There's a lot of confusion surrounding the process, structure, and the federal, local, and state laws regarding restaurant tip-outs. The goal is to ensure their employees are happy, paid fairly, and follow the regulations regarding tips.
For that to happen, it's necessary to understand the rules of tipping out, choose a restaurant tip structure that works for your staff, and communicate that structure to employees.
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 tipped employees. Tipping out distributes gratuities to everyone eligible to receive them.
For example, guests who leave a $20 tip at a restaurant might assume the entire amount goes to their server. However, servers are not the only ones contributing to a guest's dining experience. A tip-out ensures that their co-workers 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 $20 tip, with the bartender receiving $4, the runner receiving $3, and the busser, barback, and host each receiving $1.
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.
Types of Tips
Restaurants can receive multiple tips if they accept multiple types of payments. Although cash types have always been the most popular option, digitalization and paying by card are more common. Here are different tips that a restaurant or cafe can receive:
A tip jar next to the POS system has always been a classic option at your favorite cafe. When dining at a restaurant, patrons are most accustomed to leaving a tip on the table after paying. Cash is the traditional way of leaving a tip, which is how most people are used to paying for a tip. Of course, cash tips must be manually counted, which will take extra time and energy.
The tip jar is a low-tech way of accepting and processing tips; it's free, simple, and does not require additional software. However, the drawbacks of cash tips are that they can be miscounted, get lost, or stolen more easily. Additionally, if you only accept cash tips, you may receive fewer tips if your patrons only have credit cards.
Tippy has a stint as a thespian. Read more Adventures of Tippy comics.
Paying by credit card and digital wallets have been steadily taking over paying with cash. Pulling out a card, tapping to pay, and then quickly selecting a tip option is straightforward. For patrons paying tips via credit card, they no longer need to calculate the tips themselves, as payment software does the work for them. A receipt or a tablet will list recommended tip percentages and the dollar/cent amount, or a “no tip” or “custom tip option.”
Auto-gratuity and Service Charges
Automatic gratuity & service fees are often when a large group comes into your restaurant and requires extra service and attention. Your restaurant can determine what size would require this auto-gratuity or additional fee; often, it starts at six people. It often makes the most sense to require an automatic 18 to 20-percent gratuity. Some restaurants may opt to add a flat service charge for large parties, too.
Tip Out Methods and Systems
There's no one-size-fits-all approach to how tips are paid out. But your restaurant must adopt a method that works for your team, lest you'll impact staff retention and morale.
Who receives tips
Tips paid to those who collect
Servers, sometimes other FOH staff
Possibility of an uneven tip out and wage gaps
Full-service restaurant, fine dining
Even tip splitting
All eligible staff
Even and fair, provides camaraderie amongst staff
Some staff may not hold themselves to a high standard of service
Cafes, breweries, some full service restaurants, casual restaurants
Ensures that BOH staff receives a share of tips
Takes away a considerable portion of server's share requiring higher hourly wages
Casual restaurants, fast food, quick service
Percentage-based tips outs
Servers, other FOH staff
A fair and formal way to divide tips amongst servers and other staff
Structure and percentages must be laid out clearly and directly or this structure can become confusing
Establishments that require a diversity of staff (servers, hosts, bussers, food runners, etc.) to run smoothly
Total hours worked
All eligible staff
A straightforward way to ensure that all staff is tipped out evenly for each hour worked
Does not take into account level of experience, position, or standard of service provided
Percentage of sales
All servers or cashiers, other FOH staff
Encourages team to work together to provide high quality service
Servers make less in tips, and puts more pressure on them to sell more
Full service restaurants, casual restaurants
All eligible staff
Distributes tips based on level of responsibility of each position
Does not take into account slower shifts or individual performances
Full service restaurants
Tips Paid To Those Who Collect
The most straightforward tipping out approach is letting employees who directly earn tips keep them. It would be up to the recipient's discretion how much — if any — of their tips they share with their coworkers.
This approach incentivizes servers to create a stellar experience for every party, as they directly benefit from higher tips. It could also incentivize other FOH employees like bartenders and bussers to work faster and alongside highly-tipped servers to earn a portion of their gratuities.
As a downside, servers don't have to share these tips, and there might not even be a tip out. This discrepancy worsens the wage gap and can put servers working for themselves rather than as a team. It also puts added financial pressure on the restaurant to cover the tip credit if these workers don't make at least the Federal minimum wage between their tips and their tipped minimum wage.
Even Tip Splitting
Even tip splitting is when all earned tips are pooled and split evenly among qualified 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 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 server which averages 15-18%. This option can also diminish servers' earnings by handling more tables and larger parties.
Tip Pooling by FOH & BOH
Until recently, back-of-house workers were not legally allowed to be included in tip pools. But the Department of Labor and the Fair Labor Standards Act (FSLA) has made it clear that cooks, dishwashers, and their back-of-house coworkers can be included in the tip pool.
Sharing tips with kitchen employees effectively bridge the wage gap between FOH and BOH workers. It results in better kitchen staff retention 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 which are used to taking 50-70% of the tips they worked to earn, for example, may now find themselves only keeping 30-40%. Additionally, to take advantage of this new option, restaurants must pay employees the full minimum wage rather than benefiting from any tip credit. For those reasons, you might consider a kitchen appreciation fee instead of sharing FOH tips with kitchen staff.
Tip Pooling Calculator Template
Dive into tip pooling with this free Excel calculator.
Percentage-Based Tip Outs
The most formal option — often 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. 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 closely monitored. You'll also need to determine if 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 earnings?
This approach to tipping out is systematic and easy to understand, so employees can reasonably predict how much they'll earn per shift.
Total Hours Worked Based Tip Outs
Another form of tip pooling, tips based on hours worked adds the total amount of tips made in a week or day, and divides the total amount of tips by the total hours worked. Then, that number is the number of tips/hours employees would receive for every hour they worked.
For example, say that your coffee shop made $75 in tips in one day. Two employees worked in the morning for 6 hours, and two each worked a 4-hour shift in the afternoon. Those two employees worked 20 hours that day, so $75/20= $3.75/hour in tips. The employees who worked the long shifts in the morning would receive $22.50 each, while the employees in the afternoon would receive $15 each.
This structure works best in a food service operation where tip-eligible employees do an even amount of work and have similar positions and experience levels. Additionally, if someone gets stuck with a slow shift, this will not negatively impact their tips. One drawback to this structure is that it may not incentivize some employees to provide an excellent standard of service.
Percentage of Sales Based Tip Outs
In this structure, individual servers would tip out a certain percentage of their sales to additional staff. The percentages must be determined at your establishment, but it might look like 2 percent to the host, 5 percent to the food runner, and 8-10 percent to the bartender. A server with $50 in drinks sales would tip the bartender around $5. If they had around $250 in food sales, then $12.50 would go to the food runner and $5 to the host.
This encourages the restaurant staff to work as a team to provide better customer service. However, when shifts or slow or tips are low (possibly due to things outside a server's control), this might be unfair to servers relying more heavily on the tip than other staff.
Points-Based Tip Pooling
A point system for pooled tips is one of the more complex methods, with different types of employees awarded a certain number of points. The points correlate with the amount of responsibility (specifically in customer service), and the more points, the more tips.
Servers would likely have the highest points, say 15, while bussers and food runners may have 5. A bartender could have 10, while a host could have 7. The total amount of tips would be divided by the total amount of points and then would determine how much each point is worth in tips. You would multiply each employee's points by how much one point is worth.
Recommended Download: Free Restaurant Tip Pooling Calculator and Template
How to Choose 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 carry 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 from 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 they have any.
Fast Food Restaurants
Like 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 more significant cut of tips than another.
Cafes or Breweries
These establishments may or may not have a BOH; a cafe may just have a crew of baristas that make coffee, heat up pastries, and do dishes themselves. A brewery likely has one or two “beertenders” pouring pints and clearing tables. In most cafes and breweries, a tip-out is a structure where tips are paid out every shift or per hour worked. Most employees working the FOH in these establishments have similar jobs and skills; therefore, some type of tip pooling structure makes the most sense.
Casual Dining Restaurants
At a casual dining restaurant, a server will probably take your order at the table, and there may be bussers and food runners assisting the front-of-house staff. Tips will likely not be as significant in this establishment as in a full-service or fine dining restaurant and will, therefore, not impact your servers' take-home pay. Servers will need to be paid a higher hourly wage, and then the business could distribute tips in a percentage-based tip-out structure.
Fast Casual Restaurants
Fast casual is an establishment between fast food and casual dining. Chances are you will probably order at the POS system with a cashier (as opposed to a server) and then sit and wait to be served by a food runner. Without the need for servers, a more even distribution of tips, like in total hours worked or tip-splitting structure, is the logical choice.
At a fine dining restaurant, tipping is a considerable part of a server's take-home wages, and this is something that diners should be factored into the cost of their meal. At this establishment, servers receive a high level of training from fulfilling their job and likely having years of experience under their belt. Often, they have additional training in certain fields, such as wine, liquor, cheese, etc. Part of the fine dining experience is the atmosphere and the service, and servers play a large part in this. Career servers should be paid fairly for their expertise and take a large portion or all of the tips they earn directly.
Other Tip Payout Considerations
Before setting up your tip-out structure, remember to factor in these considerations to stay compliant and ensure staff is 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. Check out this guide on state by state tip pooling laws.
The most significant 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 contribution to wages. Most other states, however, do allow tip credits. If your restaurant is allowed to take a tip credit, it simply means you cannot reduce an employee's tips through tip-outs to the point of being paid below minimum wage. If this happens, the restaurant must make the difference to get that employee to minimum wage.
Cash vs Digital Tip Payouts
There are a few options when it comes to paying out employee tips. These are the most commonly used:
- Cash: Divvy up bills and coins in envelopes to pay employee tips.
- Payroll: Add all or a portion of an employee’s tips during a given pay period to their paycheck.
- Money Transfer Apps: Such as Venmo or Zelle.
- Paycards: Transfer tip funds onto a vendor-supplied card. A fee may apply to move funds from the paycard to a bank account.
- Instant Digital Payment: Send an employee’s tips directly to their debit account, like 7shifts’ Tip Payouts.
The right payment method for your restaurant depends on factors like the number of tipped employees you have and the payment frequency. For example, if staff are used to receiving tips at the end of each shift, the tips on payroll method probably won’t work for them. If your managers often have to run to the bank to withdraw cash for employee tips, you’ll save time using direct digital tip payments instead. To weigh the pros and cons of using cash vs. digital tip payments for employees, read this tip payment comparison guide.
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 a full service restaurant and should be rewarded for their direct efforts in making the guest experience what it is. After that, it's entirely up to the restaurant 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 take out orders, they're the only face involved in the guest experience, so they may be worth including.
Finally, restaurants must determine the fair percentage 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.
Some restaurants might choose the basic route when it comes to tip splitting, such as using the honors system for reporting tips and 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 ensure you have the right tools to record tips, pay staff, and source feedback on the tip-out model from employees. 7shifts’ tip management products integrate directly with 7shifts Payroll and POS software to automatically calculate and distribute tips among eligible staff.
1. Decide on a Payout Structure That Works for Everyone
Making changes to an existing tip-out structure could directly impact an employee's take-home pay. Therefore, it's essential 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 team, as well as electronically, and encourage them to share their thoughts and feedback via one-on-one communication software.
2. Implement Custom Tip Pools
Rather than juggling multiple spreadsheets and software subscriptions, use integrated tip management software like 7shifts. With 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.
Tip Pooling Software Example by 7shifts
3. Pay Out Tips Directly to Employee Bank Accounts
You can send your pooled and non-pooled tips directly to employee debit accounts in seconds with 7shifts’ Tip Payouts. Simply enter the tip amounts or integrate your POS and set the tip syncing rules.
Tip Payouts Dashboard in 7shifts
Review and make changes, and voila! Pay your staff’s tips instantly and easily. Best of all, it automatically tracks paid tips, then lets you export them to payroll for quick and simple tax deduction.
Setting up tip payment batches in 7shifts
Recommended Reading: How to Implement Digital Tip Payouts at your Restaurant
4. 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 vs 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's share of social security and Medicare.
Does the kitchen staff get tips?
Kitchen staff may or may not get tips, depending on your chosen tip-out structure. With tip pooling, BOH staff receive tips, so kitchen staff gets included. With percentage-based tips out, kitchen staff could also get included, making a small percentage of what the servers receive, most likely under 10%.
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