Hot Tips & Takes: How Restaurants Can (Legally) Structure Tip Pools, Service Charges, and More

With ever-changing legislation — and mounting litigation — service fees and tip policies have become a hot topic.

In this Hot Tips & Takes interview, Beth Schroeder, a partner at Raines Feldman LLP, addresses common misconceptions that can get restaurant operators, owners and execs into legal hot water.

Beth is a preeminent Labor & Employment counsel with more than 30 years of experience in representing employers in all aspects of employment and labor law. Read what she has to say about restaurant service charges, surcharges and tip pools below. (Keep in mind: while resources like this are a good place to start evaluating your policies, they aren’t intended as legal advice! If you have questions or concerns, seek legal counsel, ideally from an attorney or firm with hospitality expertise.)

How are restaurants dealing with minimum wage hikes, labor shortages, and other challenges that have been putting a financial strain on the industry?

If you don’t think you’ll be taking these costs on as a patron, think again. When labor goes up, no matter what industry you’re in, most likely that increase is coming back to the consumer.

Between Covid, minimum wage hikes, sick pay, the ACA…this industry has been through a lot. Restaurants felt like they were laid bare — so they have no choice but to ask their patrons to share in some of that increased burden. It’s not just increased menu prices, although that’s certainly happening. But we’re also seeing service charges, surcharges, and changes to tip policies.

Let’s start with service charges. How are service charges supposed to work, and how do restaurants get it wrong?

Terminology is a big issue. Service charges, surcharges, auto-gratuity — they’re often used interchangeably, but they’re all used differently, and they all have different legal stipulations and requirements.

Service charges are not gratuities. Instead, a service charge is a set percentage that is added to your check. It’s assessed by a restaurant, and it’s placed on the menu like any other menu item. Three things to keep in mind about a service charge:

It’s should not be negotiable.
There’s a sales tax placed on it.
If handled correctly, it is the property of the restaurant.

When you say it is the property of the restaurant, does that mean the service charge does not go to the employees?

Any revenue generated from a service charge is the property of the restaurant, so the restaurant can decide what to do with it They don’t have to pay any of it out to employees, but they can.

This is a key difference between a service charge and “auto-gratuity.” Auto-gratuity is really a misnomer, because the word “gratuity” itself implies that the money left by the patron is left at the will of the patron, and therefore, should be treated as a tip and the property of the employee. But the term “auto” suggests that the money is mandated, and thus, is more like a service charge. Restaurants have used this term for years to refer to a service charge, but as you can see, it is confusing nomenclature, to employees, guests and the courts. I highly suggest as an industry we get away from using this term.

Keep in mind: If restaurants choose to give some percentage of their service charges to employees, those funds must be brought in as wages, not gratuity. That money paid to employees will be treated paid as wages to the employees and will increase their regular rate, for purposes of issues like overtime, meal breaks and the like.

It’s incredibly important for restaurants to be transparent as to how they’re using the service charge. If it’s not going to employees, or if only a small percentage goes to employees, guests need to know that so they can add their own gratuity. It’s wise for restaurants to post those details on their website, menu, etc. Employees should also be made aware, to avoid any claims of uncertainty in litigation.

So, what’s the difference between a service charge and a surcharge?

Like a service charge, a surcharge is a set percentage that’s added to the guest check. Whereas a service charge can be up to 20% of your total bill, a surcharge is usually a smaller amount, say, up to 10%, so as usually not to supplant the tip, but seen as paid to the restaurant in addition to a tip.

These days, many restaurants like to defend the use of adding a surcharge onto their bill by qualifying the surcharge with words like “healthcare surcharge,” or “PPE surcharge.” The use of those qualifiers are fine, but then the restaurant will be limited to using the funds generated from the surcharge solely for that purpose, or risk lawsuits from local attorneys or even district attorneys for consumer fraud lawsuits. For example, starting in 2020, some restaurants instituted “Covid surcharges,” and that money went toward PPE and additional sanitation supplies. Balance the value of adding this language – I’ve suggested just sticking the term “surcharge” and giving yourself more flexibility.

We’re seeing both service charges and surcharge mostly in areas where the minimum wage is going up.

Is there a downside to leveraging service charges or surcharges?

No matter what, patrons will ultimately end up paying for rising costs of goods and services. As opposed to constantly playing with menu prices, service charges and surcharges can be easier to shift around as your business and the market change. And sometimes restaurants think that keeping menu prices stable makes them more competitive, even if it all comes out in the wash.

On the flip side, both service charges and surcharges can blindside patrons when they see an extra charge on their check. And while restaurants are required to communicate what surcharge funds are going toward, service charges aren’t required to have the same level of transparency. Both have led to lawsuits where employers have been accused of misleading employees or patrons or of misusing funds.

That’s why it’s so important to ensure that you’re being completely transparent with both employees and patrons. I.e., be clear about the purpose of the charge, and ensure that the funds are used in that exact manner.

Let’s talk tips. How are tips different than service charges and surcharges, in terms of how restaurants can use the funds?

Service charges and surcharges are predetermined charges mandated by the restaurant, and they belong to the employer. When paid to the employees, they also become wages and can be used to offset minimum wage. Tips, on the other hand, belong to employees — not employers, not management — period. They cannot be retained by the restaurant nor used to offset wages in any manner, although employers are responsible to see that employees accurately report their tips for tax purposes.

Why are we seeing more tip pools (and more lawsuits around tip pools) lately?

Tip pooling requires tip-eligible workers to pool all or a portion of their tips together at the end of a shift. The tips are then redistributed (often equally) among all tipped employees. Employers and management absolutely cannot participate in a tip pool, but restaurants CAN mandate a reasonable tip pool under federal and most state laws.

Many restaurants misunderstand the rules around tip pooling and shy away from it. But in most states, like California, employers are permitted to be actively involved in administering tip pools and tip sharing programs, so long as they follow the rules about who can participate in those tip pools and to what percentage.

Until recently, the rules about allowing back of the house or kitchen employees until a tip pool were murky. However, that rule was officially changed and approved by the Department of Labor in 2018. It’s now allowed in states where there isn’t a tip credit — so, primarily the West Coast. Restaurants are starting to dip their toes into it, and it has become much more popular during the pandemic.

Tip pooling can help to increase earnings of restaurant workers, especially those who might not be as customer-facing — but it can get employers into legal trouble. Million-dollar lawsuits have been filed due to illegal tip pools. Common issues include:

– Management or management employees taking part in the tip pool
– Employees being unclear about the rules of the tip pool (lack of transparency and communication)

Employees and managers wear a lot of hats. What if you’re not tip eligible, but you find yourself performing the duties of someone who is?

There are a few points to consider here…

Direct tips: It’s important to note that no matter your title, if you’re tipped directly by a patron, you can keep that money. So for example, a manager can’t accept a tip out from a tip pool — but if a patron hands that manager $20, it’s hers to keep.
Putting managers on the clock: Managers often get the short end of the stick. If they leave a tip-eligible role to become a manager, they are working harder for less pay because they’re not receiving tips. When my clients are concerned about their managers getting fairly compensated, I’ll tell them to consider taking managers off salary and putting them on the clock if most of their duties aren’t exempt anyway. So: let them pick up tables and get tips.
“Quasi-managers”: Especially at fine dining restaurants, you’ll find a lot of different categories of workers: maître d, sommeliers, table captains, etc. Some of these people may have management duties, and there can be a lot of gray area as to whether these people can receive tip outs from other employees.

In regards to number 3, the guidance is that if the person is acting as an employer in relation to the employee, they aren’t tip-eligible. A few questions to help make that determination:

Can they hire and fire employees?
Do they control employee work schedules?
Do they determine the rate/method of employee pay?
Do they maintain employment records?

If you answer yes to any/all of those questions, it’s likely they shouldn’t not be allowed to participate in a tip pool or at least receive a tip from a fellow employee.

What would you say to employers who are unsure about their tip and/or service charge policies?

Take the initiative to understand what the laws are in your state and at the federal level. There’s a lot of change happening, and many of these laws vary from state to state (California has its own orbit!) so your policies need to keep pace. It’s never a bad idea to have legal counsel review and bless what you’re doing. And hour or two of review time can help you avoid millions of dollars in litigation.

When you’re putting a policy in place, consider running it by your managers. That’s a great way to get buy-in when you’re making a change to the way you’re compensating your team. And don’t blindside your employees. Be there to answer their questions.

This isn’t as much about compensation as it is about taking care of your employees — but don’t be resistant to technology. The pandemic has helped with that. A lot of employers are becoming more tech savvy. Technology can minimize the volume of work and stress your people are dealing with.

Do you have specific questions about the policies in place at your restaurant? You can reach Beth at bschroeder@raineslaw.com.

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Product and Company News

Kickfin Ranked 65th Fastest Growing Company on the 2024 Deloitte Technology Fast 500

We’re thrilled to announce that Kickfin made the Deloitte Technology Fast 500™ list, a ranking of the 500 fastest-growing technology, media, telecommunications, life sciences, fintech, and energy tech companies in North America.

How Kickfin stacks up

Overall, 2024 Technology Fast 500 companies achieved revenue growth ranging from 201% to 153,625% over the three-year time frame, with an average growth rate of 1,981% and median growth rate of 460%.

Our 2,144% revenue growth earned us the 65th spot on Deloitte’s list. It’s another exciting milestone for Kickfin — but more importantly, it’s a meaningful validation of our mission to take the clunk out of tip management, so payouts are faster, smarter and safer for every restaurant team we serve.

Based on Deloitte’s ranking, Kickfin is:

The highest-ranked restaurant tech company on the list
The *only* tip management company on the list
Austin’s fastest-growing tech company

Growth driven by product innovation, demand for automation

Kickfin was the first digital end-to-end tip management solution on the market — and with more than $2 billion payouts to more than 250,000 restaurant employees, we continue to be the largest and top-ranked.

Why?

It comes down to working the way our customers work — and not the other way around. Not only do we automate the tip pooling and payout process for thousands of restaurants and bars; no two tip policies are alike, so we’ve built a solution that gives them the flexibility and customization they require.

With more than $2 billion payouts to more than 250,000 restaurant employees, Kickfin continues to be the largest and top-ranked tip management software on the market.

That’s a big reason we’ve focused on building direct, robust integrations with the leading POS systems on the market. So far, we’ve rolled out integrations with Toast, SkyTab, Oracle, PAR, Heartland and Square — and the list continues to grow.

“In recent years, digital tip management has become table stakes,” said Justin Roberts, Kickfin’s co-founder and co-CEO.

“Operators now understand the significant efficiencies to be gained by eliminating manual tip-out processes. It’s no longer a question of ‘if,’ but ‘how.’ As a direct result of our commitment to innovation and customer success, we’re thrilled to see more and more restaurants select Kickfin to modernize their tip management.”

A big thank-you to our customers who trust us with their payouts, to our partners who support, collaborate (and integrate!) with us, and of course, every member of the Kickfin team.

About the Deloitte 500

Now in its 30th year, the Deloitte Technology Fast 500 provides a ranking of the fastest-growing

technology, media, telecommunications, life sciences, fintech, and energy tech companies — both public and private — in North America. Technology Fast 500 award winners are selected based on percentage fiscal year revenue growth from 2020 to 2023.

In order to be eligible for Technology Fast 500 recognition, companies must own proprietary intellectual property or technology that is sold to customers in products that contribute to a majority of the company’s operating revenues. Companies must have base-year operating revenues of at least US$50,000, and current-year operating revenues of at least US$5 million.

Additionally, companies must be in business for a minimum of four years and be headquartered within North America.

Ready to take the next step?

See how brands like Walk-On’s, Marco’s, Bar Louie and more are automating tip pooling and payouts with Kickfin. Schedule your 10-minute demo today!

Industry Trends

How the 2024 Presidential Election Could Affect Taxes for Tipped Employees

It’s an election year, in case you haven’t heard! 😉 This one has major implications for tipped employees — specifically, when it comes to taxes.

It’s no secret that our Democratic and Republican candidates are running on very different platforms. But when it comes to tip regulations, Vice President Kamala Harris and Former President Donald Trump actually both support reducing taxes on tips.

A little context on taxes and tips

We’re just going to state the obvious: For the average American, tax reporting can be pretty, pretty confusing. For the millions of employees working in tipped occupations — well, that creates another layer of uncertainties.

(Do I have to report my tips? Do have to report my cash tips? Will anyone know if I don’t report my tips? What happens if I don’t accurately or fully report what I earned?)

Historically, there’s been a trend of hospitality employees underreporting cash tips to prevent higher tax burdens. And while this may reduce what employees owe Uncle Sam in the moment, there can be downsides: e.g., if they find themselves eligible for unemployment, if they’re trying to qualify for an auto loan or mortgage, etc.

However, that urge to underreport could be relieved in the near future, given the tax code changes both of our presidential candidates have proposed. The TL;DR: Both Trump and Harris have voiced their intention to relieve some of the burden on tipped workers in restaurants, bars, hotels, and other service positions.

Here’s a quick summary of each candidate’s plan, as well as some potential impacts for restaurant employees.

Trump’s plan for tipped employees

Trump shared his plan to reduce tipped income tax burden at a rally in Las Vegas — fitting for a city that’s built on the gig economy. Nevada is home to the highest concentration of tipped employees who work in the many hotels, casinos, and restaurants that millions of tourists flock to annually.

During the rally, the former president announced that he would make tipped income exempt from federal income tax, stating it would happen “right away” when he takes office.

Since speaking at the rally, Trump has not yet clarified what this would mean for tipped employees. Many servers want to know if this is an exemption just on federal income tax or if the proposal includes payroll taxes (social security and Medicare).

Harris’s tip tax proposal

Harris also took the opportunity to speak on her tipped income policy while visiting Nevada. Much like Trump, she knew she’d have a captive audience when it comes to tipped earnings.

Her proposal promises to exempt tipped income from the federal income tax, but she has made clear that tips will still be subject to payroll taxes. While not yet confirmed, campaign insiders say Harris is considering placing some guardrails on her plan — like a caveat that the tax exemption only applies to employees earning less than $75,000 per year.

Is one plan better than the other?

In short: probably not. (Most service and hospitality workers do not earn above the $75,000 threshold that’s been suggested by the Harris campaign.) So either way, servers, bartenders, and hospitality staff can expect to see a lower tax burden during the next administration.

But what does that look like in practice?

Most tipped employees aren’t receiving their tips on payroll — they’re walking out of every shift with their earnings for the night, deduction-free. Instead, the taxes are paid on payroll out of their hourly earnings, which is why many servers get $0 paychecks every two weeks. With a reduced tax burden, most servers will see the difference in higher paychecks.

On the other hand, economists are wary of the impact of eliminating taxes on tips, citing the reduced funding for social security and Medicare. And with so much negative sentiment around “tipflation” these days, experts also speculate that a reduced tax burden may result in even more hesitance at the tip screen.

Increasing minimum wage

We’re closely following campaign promises about an increase to the minimum wage — especially in regards to the tipped minimum wage and the tip credit.

Minimum wage earners have been eyeing an increase, noting that the federal minimum wage of $7.25 per hour hasn’t increased since 2009, and servers, bartenders, and other tipped employees have been earning $2.13 per hour for over 30 years. An increased minimum wage paired with the reduced tax burden could make a major difference for service workers trying to keep up with the rising cost of living.

In the Harris camp, removing tax on tips is just part of the plan to take some pressure off service workers. While Harris hasn’t shared a detailed plan for bumping up the minimum wage, she has indicated that she would support an increase.

In previous election cycles, Trump stated that he would consider a minimum wage increase, but he has not shared his opinion on the matter during the 2024 presidential campaign.

Of course, we’re a ways out from any real policy changes actually shape — but if you’re looking to make your tip management process less taxing in the interim (see what we did there?), Kickfin is here for you! Check out how you can use Kickfin to auto-calculate tip pools and send payouts directly to employees’ bank accounts in seconds.

Restaurant Management

Top 4 Ways to Protect Your Restaurant from Cash Shrinkage

No matter what industry you work in, there’s always a risk for shrinkage and theft. Ninety-five percent of all businesses experience theft in the workplace, and up to 75% of employees have admitted to stealing from their employer.

Most of the time, it’s not intentional or malicious. For restaurants, it could be something as innocent as giving your friends a free drink or asking the kitchen for food and neglecting to ring it in.

But when you have a lot of employees handling cash day in and day out, it can be very tempting for someone to take advantage of systems and pocket extra money at your expense. To make matters worse: because cash is hard to track, it can be tricky for operators to put their finger on exactly what’s happening — at least, before it starts to impact your bottom line.

While cash shrinkage can jeopardize your business, operators do have the power to protect their restaurants. Ultimately, it comes down to having the right processes, systems and partners in place.

Here are 4 things you can start doing today to protect your restaurant from cash shrinkage.

1. Create a culture of trust with employees

Most people want to come to work, do their best, and make an honest living. Creating an environment where your employees trust you with their earnings should encourage them to also be responsible with company assets, including cash.

Of course, it starts with doing your due diligence when building out your team. That means interviewing new hires in person, asking the right questions, and always checking references.

But the fact of the matter is that even good people can make poor decisions, especially when they’re struggling. As an employer, there are things you can do to keep your staff from ever getting to a place where they feel the urge or need to steal. That includes:

Paying a fair and competitive wage
Paying wages on time, in full
Giving people instant access to their earnings
Offering employee benefits and perks if possible
Adhering to federal, state and local labor/wage regulations, especially as they relate to tips

Bottom line: If you show that employees you take their financial well being seriously, it can foster an environment of mutual respect, making employees less likely to consider theft as a reasonable (or justifiable) option.

2. Minimize cash touchpoints

It’s simple. Less cash on hand = less opportunity for cash shrinkage.

In the unfortunate case that a high-ranking employee is stealing from your restaurant, cash tip outs make it much more difficult to catch and trace. Anyone with access to cash registers and safes has the opportunity to take a few extra bills — and you may not notice until well after the cash is pocketed and spent.

Instead of locking up cash and making only a few employees responsible for the massive task of paying out tips, take advantage of new technology that eliminates cash from the tip out process. Fewer people will need to manage cash, which adds one extra layer of security against theft.

Bonus: cashless tipping vendors like Kickfin give your employees more flexibility with their earnings. They can opt for tips to be sent directly to their bank or to have them put on their payroll check, empowering employees to make their own financial decisions.

3. Create a digital paper trail

The trouble with cash is the inability to track it. Half the battle is realizing that the cash is missing; and once you know it’s gone — well, now what?

Digital gratuity management software makes it easy for restaurant operators to create a digital paper trail for all tip payouts. You’ll be able to identify any improper payments, who they went to, and who authorized the payout — removing a major security soft spot.

Not only will you feel more secure, but your loyal employees will thank you for making tip outs much easier.

4. Select a secure tip management partner

Removing cash-on-hand is a great first step, and it should make any potential theft traceable back to the person responsible. But wouldn’t you rather prevent theft before it happens?

If you’re ready to bring your gratuity management into the future, make sure to thoroughly vet your options — because not every digital tip out software has strong protections against theft.

That’s why Kickfin has optional guardrails that can mitigate your risk of employee theft.

Maximum tip amounts: Limit the amount that can be issued in any individual payout.

Role policies: Create policies to limit who can receive payments by role type, and limit who can send payments to themselves.

Multi-factor authentication: Set your own rules to require MFA at any point, whether at every login or once a month.

Payment interval approval: Trigger a requirement for second approval for an employee’s first payment or their first payment in a determined number of days.

Payment velocity approval: Trigger a requirement for second approval when an employee receives a determined number of payments within a certain interval.

For our POS integration partners, Kickfin can also put guardrails around your tip calculation policies to prevent fraud. While we offer the ability to send payments through manual entry, spreadsheet upload, or using our tip calculation software, integration users can disallow manual and upload payments to prevent any ad hoc payouts.

Integration users can also lock in their tip calculation rules, so that only certain users can make changes to the calculation policy.

How Kickfin helps in the event of fraud

Even without the temptation of cash in the safe, where there’s a will, there’s a way.

If you find yourself in a regrettable situation with an employee, your tip management partner should be there to back you up. Thankfully, our platform tracks each payout which will help you identify irregularities and the source of the problem.

The Kickfin team will always be there to support our partners who experience security breaches.

Check your Kickfin security settings

Do you want to make sure you have the most up-to-date protections on your Kickfin account? We’ve got you covered. Reach out to your Kickfin customer support team to ask about a free security audit, where we’ll go over your current settings and offer guidance on how to minimize your risk.

Not yet a Kickfin user? Find out more about our platform and security settings with a demo today.

Restaurant Management

4 Ways to Save on Restaurant Labor Costs with Kickfin

In the restaurant industry, profit margins have always been tight — and these days, they’re only getting tighter.

Running a restaurant is a labor intensive business. You need a strong back of house team to push out food, front of house workers to greet and care for guests, and managers to keep everyone in check. Naturally, labor is one of the most significant expenses for restaurant operators. In order to keep costs reasonable for customers, even a slight overage on labor can break your budget — but thankfully there are levers you can pull to reduce labor costs.

If you want to secure your business’s financial future, you’re going to need to streamline scheduling practices and keep a close eye on labor costs… without frustrating employees who want more shifts.

Don’t worry: you can turn to traditional wisdom, sales forecasting, and emerging restaurant technology to make sure that you stay on budget.

Here are a few ways you can save on labor costs at your restaurant:

1. Rethink the schedule

Obviously, the most straight-forward way to cut labor costs is to reduce the number of people you schedule on a given night.

We get it — you don’t want to see hour-long ticket times and poor guest experiences. But you might not need as many folks on the line or servers on the floor as you think — at least, not all the time.

Staffing and scheduling isn’t a perfect science, but there are some tactics operators should test if they’d like to “right size” every shift — including:

Analyze your daily schedule. Don’t make assumptions about your peak times and slow periods. Analyze sales trends and let the data be your guide.
Anticipate seasonal trends. If you’re in a college town, don’t wait until your servers are twiddling their thumbs in July to implement a new summer schedule.
Let your seasoned staff shine. Your veteran employees likely thrive on those super busy nights when they’re running on pure adrenaline (and earning way more in tips). Consider giving more experienced workers more responsibility — assuming they’re willing and able — and you might be able to get away with fewer people on a shift here and there.

>> Learn about scheduling software that helps you manage labor and engage with employees

2. Assess and address productivity

Are you making the most of the team that you already have? There are a few ways you can identify your highest-producing employees and make the most of their success:

Evaluate employee performance. Most employees want to be successful; observe your team and analyzes things like sales per labor hour, table turnover rate, and tip volume to get a sense of your strongest players and those who could use more training (and bonus: this can reduce turnover and boost team morale)

Provide incentives. Create a fun bonus system that rewards strong performance and high levels of productivity. You can use data from the previous data point to set goals.
Cross-train employees. Training your staff to handle multiple roles – or hiring folks with vast service experience – offers flexibility for scheduling and can reduce your need for additional hires.

3. Don’t pay employees to wait for their tips

No, we’re not saying to cut all of your servers early (no matter how much they ask).

But, you can send your servers on their way much quicker when they don’t have to wait around for managers to count out cash tips. Once they’ve finished their sidework, servers can clock out and see their digital tips sent directly to their bank account, instead of hanging around on the clock waiting for the shift manager to do their check outs.

4. Prevent labor overages before they happen

Most restaurants simply can’t afford to pay overtime for staff. But sometimes your full-time staff creep toward 40 hours of work without anyone noticing…and suddenly you’re paying 1.5x what you expected for a single worker.

This, too, goes back to proper scheduling policies. Give yourself a bit of wiggle room for the employee who clocks in 10 minutes early or often takes a long time on sidework by never scheduling anyone for more than 38 hours each week.

5. Pay close attention to clock-outs

People make mistakes, and tired servers often leave their long double shift without clocking out for the night. Usually, they’ll realize their mistake and call the store to have someone clock them out (still adding extra time to their shift).

But sometimes, the clock keeps running all night, and no one notices until it’s time to process payroll. Two weeks later, your admin team is spending way too much time correcting clock-outs so that you don’t end up paying for 8 extra hours of work.

Try using technology that puts guardrails in place to prevent any clock-out mistakes before they happen. Kickfin doesn’t allow you to process and pay out tips until an employee is clocked out, so managers can make sure everyone is clocked out at the proper time.

(We also have some other exciting new features that can make your life easier!)

Not only can Kickfin help you reduce labor costs, but we’re ready to simplify your entire tip management process. Reach out to us to learn more about our instant tip calculations, integrations, and smarter tipping solutions.