Profit and Loss Statements for Restaurants

profit and loss statement for restaurants

How much money are you actually making at your restaurant? That’s exactly what a restaurant profit and loss statement can tell you.

Let’s break it down by one of the most common menu items in the United States: Pizza. Popular restaurant chain Domino’s charges $17.99 for a large (14”) pepperoni pizza in the Boston area. But Domino’s doesn’t make $17.99 on the pizza. Every pie costs money in ingredients (flour, cheese, sauce, spices, pepperoni), labor (the average MA Domino’s employee makes $16/hour), and packaging (pizza box).

What’s left over after all of those costs is the profit on that particular pizza. And that doesn’t even include fixed costs like rent on the kitchen space, utility and heating, appliances, and other overhead.

Answering the question of how much money you’re making as a restaurant owner can get complicated fast. But whether you’re using a team of accountants or managing the books yourself, you’ll need to put together a profit and loss statement (often shortened to the phrase “P&L”) to tell you just that. Here’s everything you need to know about creating and reading one:

What Is a Restaurant Profit and Loss Statement?

A profit and loss statement provides a record of a restaurant’s financial health by outlining revenue, costs, and expenses during a set period of time — usually over a fiscal year, but it can be more frequent depending on your management style or if you’re part of a public company. Another word for a profit and loss statement is an income statement, because it shows your overall restaurant income for the year.

Your profit and loss statement goes into detail for each revenue and expense to determine your net income, or profit. Here’s the basic equation:

  • Profit = (Total Revenue + Gains) – (Total Expenses + Losses)

A good way to remember this is thinking back to the Domino’s example. At the end of a given pizza, how much of that $17.99 does the restaurant actually see? Profit is ultimately what your restaurant “pockets” at the end of the year after paying for restaurant space, food and beverage supplies, employee wages and tips, and other overhead, like linens, decor, or appliances.

Keeping up a regular P&L statement helps you assess your restaurant’s financial health so you know exactly what’s coming in and what’s coming out — so you can make sure your restaurant stays as profitable as possible.

How Often Should You Update Your Restaurant P&L Statement?

A P&L is one of the building blocks of your restaurant accounting and should be updated on a regular basis, though the exact timing is up to you. Because it’s a helpful snapshot of your restaurant’s financial health, many restaurant owners prepare one weekly or monthly. If you have multiple restaurants, you’ll want to create a profit and loss statement for each individual unit as well as your business as a whole.

Monitoring your P&L gives you insight into:

  • Whether or not your restaurant is profitable — which can take time
  • How to prioritize business decisions, like adding new menu items, changing suppliers, or hiring and staffing
  • Where your “money makers” are on your menu
  • Any inconsistencies or losses that don’t make sense, which is a sign of theft
  • At a minimum, it should be prepared each quarter as part of your quarterly taxes.

Many point-of-sale systems automatically generate P&Ls on an ongoing basis so you can see an updated dashboard of your performance.

What is Included in a Profit and Loss Statement?

Restaurant owners create P&L statements in one of two accounting methods: Cash and accrual.

  • The cash method is the simplest accounting method and focuses on money flowing in and money flowing out. Restaurants record transactions for every cover and record liabilities (expenses and losses) whenever bills come due.
  • The accrual method records revenue as it is earned, rather than when cash is received. This method is more common for businesses that provide services or products, such as retail or software, where customers order in advance before receiving payment.

These two methods differ on the specifics included in your profit and loss statement, and how far in the future you record sales and expenses. Which method you choose is up to you (and may be worth chatting with an accountant about.)

In both methods, however, profit and loss statements include each element that makes up profit:

  • Sales and revenues by category: Food, wine, liquor, merchandise, for example
  • Costs of goods sold (COGS) by category: Typically, how much it costs for your ingredients.
  • Labor: Wages, tips, and salaried employees
    Incidental operating expenses: The types of costs that fluctuate, like advertising, miscellaneous repairs, administrative expenses like credit card fees, utilities, live music, and so on
  • Fixed costs: Monthly rent, insurance, and other overhead costs you cannot change or control
  • Depreciation: Over time, your assets, like appliances and restaurant equipment, depreciate in value. Calculate this cost using this formula.

Subtracting the sum of all of your costs (labor, operating expenses, fixed costs) from your sales and revenues will give you net profit.

Note that profit typically is calculated before taxes. Many P&Ls include an “income before taxes” line and then a line to calculate your taxes afterwards.

How to Create a Restaurant P&L Statement

Now, it’s time to put all of those elements together. Here’s an example of what a P&L statement could look like for a restaurant. You’ll want to make sure you include the categories and costs most relevant to you, but you can start with this template.

This example below takes a high-level approach, but it’s worth creating a detailed examination of at least your expenses, if not your revenue by menu item, at least once every quarter.

How to Analyze a Restaurant Profit and Loss Statement

Ok, here’s some bad news: The average profit margin for a restaurant is less than 5%. The restaurant industry has famously paper-thin profit margins, which is exactly why 60% of restaurants fail in the first year.

That’s exactly why creating a profit and loss statement is so helpful. Besides getting your books in order so you can accurately pay your taxes and manage your business, it’s the best way to understand the overall financial health of your restaurant.

Few restaurant owners sign up for this part of the deal. You’re likely passionate about food and creating deep, meaningful experiences for your customers — not crunching numbers. But taking a hard look at your profit and loss statement can help you balance your overall costs and make better business decisions, whether that’s looking at specific ingredients in season, choosing new table linens, or deciding whether or not to hire that extra server.

In addition to pulling together all of your revenue and expenses, your profit and loss statement will include several restaurant calculations to help you better understand your business:

Percentage of sales

The first area of your P&L to examine is your revenue by category (or if you’re getting detailed, your revenue by menu item.) To be able to make better decisions on your offerings and on your marketing and sales, you need to know exactly which categories perform well and which don’t.

For example, your wine list may be a powerhouse, making up the majority of your sales. If that’s the case, then highlighting your wine list in marketing materials, training your staff on your different wine offerings, or streamlining other drink choices that aren’t performing as well can help you optimize your revenue.

Gross profit = Revenue – COGS

Gross profit is the first measure of your business health. This is different from your final profit number at the end of your P&L. What this tells you is specifically how profitable your menu is — how much are you bringing in and how much is coming out based on your specific menu items and the cost of the ingredients to make them.

Knowing this allows you to start to dissect your menu to understand which items are worth keeping and which aren’t helping your restaurant grow. It’s also a good place to look at your suppliers and whether or not they’re contributing positively for your business. This might mean purchasing items in bulk or working with local suppliers that charge less for shipping or delivery.

Prime cost: COGS + Labor

Prime cost usually makes up 60% of your total costs. Calculating prime cost gives you a window into your two biggest expenses that you can (theoretically) control. You won’t necessarily be able to negotiate or change your rent, but you can change suppliers, menu items, and adjust staffing accordingly.

Restaurants typically have two levers to increase their profit: Increasing menu prices or decreasing their prime cost.

Net Profit = (Total Revenue + Gains) – (Total Expenses + Losses)

This is the big one! Your net profit is the overall profit that you’ve earned over the given time period. Ideally, this number is positive — often called being “in the black” — but for many restaurants, it takes years to reach profitability.

To increase your profit margin, you’ll need to look at both sides of the equation, increasing your total revenue and decreasing your total expenses.

What Comes Next? Improve Your Margins!

Of course, figuring out what your restaurant is important — but it’s what you do with that information that really matters. From rethinking your menu strategy to implementing new technology, there are countless ways to uncover new efficiencies and reduce costs, using your P&L as your guide. 

(If you want to learn more about how digitizing tip payouts can save your team time, make them happy — and yes, improve those margins — get a demo here!)

Hot Tips & Takes: Optimizing The Guest Experience in Your Taproom

Andrew Coplon

When it comes to craft breweries, Andrew Coplon says great beer is table stakes.

And he knows a thing or two about the craft brewing industry: Andrew is the founder of Craft Beer Professionals and Secret Hopper — which means he spends his days helping brewers optimize their operations and increase their in-house revenues.

While top-notch brews might bring people into a brewery, Andrew says it’s the taproom experience that keeps people coming back.

So how do you turn first-time guests into die-hard fans? Andrew says there are three key factors that will create brand loyalty (and generate repeat business) among your taproom patrons. Read on for the full interview!

What is it about taprooms that people are drawn to?

It’s all about the connections you make there. For me personally, I love learning. So when I visit a taproom, I’m usually talking to the staff. I’m learning about them personally, and I’m also learning about the taproom — what’s the story, what were the goals, what are their values. And of course, I want them to teach me about the beers.

But it goes beyond the staff. Recently, my family and I were at a brewery in Northern Virginia. It was the first time we had done something like that since before the pandemic. While we were there, we were sitting with another family outdoors — we were talking about where we were from, how we both had toddlers. I completely forgot how much I enjoyed talking to strangers.

It’s so simple, but that’s what happens in these spaces. They bring people together.

What are the variables that can make or break the taproom experience?

There are really three key factors. I actually think about it like a Venn diagram.

Beer is the first circle. Atmosphere is the second circle. And then staff is the third circle. When you do all three of those things really well, you’re going to create the ultimate taproom experience.

So what does that look like in practice? How do you optimize all three factors?

Well, beer is a given. The beer has to be good. And that’s what will draw people in. Everyone’s there for the beer initially. But we’ve all been to taprooms where we’ve had a great beer, and we never come back. Great beer is a must, but it isn’t enough.

The atmosphere — it’s a lot of little things that come together. Lighting, music, food. What’s on the walls? Does the space tell a story, or does it just feel kind of cookie-cutter?

And then there’s the staff. What are they like? Are they just doing their job, or are they engaging the guests? Are they knowledgeable? Are they making and facilitating connections?

As an example: When I visited Perennial Artisan Ales in St. Louis, the person behind the bar was talking with me, sharing personal tidbits about herself. She told me she was in a band that toured around. It was a great conversation. A year later, I go back to the same taproom. I’ve got the same server. And she says, “Aren’t you the guy from Virginia?” A whole year later, she remembered who I was. 

That story also speaks to the importance of hiring and retaining the right people — which is incredibly challenging right now. Plus, it takes a more specialized skillset to manage a taproom. How are operators handling the tough labor market?

Staffing right now is very challenging within the craft brewing industry.

Bottom line: You have to know what your goals are. Is it important to hire someone who already knows a lot about beer? For some breweries, it might be. But in a lot of cases, you can find someone who literally just likes to talk to people — and then you can teach them everything else.

I have a friend who owns a taproom in Richmond, Virginia. When they closed during Covid, they lost almost all of their staff. They were having trouble hiring when they reopened. He ended up bringing on an out-of-work teacher. And pretty soon most of his staff ended up being former teachers. It worked so well — sure, they knew nothing about beer, but they knew how to educate people and break things down.

Basically, your employees don’t have to be the biggest beer nerds. They just need to be great with people and willing to learn.

So when an operator wants to address any of those three factors — beer, vibe, staff — how do you make sure everything still feels cohesive and true to your brand? 

Well, you really have to know your brand. And I often tell people — you should be able to explain or articulate the essence of your brand in about five words.

If you can’t: consider bringing your team team together, and have everyone collectively write down a handful of words that pertain to your values, or your vision for your brewery, or how you want to make people feel when they’re in your space. It could be random words, or you could turn it into an actual mission statement.

Lady Justice Brewing in Colorado has a great tagline — “Great beer. Better world.” That’s what they stand for, and every aspect of their taproom experience reflects that.

It’s important to find a way to differentiate your brand — with 9,000 breweries out there, differentiation is a must. And you need to get buy in from your staff. Get them involved in the process and excited about what you stand for. That way, they’ll feel personally invested in it, and they’ll embrace it.

What would you tell operators who don’t know where to start? What if you’re not sure what’s working and what needs to change?

A great way to learn more about the guest experience is by simply talking to your guests. Ask them questions. Also, visit other breweries. What are they like? How are you greeted when you walk in? Follow them on social media. See what they’re doing and learn from them.

To be honest, it can be hard when you’re in your own taproom day in, day out. It’s kind of a blur. You’re not thinking about all the little things.

That’s a big reason why we started Secret Hopper. It’s a secret shopping service for craft beer businesses. We send mystery shoppers into your brewery, and we analyze about 25 different components that contribute to the guest experience. So that gives you a baseline. We might discover engagement is low or staff members are doing things inconsistently.

Then we give you some actionable steps to improve those different components, and we’ll customize that plan based on your brewery’s specific needs. We also host workshops that address a lot of the challenges that craft breweries face.

Aside from generating repeat business, how does enhancing the guest experience impact a brewery’s bottom line?

Over the course of thousands of non-paid brewery visits, we’ve gathered some data points that really blow me away. For example, during about 45 percent of visits, guests aren’t encouraged to get a second drink. That’s crazy. When you simply ask your customers if they want another beer, the average tab is $6.50 higher.

We also discovered that brewery staff ask guests if they would like to purchase to go beer 18.6 percent of the time. When staff doesn’t ask this question, guests only purchase growlers 9 percent of the time, but when staff members do ask, guests purchase growlers 49 percent of the time. 

These are simple changes you can train your staff to make that can significantly increase your revenues.

What would you tell operators who might have the guest experience down pat, but for whatever reason, they’re having trouble getting people in the door?

Marketing is half the battle. You’ve got to make sure people know you’re there.

Get creative. Innovate. Look outside of your space — how are your favorite brands marketing themselves? Netflix, Starbucks — what’s working for them?

Don’t be afraid to ask for help. There are a lot of marketing agencies that specialize in craft beer. Or consider bringing someone on your team who has that skillset. They might cost more money, but if they do their job well, it’s a worthwhile investment.

 Do you own, operator or work for a craft brewery? Join the Craft Beer Professionals community on Facebook and connect with more than 14,000 beer pros for tips, networking and collaboration! 

5 Reasons Why Quick Service Restaurants Have Embraced Tipping

Profit and loss statement

For decades, tipping has been the domain of dine-in, full-service restaurants. In fact: tips make up the majority of earnings for front-of-house staff at most FSRs, thanks to the tip credit. 

But in a post-Covid world and a tough labor market, more and more quick- and counter-service restaurants are enabling tipping.

The QSR tipping trend has coincided with the proliferation of mobile apps. Panera Bread now asks if you want to add a tip to your order at checkout. At Starbucks, you can select denominations in $0.50, $1.00, or $2.00 increments within the Starbucks for iPhone app. And popular burger chain Sonic rolled out digital tipping to 2,000 locations across the U.S. in November 2021, bringing in $12.2 million in gratuities to their employees. 

Here’s why QSRs are enthusiastically embracing tipping, both in-store and through their mobile apps.

1. Stop the “wage wars”

52% of families of front-line fast food workers are enrolled in a public welfare program, and one in five live below the poverty line. With median pay across the U.S. for QSR workers at only $11/hour, and with varying shifts, it’s often not enough for workers to live on. That’s why since 2012, fast food workers have made a concerted push for higher wages in so-called “wage wars,” both through policy changes such as the “Fight for $15,” which successfully raised the minimum wage in New York City and by negotiating directly with restaurants. 

But as people in the business know, the realities of running a restaurant make increasing wages complicated. When quick- and counter-service restaurants enable tipping, they can significantly increase the earnings of hourly workers, far beyond what revenue constraints allow. 

Take The Human Bean, a national drive-through coffee franchise. When a Georgia-based franchisee enabled tipping and used Kickfin for instant, digital tip payouts, their employees’ take-home pay increased by an average of $4/hour.

2. Get the competitive edge on hiring

QSRs that jump on the tipping bandwagon now have a significant competitive advantage over other employers when it comes to hiring.

The nationwide labor shortage remains one of the most challenging aspects of restaurant management: 78% of restaurant employers told the National Restaurant Association that recruiting and retaining employees was their top challenge in the past year. With more than 1.7 million job openings across the United States in the leisure and hospitality sector, it’s more difficult than ever to find employees.

When a Human Bean franchisee enabled tipping and digital tip payouts with Kickfin, their employees’ take-home pay increased by an average of $4/hour.

Restaurants like McDonald’s, Wendy’s, and Shake Shack are temporarily boosting wages, adding hiring bonuses, and offering other short-term benefits in order to attract more staff. But even those perks aren’t enough: many companies (like Yum Brands, which operates KFC, Taco Bell, and Pizza Hut) have reduced hours and streamlined menu items in order to work around labor shortages.

One of the problems with these tactics is that they can feel gimmicky, and many are intended to be interim solutions. In other words: they don’t signify a positive, permanent shift in a company’s culture or treatment of employees. And of course: they’re expensive for the employer.

Tip enablement, on the other hand, provides an instant benefit to both employees and employers — and because it has no impact on a business’s bottom line, there’s no need to rethink it or roll it back as market conditions change. 

That means your staff will see an immediate, sustainable boost in their take-home pay that other restaurants without tip enablement simply can’t offer.

3. Improve employee retention

With so many restaurants offering shiny hiring incentives, it’s no wonder that retaining employees is just as challenging as hiring them. Once those bonuses and other benefits run out, there’s another exciting benefit on the horizon for an employee to hop to the restaurant across the street. 

And that adds up. According to research firm TDn2K, turnover costs restaurants more than $1,800 for general employees — and up to $8,000 per manager. 

Introducing tipping gives your team a reason to stay that doesn’t collapse within 90 days. Making your employees eligible for tips allows them to earn more over time, so they’ll stick with your restaurant rather than be tempted elsewhere.

4. Incentivize good performance 

The biggest difference between an hourly wage and working for tips? Your employees now have a financial incentive to deliver a better performance. At Dickey’s Barbecue, part of the Harder Restaurant Group in Ohio, adding Kickfin didn’t just help with employee hiring and turnover. It created a shift change in how their employees performed.

“With Kickfin, our employees understand the importance of customer service more than ever. They see money separate from their paycheck, and it hits their account immediately. It puts an extra pep in their step.” – Brett Jackson, COO Harder Restaurant Group

Adding easy cashless tipping with Kickfin helped immediately illustrate to the team exactly how better service correlated to more cash in their pockets. In other words: when tips are on the table, quality of service improves, which increases customer satisfaction and loyalty — all of which benefits your business.

"With Kickfin, our employees understand the importance of customer service more than ever. They see money separate from their paycheck, and it hits their account immediately. It puts an extra pep in their step." - Brett Jackson, Dickey's Barbecue Pit

5. Technology-enabled instant payouts make it easy

Increasing take-home pay through tip enablement represents a major opportunity for QSR employers. But it’s not just how much your people are earning that matters; now more than ever, employees want instant, unfettered access to their earnings. 

That’s especially true for quick-and-counter service workers who are living paycheck-to-paycheck; waiting days or weeks for their earnings can be extremely challenging. According to a recent survey, 83% of workers want access to earnings after every shift, and 80% prefer those funds get automatically streamed to their bank accounts.

With Kickfin, employers can enable tips and distribute them in real-time — directly to their employees’ existing card or bank account, immediately after every single shift (no cash required). That’s a huge win for employees who are concerned about their financial wellbeing. 

And for employers, the benefits of real-time, cashless tip payouts are clear. Digitizing tip payouts means you can give your people immediate access to their earnings, without worrying about bank runs or divvying up cash at the end of a shift — or making your employees wait for a paycheck. Kickfin makes tip distribution safe, seamless (and trackable!), whether you’re enabling tipping through your mobile app, your POS, or both. 

Want to learn more about tipping at quick service restaurants?

Thousands of QSRs across the country are standing up their own tipping programs. Schedule a free demo with Kickfin to see how you can reap the benefits of a tip-friendly culture by distributing instant, cashless tip payments directly to your employees’ accounts. See Kickfin in action!

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

Hot Tips & Takes - Beth Schroeder

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…

  1. 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.
  2. 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.
  3. “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