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Thursday, July 11, 2024 | Back issues
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Class Sues Starbucks Over ‘Phantom Wages’

PORTLAND, Ore. (CN) - Starbucks adds a taxable "phantom wage" of 50 cents an hour in tips to paychecks, causing some employees to be paid less than minimum wage, workers claim in a federal class action.

Lead plaintiff Hannah Fredrickson claims that Starbucks illegally makes up the tip numbers "out of thin air" and reports the amount on pay stubs and W-2s.

Suing for the class for employees and former employees, Fredrickson and two co-workers claim Starbucks violates the Fair Labor Standards Act.

At each outlet, tip-eligible employees pool their tips every week and distribute them based on the proportion of total hours worked, according to the lawsuit.

"The employees never report that they have received that amount of tips to Starbucks - indeed, Starbucks specifically discourages its employees from reporting their tips," the complaint states. "Instead, Starbucks assigns a phantom amount of unreported tips to each employee - 50¢ for each hour they worked. Starbucks calls these phantom unreported tips 'imputed tips.' Starbucks just makes up that phantom number out of thin air and reports that amount on the employees' pay stubs and Box 1 of the employees' W-2 returns as a fake amount of tips that it tells them they received and reported."

Fredrickson claims this may reduce paychecks to less than minimum wage - and that Starbucks is not required to withhold taxes on tips.

"The Fair Labor Standards Act prohibits deductions from an employee's pay if they reduce the employee below the minimum wage or overtime requirements. Starbucks deducts amounts from its employees' pay that reduce their paychecks below the minimum wage and/or overtime requirements. Its stated reason for the deduction is that the employees owe taxes on their tips, but that is false. Neither Oregon nor federal law require Starbucks to withhold taxes from unreported tips. The employees do not owe taxes on the tips, because their income is low enough that the withholdings from their regular wages are more than enough to meet their annual tax burden. Even if this were not the case, however, the employees would not have to pay any taxes on those unreported tips until the following April 15 (tax day). The FLSA requires employers to pay the minimum wage and overtime on payday, so the fact that the employees might receive a refund of these wrongfully deducted amounts (in many cases over a year later) does not eliminate the violation." (Parentheses in complaint.)

Starbucks "willfully filed fraudulent information," in violation of federal tax law, by reporting the made-up tips in W-2 returns, Fredrickson claims.

She seeks class certification, an injunction, and damages for wage and hour violations and $5,000 or the sum of actual damages incurred, whichever is greater, for providing false information on tax returns.

The putative class is represented by Jon M. Egan of Lake Oswego.

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