There's a lot of confusion surrounding the process, structure, and laws regarding restaurant tip outs. At the end of the day, the goal is to make sure their employees are happy, paid fairly, and following the laws when it comes to tips.
For that to happen, it's necessary to understand the rules of tipping out, choose a structure that works for your staff, and communicate that structure to employees clearly.
Read on for everything you need to know to establish a successful process for tipping out in your restaurant.
What is a Tip Out?
In restaurants, a tip out occurs when someone in a heavily-tipped role shares a portion of their tips with other employees. Tipping out distributes gratuities to everyone who is eligible to receive them.
For example, when guests leave a $20 tip at a restaurant, they might assume the entire amount goes to their server. However, servers are not the only ones who contribute to a guest's dining experience. A tip out ensures other employees working in the front of the house share in gratuities, such as:
- Food runners
- Hosts & hostesses
In this example, the server might keep $10 of that initial $20 tip, with the bartender receiving $4, the runner receiving $3, and the busser, barback, and host each receiving $1. The tipping out model acknowledges the contributions of all of these positions, with extra weight given to those who have a more active role in forming a connection with guests.
The main benefit of tipping out is that more employees can be considered tipped employees. In most parts of the country, restaurants may pay an hourly rate lower than the minimum wage if the difference is made up by tips.
The difference between the tipped hourly rate and the actual minimum wage - known as the tip credit - must be met or exceeded by gratuities so that employees receive the full minimum wage to which they are entitled. If not, the restaurant must make up the difference..
Tip Out Methods
There's no one-size-fits-all approach to tipping out. But it's important that your restaurant adopts a method that works for your team, lest you'll impact staff retention and morale. Here are a few of the common methods:
Tips Paid To Those Who Collect
The most straightforward approach to tipping is to let employees who directly earn tips keep them. It would be up to the discretion of the tip recipient as to how much — if any — of their tips they share and with whom.
This approach incentivizes servers to create a stellar experience for every party, as they directly benefit from any higher tips. It could also incentivize other FOH employees like bartenders and bussers to work faster and alongside highly-tipped servers in hopes of earning a portion of their gratuities.
As a downside, servers would not be required to share these tips, and there might not even be a tip out. This worsens the wage gap, frustrating other employees who wouldn't benefit from working more diligently. Plus, it puts added financial pressure on the restaurant to cover the tip credit if these workers don't make at least the minimum wage between their tips and their tipped minimum wage.
Even Tip Splitting
Even tip splitting is when all earned tips are all pooled and split evenly among eligible staff. You might see this solution at fast-casual restaurants or coffee shops, where a tip jar sits on the counter and its contents are divided among the team at the end of a shift.
At full-service restaurants, even tip splitting is still an option. When done well, it creates a sense of camaraderie rather than competition among staff. For example, a server who gets stuck with a table that doesn't tip well — regardless of their server's efforts — wouldn't have to worry about the personal financial implications.
However, this option can backfire if not all team members hold themselves to the same standard of service. A positive, efficient server who consistently brings in 20-25% tips might feel neglected when being forced to share his earnings with a less-attentive waiter who averages 15-18%. This option can also diminish the earnings of servers handling more tables and larger parties.
Tip Pooling by FOH & BOH
Until recently, back-of-house workers were legally ineligible to be included in tip pools. Now, they are eligible.
Sharing tips with kitchen employees is an effective way to bridge the wage gap between FOH and BOH workers. It results in better retention of kitchen staff, and provides more compensation to those working busier shifts.
However, this approach can take even more of a cut out of a server's tips. Effective servers who are used to taking 50-70% of the tips that they worked to earn, for example, may now find themselves only keeping 30-40%. Additionally, in order to take advantage of this new option, restaurants must pay employees the full minimum wage themselves, rather than benefiting from any tip credit. For those reasons, you might want to consider a kitchen appreciation fee in lieu of sharing FOH tips with kitchen staff.
Percentage-Based Tip Outs
The most formal option — and oftentimes the most agreeable — is percentage-based tip outs. This method looks at a server's total tips for a shift and then distributes a portion to other employees based on a set percentage contingent on their duties. For example, if a server receives $100 in tips for the shift, a percentage-based tip out may distribute that money as follows:
- 70% for the server to keep, or $70.
- 15% for the bartender, or $15.
- 10% for the food runner, or $10.
- 5% for the busser, or $5.
With this model, tip outs must be clearly understood and monitored. You'll also need to determine if there is tip pooling within this model—do all servers in a shift get 70% of all tips collected, or does each server keep 70% of their own earnings?
This approach to tipping out is systematic and easy to understand, so employees can reasonably predict how much they'll earn per shift.
How to Choosing the Right Tip Payout Method For Your Business
The right tip payout method for your business depends on your service model. Here are a few common service styles and what should be considered when choosing a tip payment method.
Servers at traditional full-service restaurants rely on tips more than any other restaurant concept. It's important to consider how many employees are in tipped positions, your staff's experience, the shift schedule structure, and projected wages with tips added.
In a fine-dining establishment with career servers, a shared tip pool might work well, as employees will know to support each other on the floor and everyone will be carrying their weight.
Conversely, if your restaurant team's experience level varies, think through the impact of tip pooling. Veteran servers may resent sharing tips with rookies—but those new hires may appreciate the wage security that comes with communal tipping and be inclined to stick around longer.
Tip jars (and their digital equivalents) are popular among workers at quick-service restaurants like cafes, pizzerias, and ice cream shops. It's common for the tips earned by the staff to be divvied up evenly after each shift, with all eligible employees taking a cut.
The only other decision the business needs to make is whether or not back-of-house employees are eligible for tips, if you have any.
Fast Food Restaurants
Similar to QSRs, fast food restaurants might have a tip jar (or digital equivalent) for either counter workers or all employees to share at the end of a shift. However, most fast food chains like McDonald's don't allow their workers to receive tips. If your fast food restaurant is an exception, clearly define who is eligible to be tipped, and if any role gets a larger cut of tips than another.
Other Tip Payout Considerations
Before setting up your tip out structure, remember to factor in these considerations to stay compliant and ensure staff are satisfied with the approach.
The legality of tip outs and tip pooling are subject to local regulation. For example, Minnesota restaurants are not allowed to pool tips. We recommend reviewing your area's laws before adopting or altering a tip out procedure to remain legally compliant.
In general, the biggest local rule to check during tip outs is whether your area has a tip credit. Some states like California require employers to pay the full minimum wage regardless of tips — meaning restaurants can't rely on the tip credit to offset their own contribution to wages. Most other states, however, do allow tip credits. If your restaurant is allowed to take a tip credit, it simply means an employee's tips cannot be reduced through tip outs to the point of being paid below minimum wage. If this does happen, the restaurant must make up the difference to get that employee to minimum wage.
Who Should Get Tips? And What is Fair?
First and foremost, tips should go to servers and bartenders. They're the frontline of service in an FSR, and should be rewarded for their direct efforts in making the guest experience what it is. After that, it's completely up to the restaurant in how it sets up its wage and tipping structure. Most restaurants recognize the hustle of bussers and food runners and include them in tip outs, while others might loop in the host or hostess.
Regarding fairness, it too is dependent on the restaurant. Let's revisit the idea of tipping your hosts. If all the host does is greet diners and bring them to their tables, they're not as active in the dining experience and might not be eligible for tips. However, if they also takeout orders, they're the only face involved in the experience for those guests, so they may be worth including.
Finally, restaurants need to determine what percentage is fair for each employee included in the tip out process. While this also differs in each restaurant, you should consider the number of employees in each role included in the tip out, the level of interaction with guests, and the overall impact on employee wages to determine a fair tip out structure.
Tipping Out vs. Tip Pooling
The difference between tipping out and tip pooling lies mainly in the position one holds in a restaurant. Tipping out occurs when servers distribute a portion of their tip earnings to other front-of-house, non-waitstaff employees. On the other hand, tip pooling refers to those in the same position combining their tips and taking an equal amount from the pot. When tipping out, servers tend to keep most of the tips they earned directly, but when tip pooling, their tip amounts could heavily fluctuate based on the earnings of their peers.
Recommended Reading: Tip Pooling Tools to Manage Tips at a Restaurant
Implementing Tip Payouts Efficiently
Landing on a tip out process is one thing — effectively implementing it is another thing entirely.
Some restaurants might choose to go the basic route when it comes to tip splitting, such as using the honors system for reporting tips and using a spreadsheet to determine everyone's share. However, servers who earn a generous cash tip might be less incentivized to share the full amount, and let's face it - manually entering tip amounts into a spreadsheet and distributing them accurately takes up far too much of your time.
Nowadays, to fairly split and distribute tips in your restaurant, simply make sure you have the right tools in place to record tips, pay staff, and source feedback on the tip out model from employees.
1. Decide on a Payout Structure That Works for Everyone
Making any changes to an existing tip out structure could directly impact an employee's take-home pay. For that reason, it's important to run any proposed alterations to tip sharing by your staff in advance of those changes to ensure your model is agreeable to employees. You should share these updates publicly in front of your staff, as well as electronically, and encourage them to share their thoughts and feedback via a one-on-one communication software.
2. Use Tip Pooling & Payout Software
Rather than juggling multiple spreadsheets and software subscriptions, use dedicated tip pooling software like 7shifts.
Tip Pooling Software Example by 7shifts
7shifts' tip pooling feature integrates directly with POS software to automatically collect and divide tips among eligible staff. As a result, managers' time spent calculating tip payouts will be reduced by eight hours each week on average.
3. Implement Custom Tip Pools
Setting up your tip pool structure shouldn't be a days-long activity. When using 7shifts' tip pooling software, all managers have to do to implement a new tip pool is:
Building a tip pool in 7shifts
- Choose the location the pool is for.
- Add in the employees who are eligible for the pool.
- Define your tip pool rules.
Moving forward, that saved tip pool will be available for you to utilize whenever recording tips for a shift. You can also easily edit the rules of the tip pool or the employees included should the need arise.
Using a saved tip pool in 7shifts
4. Payout Employees and Gather Feedback
Whether this is your first tip splitting format or fourth, you should follow up with your employees after their next few payouts to see how they're receiving the structure. If you don't, you risk losing productive and efficient employees who feel like the format doesn't acknowledge their work.
For example, with 7shifts' employee communication software, you can send an announcement to all employees asking for feedback on the tip pooling format. Employees can then communicate with you in-person or via 7shifts to provide candid and actionable feedback to help you respond to their comments or concerns.
Frequently Asked Questions
What is the difference between tip pooling and tip sharing?
In restaurants, tip pooling refers to a process where everyone who works in one position (server, bartender, etc.) takes a set percentage of the overall amount of tips earned by waitstaff in a shift. Tip sharing, however, is when a server distributes a portion of their own tips to other employees who contributed to the diner's experience, such as food runners, barbacks, and bussers.
Can managers enforce tip out percentages?
Managers may enforce tip out percentages for their staff, so long as those percentages are communicated to employees. However, if an enforced tip out percentage causes an employee to be paid below minimum hourly wage, the employer must make up the difference as a result.
Do restaurant owners pay payroll taxes on tips?
Yes. According to the IRS, the restaurant must pay payroll taxes on all tips an employee earns if that amount exceeds $20 per month. This includes withholding employees' income, social security, and Medicare taxes, in addition to paying the employer share of social security and Medicare.
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