholding, Judge Paul Watford wrote in an opinion joined by Judges Raymond C. Fisher and Donald E. Walter.

Withholding Policy Said to Have Changed in 2003

The case properly returns to state court where it was originally filed in 2013, said attorney Jon Egan of Lake Oswego, Ore., who represents the baristas. He’s “very optimistic” the state court will rule favorably on their claims that Starbucks can’t withhold taxes based on some estimate of tips rather than amounts the baristas actually receive.

Starbucks in 2003 changed its policy nationwide to begin withholding based on estimated tips rather than the actual amounts, Egan told Bloomberg BNA Nov. 3.

This class potentially includes current and former employees at about 250 Starbucks locations in Oregon going back for at least three years, he said.

A Starbucks spokesman Nov. 3 said the company is disappointed in the ruling and believes it’s complying with all relevant tax laws. The company supports its employees’ ability to earn tips, the spokesman told Bloomberg BNA. But it disagrees with their legal claims and will defend the case as it proceeds, he said.

Limited Power on Tax Matters

Under a federal law called the Tax Injunction Act, Congress “sharply curtailed” the power of federal courts to issue declaratory judgments or injunctions that impede a state’s collection of taxes, the Ninth Circuit said.

The Tax Injunction Act would bar the federal district court from ordering Starbucks to stop withholding the state taxes from baristas’ paychecks, the appeals panel said.

Granting the baristas’ requested relief “would reduce the flow of state tax revenue,” the court said. “If the relief were granted, Starbucks would not collect the state taxes in question and would no longer remit those funds to Oregon’s treasury.”

The Anti-Injunction Act, a companion law, precludes federal courts from issuing declaratory or injunctive relief regarding Starbucks’ withholding of federal taxes from baristas’ paychecks, the Ninth Circuit said.

The baristas also sought statutory damages under Oregon wage and hour laws. They impose damages of 30 days of wages or $200 per paycheck for improperly withheld pay.

Defer to State Court

The federal district court lacked power to rule on these claims as well, the Ninth Circuit said. Principles of “federal-state comity” mean an Oregon state court must decide these state law issues, the appeals court said.

Comity dictates that federal courts should refrain from hearing claims for relief “that risk disrupting state tax administration,” the court said.

Allowing the federal court to rule would improperly interfere with Oregon’s administration of its state tax system, the Ninth Circuit said.

Jon M. Egan PC represented the Starbucks employees. Akin Gump Strauss Hauer & Feld LLP and Davis Wright Tremaine LLP represented Starbucks.

To contact the reporter on this story: Kevin McGowan in Washington at kmcgowan@bna.com

To contact the editors responsible for this story: Peggy Aulino at maulino@bna.com; Terence Hyland at thyland@bna.com

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