The Hidden Cost of Tipping Out in Cash

Many restaurants and hospitality groups are still tipping out in cash because it’s “easy” or it’s “the way we’ve always done it.”

If you’re in that camp: we get it.  

Sticking with the status quo is comfortable. Paying out in cash daily also helps with recruitment and retention: hospitality employees expect (and deserve) to get paid in real-time. And meeting that need is critical in the face of today’s labor crisis, when restaurants and bars are competing for talent with other establishments and gig platforms.

But the reality is that cash distributions aren’t the only way to tip out in real time. And they actually come with a whole host of hidden (unnecessary!) costs that could be putting a major dent in your bottom line. 

Don’t take our word for it: here are five ways that your business may be “paying” for cash tips.

1. Employee Theft

You work hard to hire the right employees: people you can trust. You ask the right questions, check all their references, run the background checks.

You can do everything right, but employee theft still happens. An estimated $3-6 billion of revenue is lost annually as a result. 

Does it mean your employees are bad people? Not necessarily. But tough personal times — or pure temptation — can lead good people to make bad professional choices and justify illegal behavior. Reducing or eliminating cash held on premises for tipping out reduces the risk (and temptation) of both minor skimming and major theft.

2. The ABC of Fees 

Accounting Fees – Cash tip reconciliation, accounting for last minute bank cash orders is time-consuming. Your bookkeeping firm will bill for the additional hours needed to accomplish these tasks. If you’re also at the helm of a multi-location establishment, you’ll need to plan for the reporting delays and additional cost involved in requesting payroll reports from each location.  

Bank Fees – As many banks outsource their vaulting to cash management companies, they roll a piece of their cost for this service down to their customers in the form of a fee for local cash pick up. Combine this particular fee with a massive liability issue – anything could happen while your GM is off premise to courier the cash, including theft or robbery. 

Cash in Transit Fees – Choosing to use an armored car service to deliver cash is common practice for high-volume locations. However, it comes with both a fee for delivery and for the cash itself. These fees can range from $250 – $400 per week.

3. Labor Cost Tradeoffs

Employees will stay on the clock waiting to tip out since both the employer and employee need to be physically present when currency is exchanged. To quantify this, pick a state…how about Colorado where the server minimum wage is $8.98?  If a Colorado restaurateur has 10 employees waiting together on the clock for 15 minutes, that’s 150 minutes of unnecessary compounded labor or $22.45/day – almost $675/month.

Alternatively, if send them home to save “on clock time,” they’ll likely come back the next day to complete the envelope pass. This means pulling your manager off the floor and away from core responsibilities. You may have saved on employee labor costs yesterday, but now the labor cost is at your manager’s salary level. 

4. Rounding Up (and Down)

Some employers use a time-rounding policies that can result in shortchanging employees on wages they were scheduled to earn. Other employers round up or down on tips, which either inflates the tip outs or withholds money that is supposed to be payable to the employee. The rationale used in both cases is that eventually it all evens out. Beware the security risk you are inviting here. Employees can claim that you are underpaying them for their time and/or their tips since it is not an accurate disbursement each night.

5. Employee Safety & Wellness

Restaurateurs also often feel responsible for their employees in ways that don’t apply in other work environments. You spend a lot of time together and it starts to feel like a family. As the head of that family, you can make choices to further promote employee safety. For example, employees feel safer and more secure leaving at night without cash in their pockets. They also report that tipping out in something other than cash means they tend to spend less of their tips on frivolous things.

Operating a restaurant and making decisions for a hospitality group means looking for ways to simplify your backend processes so that your frontend can delight customers and exceed expectations.

But for years, optimizing the tip out process wasn’t an option: because a better way didn’t exist, restaurateurs had to simply accept the cost of cash tips as part of doing business. 

Good news: that’s no longer the case. Innovative, easy-to-use technologies present safer, more efficient alternatives to tipping out in cash. They can make a standard process easier for you and your team, decrease liability, and eliminate other hidden costs to your business. 

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Tip Pooling: What Every Restaurateur Should Know

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.

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