Compare: Digital Tip Payouts vs. Cash Tip Payouts in Restaurants

There's no two ways around it. The hospitality industry is becoming digital in every sense. Most notably with how the bills get paid. Restaurant transactions have been moving away from cash and towards electronic forms of payment for years—and that's extending to tips now too. So much so that 84% of restaurant transactions are cashless, according to a recent PYMNTS study.

While this is convenient for customers, what are the implications for restaurants—and is this good for employees? According to Forbes, yes. Americans who leave their tips digitally tip nearly 15% more than when they tip with cash. However, more digital tips means less cash passing through the restaurant on a daily basis. This causes managers to waste time running to the bank to restock cash for employee tip outs, and employees have to wait days or weeks to receive their earnings with potential real-life consequences for those with tipped minimum wages whose income depends on tips.

Restaurants turned to tech for a solution, and tip payment software was born. Software like Tip Payouts enables managers to send tips digitally to their employees in seconds, eliminating the need for cash handling. It's like Venmo or Zelle, but built specifically for the needs of the restaurant industry. Think: POS system integrations, tracking and reporting capabilities, and separation from personal employee accounts.

Historically, adopting change in the restaurant industry has been notoriously slow. But due to rising costs, the labor shortage, competition, and operational complexities, owners are open to new ways of working. Spot On's State of Restaurant Tech Report found 71% of independent and small chain restaurant operators expect to increase spending on technology systems in 2023. For those considering making the switch from cash to digital tip payment solution, there are many factors to consider.

1. Process efficiency using tip payouts

An owner or manager's to-do list is piled so high that there isn't time to be anything less than hyper efficient. Simply put, digital tip payouts are faster and more efficient than cash payouts. With a few clicks, tips are sent directly into employees' bank accounts or onto a digital payment platform (depending on the software you choose). This eliminates the need to count cash, make bank runs, and manually track payouts.

2. Accuracy of tip payouts

Math isn't everyone's cup of tea, and even the wizards are still human. Mistakes are to be expected, especially when managers are doing hundreds of manual calculations every week. Digital tip payouts eliminate human error that occurs from counting cash payouts daily. Beyond the physical counting required for cash payments, some digital payment platforms integrate with Tip Pooling software to automatically calculate and pull in each employee's tip out totals, reducing the likelihood of calculation error. Managers spend less time correcting errors and employees get paid the legally correct amount owed.

3. Payment security questions to consider

On the employer side, digital tip payouts are more secure than cash payouts. Reliable digital payment platforms have built-in security features that protect against fraud and unauthorized access, as well as FDIC-insurance so funds are backed by the full faith and credit of the United States Government. Digital payments also eliminate the risk of theft and misplaced cash from storing it in-house.

On the employee end, having a stack of cash in hand at the end of a shift is exciting, but can also be scary. It's not uncommon for employees in pubs, lounges, and bars to head home at 3am with $250 or more in cash tips. When I myself used to work as a waitress, every night after my shift I would ask to be escorted to my car or walk with keys between my fingers to protect myself. Having that much cash on hand made me a target and I often felt unsafe. Additionally, saving hundreds or thousands of dollars at home until you can get to the bank is a security risk. Not to mention living with someone with sticky fingers? Digital tip payouts ensure tips get safely deposited into an employee's bank account, immediately.

4. Upfront and hidden cost

There's two things to consider with pricing: upfront versus hidden costs. Digital tip payouts will always cost more upfront. Typically there will be a base monthly price, plus there may be associated transaction fees. Depending on the platform, operators may get to choose if the restaurant or employee incurs the transaction fees. These fees are typically nominal and don't significantly impact the overall take-home tips of the employee, however operators should be aware that push-back may occur.

With cash tip payouts, there's no upfront cost but there is a hidden cost. If time equals money, how long is management spending on manual math calculations? How often do they make mistakes and need to go back and correct the numbers? How much time does it take them to do a cash run to the bank? All this time could be freed up to grow their team, provide better customer service, and keep other operations running smoothly.

5. Thorough record-keeping

Digital tip payouts eliminate excel docs, paper storage, and lost documents. Everything is securely centralized for both employers and employees to access when they need. Payouts are tracked and recorded in an organized manner for the restaurant's benefit, making it easier to comply with tax and regulatory requirements (platforms have no affiliation with the IRS).

However, there is one elephant in the room, which is an unspoken occurrence among restaurant employees who receive cash tip outs. Many pocket a portion of their tips and don't claim their full tip earnings on tax returns. While we don't recommend doing that, some employees still may not love the accurate recordkeeping of their tips. However, it can be extremely helpful for others who find it difficult to maintain accurate records themselves. Not only does it require zero effort for employees to track their earnings over time, they have proof of income which is helpful for those looking to get a car loan, new credit card, or a mortgage.

6. Training staff to use tip payouts

Implementing new technology in your business means disrupting the status quo. A change in process requires training mostly for management, but also setting expectations with employees. Although digital tip payouts are designed to be easy to set up and use, humans are creatures of habit and change can be hard. Educating employees about the benefits helps them understand the reason behind this decision so training is a breeze. Some platforms may also offer employee instructional videos to make training simple.

7. Improving trust & transparency amongst employees

This one's tough to accurately measure, but the general consensus is digital tip payouts improves trust and transparency in restaurants. With improved employee visibility from recordkeeping comes greater trust in management. Katie Button, CEO/Co-Founder of Katie Button Restaurants, spoke to us about how she replaced her teams' manual tip pooling process with 7shifts' digital Tip Pooling saying, "It's all about the fact that a software program is auto-calculating it based on their punches, [rather than] us in an Excel spreadsheet. It makes all the difference in the world in people's trust."

Thanks to a clear payout history, managers will see a reduction in questions and disputes from staff. Any confusion can quickly be clarified because all the information is right at their fingertips. That's a win/win for everyone.

Weighing the pros and cons

Overall, it's important for restaurant owners to carefully consider the implications when thinking about shifting from cash tip payments to a digital tip payment solution. First and foremost, assessment of the preferences and needs of their employees including convenience and financial well-being should be considered. Then, owners should evaluate the potential benefits, like increased transparency, improved record-keeping, and enhanced security for both employees and the establishment. Assessing factors like initial setup costs, transaction fees, employee training, and ongoing technical support will help owners make an informed decision about whether this is right for their restaurant team.

Kelsea Schnitzler

Before I began writing for a living, I worked in restaurants for almost a decade. Now in the marketing world, I apply my experiences to create helpful content for the 7shifts community.