PORTLAND, Ore. (CN) — The Ninth Circuit on Thursday remanded Starbucks baristas' "phantom wage" class action to state court; the baristas claim Starbucks makes up tipped wages "out of thin air" and reports it as taxable income.
The Oregon District Court did not have the authority to grant summary judgment based on federal tax law, the Ninth Circuit ruled.
Three Starbucks baristas sued the company in Multnomah County Court in December 2012, alleging violations of Oregon wage and hour laws. The lawsuit was removed to federal court, where it was dismissed.
Lead plaintiff Hannah Fredrickson et al. say the coffee giant makes up tip numbers "out of thin air" and reports the phantom wages on their pay stubs and tax forms.
"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."
the Ninth Circuit said Thursday that the U.S. District Court did not have authority to stop Starbucks from withholding state taxes from baristas' paychecks based on the federal Tax Injunction Act, which does not allow injunctive or declaratory relief for state tax collection.
"Granting the declaratory and injunctive relief requested here ... would reduce the flow of state tax revenue," Circuit Judge Paul Watford wrote for the panel.
"If the relief were granted, Starbucks would no longer collect the state taxes in question and would no longer remit those funds to Oregon's treasury."
Nor did the U.S. District Court have authority to award damages based on Starbucks withholding of federal taxes, Watford wrote. The dispute over the tax withholding is an issue of state law and "there is no federal interest involved in the dispute, which Oregon's courts are better equipped to resolve."
The panel reversed and remanded.
Circuit Judge Raymond Fisher and Senior District Judge Donald Walter from the Western District of Louisiana, sitting by designation, joined Watford on the panel.
The baristas are represented by Jon Egan of Lake Oswego, Starbucks by Pratik Shah with Akin Gump Strauss Hauer & Feld.
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