Many restaurant owners implement a tip-splitting system between servers and supporting staff. While the servers are the main point of contact for the restaurant patron, good service cannot be delivered without the help of other staff members.
You may also be looking to start a tip-splitting policy for the first time for any new business operations you started during the coronavirus pandemic.
Did you hire a new to-go or delivery crew? Is there anyone that performs curbside operations now? With everyone working to increase efficiency in these new practices, it makes sense to split the tips that the customer-facing employee receives.
Between complying with different legalities around tip splitting and choosing between different options, the process can be a difficult one—that’s why we’re here to help. We’ve laid out everything you need to know to make tip splitting as seamless and simple as possible, from the legal information to a breakdown of the differences between the choices and how to implement them with ease.
We even included a custom tip splitting template so you can tip split like a champ. But first, let’s go over some of the basics you need to know.
What is a tip?
The Internal Revenue Service (IRS) defines a tip as “discretionary (optional or extra) payments determined by a customer that employees receive from customers.” These payments are typically found in the hospitality industry and include:
- Cash tips directly from customers.
- Credit card, debit card, gift card, and any other electronic payment method or charged tip.
- Any non-cash tip value such as tickets.
- Tips received from other employees paid out through tip pools or tip splitting, or other formal or informal tip sharing arrangements.
In general, the tip amount is the cost of the service multiplied by 0.XX, with XX being the percentage you want to leave as a tip. Your total cost (service and tip) is your cost multiplied by 1.XX, with XX again being the percentage you want to leave the staff.
What exactly is tip pooling?
Tip pooling means all or some of the tips collected are combined and redistributed fairly among all employees at the end of a shift.
A tip pooling policy makes sure every restaurant group of employees—including back-of-the-house staff such as cooks and dishwashers—benefit from tip pooling arrangements.
Are there any tip pooling laws?
According to the Fair Labor Standards Act (FLSA), which is administered by the Department of Labor (DOL) and is a federal law, employers must pay minimum wage to all employees. However, they are allowed to take a “tip credit” of up to $5.12 an hour of employees’ tips against their minimum wage obligation.
If the house keeps any tips or requires employees to share tips with non-tipped staff members, the employer cannot take this tip credit and must pay the employee full minimum wage. Employers are allowed to require servers to share their tips with non-tipped employees as long as all employees are earning the current minimum hourly wages of $7.25 an hour, minus the tips.
What is the difference between tip pooling and tip sharing?
While sometimes used interchangeably (which is incorrect), the main difference between tip pooling and tip sharing is that tip sharing is entirely voluntary and does not carry the same mandatory guidelines as tip pooling does. Tip sharing involves getting a certain percentage or amount of collected tips and splitting them between non-salaried employees.
Employers must meet the following requirements to implement tip splitting:
- They must pay tipped employees at least $2.13 an hour (the minimum cash wage) and the federal minimum wage.
- No employer can claim a tip credit above $5.12.
- They cannot claim a tip credit that exceeds the amount of tips actually received by the tipped employee.
- Employees must know that the employer is applying a tip credit.
3 methods of tip splitting
When it comes to tip splitting and tip pooling, there are several different options that can be set by the manager as long as the employees agree, including:
- Split tips based on hours worked
- Points system
- Percentage tip-out
Here is a breakdown of each method and how it works.
1. Splitting tips based on hours worked
Some restaurants split tips based on how many hours an employee worked. Since there are both full-time and part-time servers, it wouldn’t necessarily be fair for those who worked a full shift to split tips with those who only worked the dinner rush.
To split servers’ tips based on hours worked, add up the total amount of tips and then divide that figure by the total hours worked. Then, multiply THAT figure by the hours an individual server worked.
Here’s an example:
- Your employees earned a total of $1,000.
- Server #1 worked an 8-hour shift.
- Meanwhile, server #2 worked a 5-hour shift.
- Lastly, server #3 worked a 7-hour shift.
- The total number of hours worked is 20.
$1,000 divided by 20 is 50, so multiply that each employee’s hours.
- Server #1: 50 X 8 = $400
- Server #2: 50 X 5 = $250
- Sever #3: 50 X 7 = $350
To check your calculations, make sure the individual employees’ take-home tips equal up to the total amount of tips earned in the shift.
2. Splitting tips using the points system
A points system is an effective way for a manager to pool 20-100% of the servers’ tips and fairly disperse them amongst all of the employees, including bussers, bartenders, hostesses, runners, and other staff members who help keep the restaurant service running smoothly. This method also helps keep the staff content by ensuring that no one has a particularly terrible shift.
The dispersion is usually done on a percentage basis that is calculated with a point system. Different types of employees are given a certain number of points. These points determine the percentage of the tip pool they receive.
Let’s say your servers are given 10 points each, and your bartenders and bussers were given 5 points each. If $1,500 in tips was earned in a shift, it would look like this:
- Servers (3): 30 points
- Bussers (1): 5 points
- Bartenders (2): 10 points
Total points: 45
- Divide the total number of tips ($1,500) by the total number of points (45) and you’ll get the worth of each point, which in this case is $33.30.
- Multiply each staff member’s points by $33.30
- This results in the servers will each receive $330 and the busser and bartenders will each receive $166.50.
3. Splitting tips based on percentage
Another form of tip splitting involves servers using the honor system. A restaurant tip-out structure includes tipping out the support staff based on a percentage of the tips they earned. Each of the supporting service roles is assigned a percentage of the total tips. Usually, the percentage split would be 10% to the bartender and another 25-30% shared among the remaining employees.
Here’s an example based on a to-go crew. If a delivery driver’s total sales equaled $1,000 and they earned $200 in tips, here’s how much the rest of the staff could earn:
- The cook would receive $20 (or 10%)
- The hostess (or person taking orders) would receive $12 (or 6%)
- The order preparer would receive $26 (or 13%)
- The busser would receive $12 (or 6%)
- The delivery driver would take home $130, which equals 65% of their total earnings
Regardless of the method, it’s important to make sure you stay on top of the process. We’ve put together a free tip splitting spreadsheet to take the headache out of keeping up with who gets what.
Tip pooling FAQs
Can an owner be part of a tip pool?
Depending on the state, local, or federal laws in your area, as well as your business structure, the answer is mostly no. There are some exceptions, however, but most laws indicate that an owner or manager is not allowed to take a tip that is left for an employee.
Is tip pooling a good idea for small restaurants?
Pooling tips can have its advantages and disadvantages, but it is common in many restaurants and bars. The most important thing is to communicate with your staff about your intentions and accept their feedback or criticism. After all, you are asking them to share their money.