In the hospitality industry, tips (or gratuities) aren’t icing on the cake: they’re often the reason employees can make a living wage. The process of splitting tips — i.e., tip pooling, tip sharing or tipping out — helps to ensure that everyone who contributes to a customer’s experience can reap the rewards of a job well done.

To truly benefit your team and business (without damaging your culture) tip pooling or tip sharing must be done fairly, transparently, and in accordance with current regulations. 

Whether you’re in California or Connecticut, here’s an overview of how tip pooling (or tip sharing, or tip splitting) should work, plus some resources to make sure you’re in compliance with the laws in your own state.

Before we dive into various tip-out or tip pay-out methods, it’s important to understand some basic terms and stipulations around restaurant tips.

What is a tip? 

A tip, or a gratuity, is a sum of money that a restaurant customer pays in addition to their check amount. It’s important to note that a tip or gratuity is not mandated. In the U.S., a tip is often expected, particularly at full-service restaurants — but it’s not required. Generally, a tip or gratuity is somewhere between 10-20% of the total check amount (before taxes and other fees). However, the tip amount is ultimately left to the discretion of the customer.

Who can receive tips?

Tips belong to employees, period. While restaurants can redistribute tips by way of a tip pool (more on that below), managers and employers cannot participate in tip pools. (With that being said, if a manager receives a tip directly from a customer, they are entitled to that money.) 

There are some positions that are commonly tipped — like servers, bartenders, bellhops, valets — but the title isn’t what really matters. Your employees qualify as tipped employees if they “customarily and regularly” receive more than $30 in tips per month.

Non-tipped employees are generally back-of-house staff, like chefs, line cooks, dishwashers and janitors. These people contribute to a guest’s experience, but they don’t actually interface with the guests and therefore don’t have the opportunity to receive a tip.

What’s the tip credit?

Employers in the hospitality industry can legally pay their employees less than minimum wage if their employees’ tips make up the difference. When employers do this, it’s called taking a tip credit, because they’re crediting their employees’ tips toward an employer obligation to pay minimum wage. (Keep in mind: not all states allow tip credits. To check out minimum wage rules for your state, go here.)

Tip Pooling for Restaurants

Now let’s take a look at the ins and outs of tip pooling: what it is, how it works, and different tip pooling structures that your restaurant might consider.

What is tip pooling?

Tip pooling is a practice in the hospitality industry where tipped employees contribute the tips they’ve earned into a pool at the end of a shift. That pool is then divided (often equally, but not always) among a designated group of employees. Simply put, all tips received during a shift are pooled and then redistributed among employees.

When restaurants require tip pooling, they’re subject to certain regulations at the federal level, as well as state-level regulations that vary depending on where your restaurant is located. Illegal tip pools have led to multimillion-dollar lawsuits for restaurants, so it’s important to ensure your restaurant is operating within the letter and spirit of the law before instituting a tip pool.

What is tip sharing?

People often use the terms tip pooling and tip sharing interchangeably. And in reality, there’s no real legal definition for tip sharing. From a legal standpoint, we typically see the term “tip pooling” used as a broad, high-level category for the process of contributing any amount of tips to a pool and redistributing them (including what you might consider tip sharing). Learn more about the difference between tip pooling and tip sharing.

However, while tip pooling is often (but not always) based on an equal distribution of pooled tips, tip sharing is based on percentages that vary based on position. For example, servers may keep 60% of their tips and “share” the other 40% with other employees, including FOH staff like bussers and hostesses, and/or BOH staff like dishwashers and line cooks.

What is tipping out?

Tipping out is essentially the same as tip sharing. In the explanation above, the “sharing” part is actually tipping out. So a server would keep their share or percentage of the tip pool, then “tip out” bussers, hostesses, etc. based on pre-set percentages.

What are the current tip pooling laws for 2022?

The laws around tip pooling or tip sharing (and tip payments in general) are somewhat complex. Here’s a quick rundown of tip pooling laws and regulations.

• Who can participate in a tip pool? Managers, supervisors and employers absolutely cannot participate in a tip pool, period. (If you have managers or supervisors that sometimes perform duties of a tipped employee, you can learn more about that here.)
  In 2018, the Department of Labor issued a rule change that now allows BOH employees to participate in a tip pool, but only in states where there isn’t a tip credit — so, primarily the West Coast.
  
• Federal vs state tip pooling laws.: There are both federal and state regulations around tip pools. It’s critical to understand both the federal laws and the state laws that apply to your business. Keep in mind: if you operate multiple sites, each site is governed by the regulations where it is located. (In other words, it doesn’t matter where you’re headquartered.)
• Tip pooling lawsuits. There have been multimillion dollar lawsuits due to illegal tip pools. Generally, tip pool lawsuits are the result of a) Management or management employees taking part in the tip pool, or b) Employees being unclear about the rules of the tip pool (lack of transparency and communication).
• Changes to tipping regulations. Laws continue to evolve as they relate to minimum wage for hospitality workers, the tip credit, and more. Many of these changes are tied to administration changes. (For example: the 80/20 rule has shifted under Obama, Trump, and now Biden.) Changes to these laws can impact your tip pooling policies, so it’s important to stay up-to-date. 

Restaurant tip pool policies and formulas

In order to create a tip pool for your restaurant, you’ll need to answer these two questions. 

How is the tip pool being created or calculated? In other words, what’s going into the pool? A few common options:

• Require all tips to go into the tip pool, then redistribute. 
• Require a percentage of a server’s total sales to go into the pool. (E.g., a server’s sales for their shift total $500; the server might put 2% of his sales, or $10, into the pool.)
• Servers keep a set percentage of their tips, then contribute the remainder to a pool.

Who is participating in the tip pool? We’ll say it again for the people in the back: Managers, supervisors and employers cannot participate in a tip pool. But you’ll need to decide which employees you want to benefit from the tip pool. That could be:

• Only servers 
• Servers and bartenders
• FOH staff
• FOH and BOH staff

Sample tip sharing policies and methods

Below are a few sample tip pooling policies. Of course, before instituting a tip pool policy, you’ll need to make sure it’s in accordance with both federal regulations and the state regulations that govern your restaurant locations.

1. Basic tip pool. All tips are pooled, then evenly distributed among participating employees. This happens more frequently with QSR and fast casual restaurants — i.e., the type of establishment that might have a tip jar.
2. Set percentages. Generally, for percent-based tip-outs, servers keep a majority percentage of their tips, then contribute the remainder to a pool. An employee’s role or position then determines the amount they receive from the pool.  

Real world example: Servers keep 70% of their tips and contribute 30% to a pool. Bartenders might get 50% of the pool, hostesses get 20%, bussers get 10%, dishwashers get 10%, and so on. 

3. Points system. Employees are assigned points based on their role, and those points determine the percentage of the tip pool they receive. 

Real world example: Let’s say servers get 15 points, hostesses get 5 points, and bussers get 2 points. You’d want to determine the total points for each shift. 

• 4 servers = 60 points 
• 2 hostesses = 10 points 
• 1 busser = 2 points 

So, total points = 72. 

If total tips earned in one shift is $792, the value of a point is (792 / 72), or $11. So each server would get $165 (15 x $11), each hostess would get $55, and each busser would get $22.

4. Hours worked. Tip pool amount is divided by total hours worked. That number is then multiplied by the hours each employee worked to determine what they’re owed. 

Real world example: 4 servers worked a total of 25 hours. The tip pool totals $450. For every hour worked, servers earn $18.

• Server A worked 4 hours, gets $72
• Server B worked 7 hours, gets $126
• Server C worked 8 hours, gets $144
• Server D worked 6 hours, gets $108

Learn more about calculating shared and pooled tips here. 

A few other notes on tip policies

Employer tip “deductions”

As stated above: tips belong to employees, not employers. However, when your employees are tipped via credit card, federal law generally allows restaurants to deduct a proportionate percentage of the credit card processing fee from the tip. (That is, if you have to pay a 4% credit card processing fee, you can legally deduct 4% from your employees’ tips. Keep in mind: this is another case where federal law may permit this policy, but states may have stricter rules.)

Service chargers, surcharges and auto-gratuities

Service charges and surcharges aren’t gratuities. If any of those charges go toward employees, they must be treated as wages, not tips. That goes for auto-gratuities, as it’s a mandated charge and not at the discretion of the customer. For more information on these charges, check out our post with labor and employment attorney Beth Schroeder.

What is the best tip-out policy for your restaurant?

 Tip pooling can be a sensitive subject. Many restaurateurs have the best of intentions when they decide to establish a tip pool, but it’s not always done in a way that benefits the team.

While everyone plays a role in a guest’s experience, servers typically put in the face time and (arguably) can make or break the tip by managing the experience — i.e., establishing rapport, avoiding mistakes, doing damage control when the kitchen’s backed up or runs out of salmon. Servers and other tipped employees may be less excited about sharing tips with back-of-house staff.

And, unfortunately, there’s a level of distrust that your employees may have around tip pools, as some restaurateurs and employees have gamed or abused the system for their own benefit. While they’re certainly in the minority, they’ve given tip pooling a bad rap.

On the other hand, there are some pros to tip pooling and tip sharing with non-tipped employees. It keeps anyone from having a truly terrible night in terms of tips earned. Also: Your back-of-house staff certainly contributes to the experience a guest has — and they’re working just as hard as their tipped co-workers — but they don’t have the earning potential that comes with being a tipped employee.  

If you’re establishing a tip pool for the first time, after ensuring that you’re 100% compliant with state and federal laws, think through the policies and specific percentages that will work best for your restaurant.  

Then, focus on transparency: clearly communicate your objectives and policies. Not only is it required by law that you provide oral or written notice, but it’s also important from a culture and trust perspective. If employees understand the thought and logic behind your decisions, they’ll feel confident that you care about the financial well-being of every person on your team.

Do you want to foster teamwork in your restaurant? Want everyone to feel invested in providing top-notch customer service? Look no further — we’ve got the low-down on tip pooling versus tip sharing. 

While guests may only interact with one server, we know there are a lot of people working behind the scenes to create an excellent guest experience. By pooling or sharing tips, you can reward eligible staff for their hard work without increasing labor costs. 

People tend to use “tip pooling” and “tip sharing” interchangeably, but there are some major differences that you’ll need to know before implementing any tip-splitting system. Let’s go over the two systems to see which works best for your business model: 

Tip pooling 

In a tip pool, servers contribute anywhere from 20-100% of their tipped earnings, and managers redistribute tips between all eligible staff. While you may be accustomed to servers working independently to earn their tips, tip pooling creates a less competitive and more collaborative work environment. 

Each employee’s payout depends on all guests receiving great service, not just those in their section. Whether you choose to evenly distribute the tips or do a weighted system, tip pooling provides an opportunity for teamwork and increased productivity.

Pooled tips also alleviate section and table disputes between servers. Your veteran servers may feel slighted if they don’t get the “best” section, but new servers want the opportunity to show off their skills. And, of course, mistakes happen, and servers may accidentally take a table in the wrong section. With pooled tips, this situation becomes no big deal. Everyone is equally rewarded for their work — and you won’t have to mediate any disagreements.

There is, of course, a downside. You have much less insight into how your servers are individually performing, and your top-earning servers may feel like they’re losing out under a tip pooling system. 

Tip sharing (or tipping out)

Most servers are familiar with “tipping out,” or sharing a percentage of their tips with bartenders, hosts, and other support staff. Generally, servers tip out based on a percentage of their sales as a way to thank their team members for contributing to the guests’ experience. For example, the bartender may earn 5% of alcohol sales, while hosts and bussers earn 5% of food sales.

Allowing servers to keep the majority of their tips incentivizes them to offer their best customer service to their sections. Hosts, bartenders, and other support staff also feel invested in creating positive guest experiences because their extra tip-out depends on it. However, you may see more competition between servers for better sections and shifts.

So, what’s the difference between tip pooling and tip sharing? 

Legally speaking, nothing. No matter which system you use, you still need to comply with federal and state laws surrounding tip pooling — or else you may be hit with a hefty fine.

Here are some of the rules you need to follow for both tip pooling and tip sharing: 

• Employers, managers, and supervisors cannot keep any tips under any circumstance
• If an employer is paying the full minimum wage (not taking the tip credit), non-tipped employees like cooks and dishwashers may participate in the tip pool
• Pooled tips must be redistributed within the pay period 
• If you pool tips, you need to maintain detailed records of tips reported, tips distributed, and payroll records

Make sure you also look up your state’s tip pooling laws to avoid getting into hot water. According to the Civil Money Penalty final rule, you’re liable for fines and other punitive actions, even if you unknowingly violate tip regulations.

How to choose a tipping system 

The main difference between tip pooling and tip sharing is your restaurant’s employee culture. If you’re running a counter service cafe where employees take turns running the register and serving up food, pooling tips and dividing them evenly might be your best bet. With servers taking care of their individual sections, they most likely expect to take home the majority of their tipped earnings. 

The best way to choose: talk to your employees. Tips account for the majority of their income — so they’ll naturally want to weigh in. If they’re not happy with the tip sharing system, you run the risk of losing your best people.

Whether you pool or share tips, your employees want to be paid sooner rather than later. With Kickfin, you can instantly send tips straight to employees’ bank accounts. Request a demo today.  

Calculating tip pools can be hard. But calculating tip pools at 2 a.m. in the back office after pulling a 10-hour shift? Let’s just say that’s not anyone’s idea of a good time.

Restaurant managers have a lot on their plates, and for teams that still tip out in cash, you can add bank teller-slash-mathematician to their job description, too. 

Tip pooling can be a great way to ensure everyone on your team gets rewarded for a job well done. But if it’s not done accurately, fairly, and legally, the consequences can be anything from accounting headaches to unhappy employees to serious lawsuits.

To ensure you get all of the benefits of tip pooling and without the risk: here are a few best practices and formulas that you can put to work. 

Setting a tip sharing policy

Tip pooling and tip sharing are two ways restaurant owners can increase employee wages without increasing labor costs, and it can help foster a sense of teamwork among employees. It does, however, mean that your managers will need to do a bit of math before distributing tips at the end of a shift.

First things first, you need to choose a tip pooling or tip sharing system and stick with it. Here are some easy ways to split tips between employees — and how to calculate tips for each of them.

1. Tip Pooling 

If you want to collect all tips and redistribute them evenly, tip pooling is for you. This is a way to ensure that all servers, bussers, cooks, hosts, and dishwashers benefit from the tipping system. Everyone has a stake in the game to provide excellent service to guests. However, tip pooling is heavily regulated — so make sure you check out your state’s tip pooling laws before implementing this system.

To calculate each employee’s tips after a shift, you generally just need to divide the total tips by the number of eligible employees: 

• 3 servers, a bartender, and a host are all eligible for tips
• Total tips = $1000 
• $1000 tips / 5 employees = $200 each

In restaurants, shifts can often be unpredictable. One server may get cut way earlier than the other, so splitting evenly doesn’t always feel fair — and employees may not be willing to work under this system. To make things more equitable, some restaurants choose to split pooled tips a different way. If you’d like to follow the “hours worked” system, you can divide the tips by the total number of hours worked and tip each employee based on their hours worked. For example: 

• 2 servers and 1 bartender are eligible for tips 
• Server #1 and the bartender worked 8 hours each 
• Server #2 worked 4 hours
• Total tips = $500
• Total hours worked = 20
• Each hour worked = $25 in tips 

Now we’ll multiply each employee’s hours by 25 to find out how much they earned this shift:

• Server 1 = $200 
• Server 2 = $100 
• Bartender = $200

 This system requires a little more thought (and in real life, the numbers won’t be quite as clean), but your servers and bartenders may find this more agreeable than an even split.

      2. Tipping out

Most servers are familiar with “tipping out,” a system where they share a percentage of their tips with bartenders, hosts, and other support staff. In this scenario, the server keeps the majority of the tips they’ve personally earned, but other staff members are still rewarded for their contribution. 

Usually tip out percentages are based on sales. You’ll need to set your own tip out policies, but here’s an example of how to calculate tip outs:

• Your servers tip out 5% of alcohol sales to bartenders and 2% of food sales to the host
• A server sold $500 in alcohol and $1000 in food
• The server received $300 in tips 
• Bar tip out = $25 
• Host tip out = $20 
• The server would leave with $255 in their pocket 

      3. The Point System

While very similar to the “tip out” system we just described, the point system is another valid way to share tips among employees. You assign a point value to each role in the restaurant, and use those values to distribute tips. Here’s an example of how it works when there are 2 servers, a host, and a bartender working together: 

• 2 servers = 35 points each
• Host = 10 points 
• Bartender = 20 points 
• Total tips = $1000 
• Total points = 100
• $1000 in tips / 100 points = $10 per point

Now, you multiple each worker’s points by 10 to see their tips earned for the night: 

• Server tips = $350 each 
• Bartender tips = $200 
• Host tips = $100

Go Cashless

No matter which system works best for you, we also recommend ditching cash tips. After doing all the tip calculations for the night, the last thing your managers want to do is sit and count cash.

Go digital with Kickfin instead. Our tip distribution platform allows you to quickly input employee tips and send money straight to your employees’ bank accounts. Your managers will save time, your employees will be happier, and you’ll save on labor costs. Request a demo to see Kickfin in action today.

Last month, Kickfin sponsored FSTEC, a premier industry event in Texas, where co-founder Justin Hassan had the chance to moderate a panel of executives from top-tier franchises. He sat down with:

• Jakub Petri: Senior Director, Global Visa Direct
• Dave LaRocque: Director of IT, Rock N’ Roll Sushi
• Jared Hinshaw: VP of Technology, Walk Ons
• Scott SirLouis: COO, FSC Franchise Co. (Beef ‘O’ Brady’s / The Brass Tap).

Panelists discussed the “hidden” costs of a traditional tip program — and how revamping their approach to tipping has improved recruiting and retention, cut labor costs, streamlined accounting, and reduced theft, human error, and compliance issues. If you missed it, scroll down for a quick breakdown of key takeaways.

Tipping Is Here To Stay

Compensation is more important than ever, especially in a tight labor market. Most hospitality workers have come to expect and enjoy the benefits of being tipped out in cash on a nearly daily basis. Tips not only help employees pay their bills, they keep your labor costs down as well. With the added tip revenue, tipped service employees’ earnings increase to $25 an hour, on average—a far cry from the $7.25 per hour national minimum wage. Can you afford to pay your employees the equivalent of what they make in tips? If not, tips may be the only way to find and retain skilled service workers.

Cash and the tip-out dilemma

Most customers are paying with credit cards or digitally—leaving restaurants without adequate cash to tip out employees at the end of each shift. Even with this roadblock, 90% of restaurants are still tipping out with cash.

But tipping out with cash comes with a host of hidden costs: 

• Weekly or daily bank runs
• Expensive cash deliveries
• Risk of theft, skimming, and human error
• Tedious cash counting & distribution
• Labor costs (waiting on the clock)
• Rounding up to the nearest dollar 
• Complicated reconciliation and reporting 

Tipping Transformation

These days, higher earnings from tips aren’t enough to keep your best employees around. Naturally, workers want more control over their pay—and when they receive it.

According to a recent survey of service workers: 

• 83% want instant access to their pay after every shift 
• 80% prefer funds to go straight to their bank accounts
• 81% are more likely to choose an employer that offers on-demand pay

3 Steps To Reinventing Your Tipping Program

Restaurants should aim to stay ahead of the curve when it comes to digital tipping—or you risk losing your best employees. As you revamp your traditional tip processes, follow these steps to ensure a smooth transition.  

1. Talk To Your Employees

Present your employees with better options than cash-only tips, including instant digital tips, tip-out cards, and payroll tips. By putting the choice in their hands, you’re empowering employees to control their financial future. Most importantly, be sure to explain why this change is good for both employees and the business as a whole.

2. Revisit Tipping Laws

Laws vary from state to state and country to country, so you’ll need to be up-to-date and flexible when it comes to your tip structure. It’s especially important to read up on tip-pooling laws, as new litigation has been popping up frequently. With compliance in mind, seek a solution that helps you stay above board by placing guard rails around your tip program. 

3. Choose a Vendor

Before you can implement a new tip program, you’ll need to choose a vendor. Look for a partner that has a robust customer service department to help you smooth over any bumps in the road and help you train staff. Ultimately, this relationship should help you build your business and hire new employees, while helping your employees reach even greater financial success.

Interested in simplifying your tip-out process? Request a demo to see how Kickfin works.

Tipping out in cash is one of the most analog processes in the restaurant industry. And it’s more than a headache: It’s probably impacting your bottom line.

From time-consuming bank runs to tedious cash counting to the ever-present risk of theft and human error: cash tip-outs are, quite simply, a liability for your people and your bottom line.

And yet: 90% of restaurants continue to pay tips in cash. 

We get it.

Change is hard, and sometimes the status quo is the path of least resistance. But there’s never been a better time to hit the reset button on tip-outs.

Going into 2023, digital tipping will be one of the largest transformations to the hospitality and service industries.

If you’re not sure where to start: we’ve got you covered.

Get the Restaurant Exec’s Guide to Digital Tipping [2023 Edition]

Check out our free Digital Tipping Guide to learn about the overnight, measurable ROI you can expect when you make the switch. Inside the guide, you’ll get more details about the hidden costs of cash tip-outs as we move to an increasingly cashless society.

You’ll also learn about the less-obvious benefits of cashless tipping, including:

• Reduced employee turnover
• Robust tip payment tracking and reporting
• Org-wide compliance with complicated tipping regulations
• And more! 

Plus: when you download the guide, you’ll get a rundown on the Top 5 “Must-Haves” when selecting a digital tipping solution. Choosing the right vendor is key to the success of any digital tipping program — and it all starts with understanding your own needs and understanding all of the options on the table. 

Want the Cliff Notes version?

We’ll break it down for you. A digital tipping platform allows you to tip out your servers, bartenders, and other hospitality staff without the hassle of payroll tips, bank runs or bill-counting.

To get all of the benefits of digital tipping, it’s critical that you select a software that gives your employees the options — including (and especially) the option to have their tips sent instantly and directly to their existing bank account. 

Whether they opt for instant digital deposits or payroll tips, employees appreciate having more control over when and how they get paid. On top of happy employees, your flexible payment options make for a great hiring tool to attract excellent workers, even amidst a labor shortage. 

If you want to skip the guide and see digital tipping in action: schedule a demo today and we’ll give you a free, personalized walkthrough of Kickfin!

Are your managers struggling to keep up with constant cash runs to pay your employees? While restaurants have traditionally paid out in cash, it’s becoming more challenging as more and more customers pay their bills with credit cards or digital methods. Cashless tipping solutions are easier for both you and your employees, but you have some options when it comes to giving up the Benjamins. Tipping on payroll is one way to eliminate some of the issues that come with cash—but is it the best solution for your business model?

Why are employers considering tipping on payroll?

Whether your tipped employees are servers, bartenders, bellhops, valets, or estheticians, they most likely rely on tips for the majority of their pay. What’s more: they expect to get those tips at the end of every shift. (In fact, real-time access to tip payouts is one of the biggest draws of working in hospitality.)

So why would an employer suddenly make the switch to payroll tips — requiring employees to wait days or weeks for their earnings?

Well, as noted above: The increase in credit card and digital transactions has made it nearly impossible to pay out cash tips on the daily. Many employers know their people want instant access to their earnings, so they’re going to great lengths to get the cash they need to pay out tips — even if it means making late-night bank runs or paying for expensive cash deliveries. 

(Of course, it’s worth noting that jumping through those hoops still doesn’t solve for other risks and headaches associated with cash tip payouts — like theft and human error, poor tracking and reporting, and the general inefficiency of counting and distributing cash.)

So it’s no surprise that hospitality employers are looking for ways to introduce cashless tip payouts. Many have turned to new technology in order to enable cashless tip payouts. But some restaurant teams are exploring alternative methods of paying out tips — like putting tips on payroll. 

Pros and cons of tipping on payroll

If you’re looking for better insight into your tip-outs, going cashless is definitely for you—and tipping on payroll is one viable option. Weigh the pros and cons to determine if it’s a good fit overall.