Guide to Restaurant Employee Tip-Outs: Tip Pooling, Tip Sharing & Tip-Out Methods

All owners love it when evenings are busy at their restaurants, bars, or cafes. You’d also like when your servers are working their best to provide excellent customer service, right? Now, let’s imagine, they gather to count their tips and, suddenly, there’s chaos over how tips should be distributed. One server feels shortchanged, another thinks the kitchen staff deserves more, and you find yourself controlling the uncomfortable situation. How would you avoid such circumstances? Enter a fair tip-out structure!

In this blog, we will cover:

1. What is a tip-out?
2. Types of tip-outs
3. Pros & Cons of tip-outs
4. Factors to consider while creating your tip-out method
5. Best practices for implementing your tip-out structure

Let’s get started!

What is a tip-out?

 At restaurants, usually, the servers receive direct tips from customers. But they are not the only ones who contribute towards creating dining experiences. Correct? Many people are involved in delivering optimized customer experiences – For example, chefs, counter managers, bussers, and others. A tip-out is defined as a process where servers share some part of their tips with other staff members who do not directly receive tips.

Why is tip-out important?

When you have a structured tip-out system, you gain various benefits for your restaurant business.

• First, it promotes fairness and all your staff members feel equal. It is not one person who is responsible for good customer service. You can highlight the fact that the quality of service is a team effort.
• You like it when your customers like your restaurant’s food and service, right? Does that mean you’ll only praise your chef and servers for that? No, right! You’d want to gift rewards to all your team members for their efforts. When you distribute tips, you ensure that employees who work behind the scenes – like employees who arrange all kitchen stuff or assist your head chefs – are also recognized for their contributions.
• A fair tip-out system also helps in retaining staff. Employees are more likely to stay with your restaurant if they feel their efforts are being appreciated.

History of tipping

Tipping waiters and waitresses isn’t something that’s always been around. It started in Europe in the 17th century! Wealthy folks would give extra money to servants if they did a good job. The concept was brought to the United States after the Civil War.  American travelers noticed the tipping culture in Europe and introduced it back home.

Types of Tip-outs

 Tipping out isn’t a one-size-fits-all situation. Every restaurant has a different style and needs a different system for sharing tips. Here are some popular methods restaurants use to ensure fair and consistent tip distribution among staff:

• Percentage of tips

In this tip-out method, servers tip out a fixed percentage of their total tips to other staff members. For example, if your server earns $100 tips, the tip-out structure would ensure that some amount, let’s assume 15% goes to the chefs and 10% to bussers. This method is straightforward. Staff members get the price for the contribution they make toward delivering maximized customer experiences.

• Percentage of sales

In this, your servers will have to tip out some amount based on the percentage of their total sales. For instance, if your server’s sales amount to $100, he/she might be required to tip out 2% to the kitchen team, 1% to the bussers, and so on – the percentage will depend on the criteria you fix for your restaurant.

• Event tip splitting

This method is used for special events or large parties. Tips collected during the event are pooled. It is then split among all staff members who worked at the event. For example, let’s say you organize a birthday party at your restaurant. Your server gets $500 in tips. So, in this scenario, you will have to evenly divide the tips among servers, bartenders, and other staff members based on their tasks and activities.

• Tip sharing

Tips are collected and distributed among a specific group of employees, such as all the servers or the entire kitchen crew. This method promotes teamwork and helps ensure that everyone in the group benefits equally.

• Total hours worked

As the name suggests, this method involves distributing tips based on the number of hours each employee worked. Let’s assume there are two servers on your team: Sarah and Andrew. Sarah works for 10 hours and Andrew works for 8 hours. The total tip gathered is $1,000. Then this amount will have to be split and distributed according to the hours they have worked.

• Tip pooling

Tip pooling is where all tips are first collected and then distributed among staff members based on a predetermined criteria fixed by your restaurant. To effectively implement tip pooling, you can use a tip pooling calculator. This tool helps you distribute tips based on criterias such as number of hours worked, staff roles, or a points system. Let’s look at a quick example to understand this better.

Suppose your restaurant collects $1,200 tips for one day. You have five staff members and their work hours are as follows:

Server A: 8 hours
Server B: 6 hours
Bartender: 8 hours
Busser: 5 hours
Chef: 7 hours

Using a tip pooling calculator, you fill in these hours and the total tip amount. The calculator will distribute the $1,200 based on the hours that each staff member has invested.

• Hybrid tip pooling

In tip pooling, as discussed above, you stick to one method for calculating tips. But in hybrid tip pooling, you combine multiple methods to distribute tips amongst employees. For example, you might pool tips from servers and kitchen staff, and then distribute them based on both hours worked and a points system.

• Points-based tip pooling

In this system, different roles are assigned different point values based on their contribution level. Restaurant owners can assign the defined points as per their requirements or brand culture. For example, a server might receive 5 points per hour worked, a bartender 4 points, and a busser 3 points. At the end of the shift, tips are divided based on the total points collected by each employee.

Are tip-outs good or bad? : Pros & Cons 

Pros of Tip-Outs

1. Tip-outs encourage better service

Tip-outs can motivate all staff members to provide excellent service. When everyone knows they will receive a share of the tips, they are more likely to work together to ensure exceptional customer experiences.

2. A tip-out system makes dining more affordable for customers

A fair tip-out system can help keep menu prices reasonable. If tips are distributed among staff, you might be able to offer competitive wages while keeping prices affordable. This can attract more customers and increase overall sales.

3. 
   

   Tip-outs keep your staff motivated

Tip-outs ensure that all employees, not just servers, are rewarded for their efforts. This can boost morale and reduce turnover, as staff members feel valued and fairly compensated.

Cons of Tip-Outs

1. Unpredictable Income

For staff members who rely heavily on tips, income can be inconsistent and unpredictable. This can make it difficult for employees to budget and plan their finances. For instance, a server’s income might drop significantly during less busy months and cause financial stress.

2. Potential for Unfair Treatment

Without a clear and fair tip-out structure, there can be perceptions of unfairness among staff. Some employees might feel they need to receive a better share compared to the amount of work they put in. For example, if bartenders receive a large portion of the tips but the bussers and kitchen staff do not, it can lead to conflict within the team.

3. Risk of Underpayment

If not managed properly, tip-outs can contribute to underpayment issues. Relying too much on tips to compensate staff can lead to situations where employees are not earning a livable income. This can affect job satisfaction and retention rates.

All you need to do is to strike the right balance – A fair tip-out method for everyone

To maximize the benefits and minimize the drawbacks of tip-outs, you need to establish a transparent system. Here are some strategies:

• Develop and communicate clear guidelines on how tips will be distributed. Define what method you’d be using to distribute tips – whether it will be point-based, some percentage of sales, etc.
• Ensure that the tip percentage you set for different roles and positions is fair. Regularly review and adjust these percentages if necessary.
• Consider providing a base pay. This can help mitigate the unpredictability of tip-based income during low sales periods.

Factors to consider while creating your tip-out method

Creating an effective tip-out method for your restaurant requires careful consideration of several factors. Here’s a detailed look at the main elements you need to take into account:

 Service model

Your tip-out structure should align with the specific service model of your restaurant. Your restaurant has unique staff members, right? So, the way you distribute tips should also be unique – and based on your unique service model.

• Full-service restaurants: In a full-service restaurant, servers, bussers, bartenders, and kitchen staff all play integral roles. A common tip-out structure might involve servers giving a percentage of their tips to bussers and bartenders.
• Quick service restaurants: These restaurants typically have less direct customer interaction with servers. There’s more focus on counter service. In this setting, tips might be pooled and divided among those directly involved in service, such as cashiers.
• Casual Dining: Such restaurants fall between full-service and quick service. Here, you might see a mix of the two approaches. For instance, servers could tip out a smaller percentage to their fellow team members while keeping a larger share themselves.
• Fine dining: A tiered tip-out system can be effective here. Servers can tip out to other staff members based on their level of involvement. The individual who contributes more will get more portions of the tip!
• Cafes: Tips can be pooled and divided equally among all staff members, including baristas, cashiers, kitchen staff, and more. This will facilitate a team-oriented environment where everyone contributes to the overall service quality.
• Breweries: In breweries, bartenders and servers usually interact directly with customers. A typical tip-out might involve bartenders receiving a higher percentage as they mingle more with customers. They prepare and serve their drinks. Servers who deliver food or additional drinks might receive a smaller percentage.

Local Laws

Local laws and regulations significantly impact how you can structure your tip-out system. Be familiar with the legal requirements in your area. Check if there are specific rules about how tips can be distributed, who can participate in tip pools, and so on.

In some states, ther are laws that may prohibit management from participating in tip pools. Then there are states where tips can be shared only among employees who receive tips.

Tip pooling & tip splitting laws in the U.S., Australia, & Singapore

In the U.S., servers must choose to participate in tip pooling, it cannot be mandatory. Only staff who regularly receive tips can be part of the tip pool. Similar to the US, tip pooling must be voluntary for employees in Australia. Only staff who customarily earn tips can be included in the tip pool. Unlike the US and Australia, Singapore doesn’t have specific regulations around tip pooling. Employers must ensure all staff, regardless of tip earnings, receive the minimum wage.

Employee inputs

Involving your employees in the creation of the tip-out structure can lead to a more accepted tip-out system. Gather feedback from your staff to understand their perspectives. Let’s say your servers feel that the kitchen staff’s contribution is going unnoticed. What will you do? You can include the kitchen staff in the tip-out discussion and assign a portion of the tips to them. Every effort matters! – Make sure you make them believe this. That is how you nurture a positive work environment.

Best practices for implementing your tip-out structure

• Talk to your staff – communication is key! 

It’s crucial to involve your staff in the process of designing and implementing your tip-out structure. Schedule a meeting to discuss the new policy, explain the reasons behind it. Let them know why you are launching the policy. Encourage them to ask questions. Educate them on how the tip-out system works, including who receives tips and how the distribution is calculated.

• Get transparent with customers

Transparency with your customers is critical when it comes to tipping. Display your tipping policy prominently in your restaurant or on your menus so that customers are aware of how tips are distributed. For instance, you could include a note on your menu stating, “We will gift a portion of your tip to our hardworking kitchen and service staff. We’d love your support to spread some smiles!”

• Leverage automation

Implementing automated systems for tip-out calculations and distribution can streamline the process and reduce errors. Use POS systems that allow you to customize tip-out percentages for different roles and automatically calculate tip distributions at the end of each shift. Invest in a POS system that offers customizable tip-out features, allowing you to set different percentages for different staff members.

• Keep monitoring! Check if the employees are happy with the tipping policy

Regularly monitor and evaluate your tip-out structure. Get feedback from your staff to assess their satisfaction with the policy and identify areas for improvement. Be open to making adjustments or revisions to the structure based on their input to ensure that it remains fair for everyone. You could conduct anonymous surveys to gather feedback from your staff on their satisfaction with the tip-out structure.

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FAQs

1. What does tip out mean in a restaurant?

Tip-out refers to the practice where servers share a part of their tips with other restaurant staff members who contribute their efforts but do not directly receive tips.

2. What is the normal tip-out at a restaurant?

The normal tip-out percentage varies depending on the restaurant and the roles of the staff involved. It typically ranges from 3% to 5% of total sales achieved.

3. How do you calculate a tip-out?

To calculate a tip-out, you need to multiply the total sales or total tips received by the percentage that was promised for each staff member.

4. What is the difference between tip-out and tip-pool?

Tip-out involves servers sharing their tips with specific staff members, while tip pooling involves pooling all tips earned by the staff and distributing them evenly among all the employees.

5. How do tip-outs work?

Tip-outs work by ensuring that all staff members who contribute their efforts receive a fair share of the tips received by servers. This promotes fairness, teamwork, and a positive work environment.

6. Is tip pooling worth it?

Tip pooling can be beneficial as it promotes a sense of teamwork and ensures that all staff members are fairly compensated for their efforts.

7. How do restaurants pay out credit card tips?

Restaurants typically pay out credit card tips through payroll processing. The tips earned by servers are added to their regular salary and included in their paycheck. Some restaurants may distribute cash tips daily or weekly.