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These are uncertain times for the hospitality industry.
Virtually every restaurant, bar and hospitality group in the country is feeling the pain of this global crisis.
But restaurant owners and operators are a savvy, resilient bunch — so it comes as no surprise that they’re finding creative ways to continue serving patrons while also taking care of their staff, despite state governments closing dine-in service at restaurants and bars as a result of the COVID-19 health crisis.
Curbside, take-out or delivery is the name of the game now. But this shift has initiated a chain reaction that’s created an unforeseen problem for employees:
- More credit card transactions.
- Less cash on site.
- Employees have to wait days or weeks for paychecks to receive tips, or seek out predatory payday loans.
Fortunately, even with this new model, employers can still tip out their employees instantly and ensure their financial security. Here’s what you need to know.
The rapid rise of the “off-premise” model
Full service restaurants across the U.S. are pivoting to models that support off-premise food and beverage sales in order to sustain their business. For some, this simply means amplifying existing take-out and delivery operations. Others are living through a full operational reimagining – translating renowned in-person-only dining experiences to a version that can be had at the kitchen table.
What does that mean for employees?
Shifts have been cut, layoffs have happened — but it seems wherever possible, restaurants are making an effort to reallocate staff from the front-of-the-house to counter service and delivery roles.
While this protects many jobs, it could benefit the restaurants, too, which would otherwise be losing sizable fees from the “big four” delivery services — GrubHub, Postmates, Uber Eats, and DoorDash.
(It’s worth noting that while these services are currently running programs that appear to give restaurants a break, there’s a lot of fine print. For example: GrubHub is deferring fees now, but restaurants will still be on the line for those commissions in the relatively near term.)
Less cash on hand
An interesting trend has also emerged in light of all this change. The ratio for transaction medium that was historically 90% credit card and 10% cash has since moved close to 100% credit card transactions.
This appears to be in part driven by public sector health recommendations, but also because employers are taking a proactive stance on protecting the health of their staff. Keeping cash out of employees’ hands is one way to reduce the number of germs they are handling during their shift.
(Side note: it’s not just cash that carries germs. Restaurants are adding NFC/contactless payments for in-person transactions so that the restaurant workers and customers don’t even have to pass credit cards back and forth.)
Where cash is still being accepted, restaurants are using products like Loomis SafePoint, which minimizes cash handling and keeps managers from having to go off-premise to make deposits. Plus, the cash is credited into your bank account the next day — like having a bank in your back office — which goes a long way when working capital/cash flow is critical.
Employers reconsider tip out process
Tips continue to be the largest earnings center for staff, even with their takeout counter and delivery service assignments. There is tremendous community support for the hard work of these individuals. However, in an environment with consistently less cash, employers must choose an alternative method for tip outs.
Cashless alternatives for tipping out
Some restaurateurs choose to put tips on payroll. This allows management to use one system to pay out all forms of their income and track the key information needed for tax purposes. The downside? Your staff has to wait until payday for their earnings to be available. This is forcing employees to utilize payday advance services, which are inherently predatory.
Other organizations may consider using a third party payroll card, which can be painful for your employees: transferring a balance from a payroll card to a bank account can take a full week, and paycards come with a host of hidden fees.
To ensure some level of financial security during an uncertain time, the best option is to give your staff instant, direct access to their earnings, without fees or wait times. Using a tool that sends tips directly to employees’ bank accounts makes life easier for employers and puts money exactly where your employees need it, when they need it.
At the end of the day, the hospitality industry – our industry – is full of smart and passionate people who are working hard to mitigate the impact of COVID-19 on the restaurant community. Now’s the time to get creative, think outside-the-box, and try out new tactics and tools. Your people will thank you for it — and you just might come out stronger on the other side.
In the hospitality industry, tips aren’t icing on the cake: they’re often the reason employees can make a living wage. Tip pooling and tip sharing can ensure that everyone who contributes to a customer’s experience, not just servers, can be reap the rewards of a job well done.
To truly benefit your team and business — without damaging your culture — tip pooling and sharing must be done fairly, transparently, and in accordance with current regulations. Unfortunately, the latter is easier said than done: legislation is always changing, and the rules vary from state to state.
Whether you’re in California or Connecticut, here’s an overview of how tip pooling should work, plus some resources to make sure you’re in compliance with the laws in your own state.
What is tip pooling?
Let’s make sure we’re all on the same page: Tip pooling is a practice unique to the hospitality industry where all tipped employees contribute some portion of their tips into a pool. That pool is then divided evenly among a group of employees.
Sometimes tip pooling is simply recommended or encouraged by an employer, but it’s ultimately at the discretion of the employees. When tip pooling is voluntary, it’s not regulated.
Other times, restaurants require tip pooling, and if that’s the case, then they need to comply with certain regulations. The biggest rule you need to be aware of: tips belong to employees, not employers. Whatever your tipping policies are, tips cannot be distributed among managers, supervisors or employers.
Who is a tipped employee?
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 often, but not always, back-of-house staff, like chefs, line cooks, dishwashers and janitors. These people typically contribute to some aspect of a guest’s experience, but they don’t actually interface with the guests and don’t have the opportunity to receive a tip.
Tip pooling vs tip sharing
Tip sharing involves pulling a certain percentage of tips from tipped employees and distributing those earnings among non-tipped employees. Employers are not allowed to require tip sharing; it can only be done voluntarily, at the discretion of the tip-earning employees. Prior to 2018, this was the only way non-tipped employees could gain access to tips.
However, with the amendment of the Fair Labor Standards Act in 2018, non-tipped employees are now allowed to participate in a tip pool. There’s one condition, though: employers who include non-tipped employees in their pool cannot be taking a tip credit. If an employer is taking a tip credit, their tip pool can only include tipped employees.
Which leads us to our next point…
What’s a 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.
Federal law states that the largest tip credit and employer can take is $5.12; minimum wage is currently $7.25, so that means means employers can’t pay their employees less than $2.13 an hour, even if tips put employees way over the minimum wage threshold.
Of course, minimum wage varies by state, and some states are more stringent with their tip credits. A few don’t allow tip credits at all. (To check out minimum wage rules for your state, go here. For a general fact sheet about what’s allowed under the Fair Labor Standards Act, go here.)
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.)
Also, service charges — for large parties or private events — aren’t considered tips, so you’re not required to share those with your employees, although many employers do so anyway.
What’s right 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.
Unfortunately, there’s also 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. 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.