How to Build an Equitable Restaurant Tip Out Structure

Love them or hate them, tipped wages are a part of the restaurant industry that’s here to stay for the foreseeable future. While there are laws that regulate who can earn tipped wages and what the minimum tipped wage is, there are no laws that dictate exactly how tips should be distributed among restaurant staff. 

Creating an equitable restaurant tip out structure is an important part of ensuring that staff are happy and make customers happy. But what’s fair when it comes to splitting tips? 

There’s no one-size-fits-all approach, which is why we’re presenting you with several options so that you can decide which tip out structure works best for your restaurant.

In this guide, you’ll learn: 

• The history of tipping in the restaurant industry
• What is a tip out structure?
• How to communicate tipping to staff and customers
• Factors to consider while creating your tip out structure
• The four most popular restaurant tip out structure
• What you need to know about tip pooling laws
• Tips for implementing your restaurant tip out structure

Let’s dive in!

The history of tipping in the restaurant industry

Ever wonder where tipping comes from? 

The tradition of tipping came to the United States from Europe in the mid-19th century. Americans who vacationed in Europe noticed that Europeans tipped service staff, a practice that originated in medieval times. These travelers brought the tradition of tipping back with them to the U.S. because they wanted to seem more European. 

After the abolition of slavery, employers didn’t want to pay former slaves wages for their work so they offered them employment without wages and made them rely on tips for income. The practice of customers subsidizing wages eventually made its way into the restaurant industry. In 1938, tipped wages were codified in the U.S. Fair Labor Standards Act. 

What is a tip out structure? 

A tip out structure for restaurants refers to a system where a percentage or portion of the tips earned by servers or front-of-house staff is distributed among other members of the restaurant’s team. Typically, this distribution includes support staff such as bussers, food runners and bartenders who contribute to the overall dining experience but might not interact directly with customers or receive tips themselves. 

The purpose of a tip out structure is to recognize the efforts and reward the entire team involved in delivering  a great service. The specific percentage or amount that is designated for tip outs can vary depending on the restaurant’s policies, local regulation, and customary practices within the region.

Adding a tip out structure can help create a sense of teamwork and fairness within a restaurant. While the specifics of a tip out structure may vary, the underlying goal is to promote a cooperative work environment and ensure employees feel valued for their role in delivering a memorable dining experience.

How to communicate tipping to staff and customers

When implementing a tip out structure in a restaurant, how you communicate policies is key to ensure transparency and understanding among both staff and customers. 

To inform staff members about the tip out structure, it’s important for restaurant management to hold clear and comprehensive meetings or training sessions. 

During these sessions, management should explain the rationale behind the tip out system, its benefits, and how the distribution process works. 

They should also outline the specific percentage or amount that will be allocated for tip outs and provide examples to illustrate how it affects the overall income of the staff. Open channels of communication should be established to address any questions or concerns that staff members may have regarding the tip out structure.

When communicating the tip out structure to customers, transparency is just as important. Restaurants can include a brief explanation on the menu or at the bottom of the bill, stating that a tip out structure is in place and that a portion of the tips goes towards supporting the entire restaurant team. This communicates to customers that their gratuity is not solely for the server but also helps recognize the efforts of other staff members. By clearly communicating the tip out structure, restaurants can foster a sense of understanding and collaboration among customers, encouraging them to appreciate the collective effort of the entire team in providing exceptional service.

Factors to consider while creating your tip out structure

Before creating your restaurant tip out structure, it’s important to consider several key factors to make the structure fair and legal. They are:

• Local laws
• Who gets tips?
• What’s fair?
• Do tips incentivize good service? 
• Employee input
• Your restaurant type

Local laws

What do your local laws say about tip sharing? 

While federal laws are blanket policies, state, provincial and city laws may be more strict. Are you allowed to share tips with untipped workers? If yes, who can participate in tip sharing? Who cannot?

Make sure that your tip out structure lets you satisfy minimum wage laws. Most states have their own tipped minimum wage and an untipped minimum wage. In most states that have a tipped minimum wage that’s lower than the untipped minimum wage, the employer must make up the difference in cash wages if tipped staff don’t make at least as much as state minimum wage after tips.

For example, the tipped minimum wage in Pennsylvania is $2.83/hour while the state minimum wage is $7.25/hour. If a server in Pennsylvania works an eight-hour shift, they have to take home at least $58 ($7.25 x 8 hours) after tips during that shift to make at least as much as the state minimum wage. If, after tips, the server only earns $45, the employer has to pay the server the $13 difference. 

Make sure that you meet tipped wage laws to avoid fines and violations.

For U.S. and Canadian restaurants, we suggest referencing the government sites below and contacting your state or provincial Department of Labor for further information: 

• Canadian provincial minimum wage laws 
• U.S. state minimum wage laws

Another important law to be aware of is that in most states, employers need to notify employees about their tip-sharing policies and/or get their consent to participate in tipping. 

Who gets tips?

You’ll have to decide if only those who work on a tipped wage, like servers and bartenders, will be part of the tip pool, or if back-of-house staff who earn untipped wages will also be eligible for some of the tips. 

Some restaurants share a percentage of the entire tip pool with untipped workers to reward them for a job well done. If you want to do this, consult your local laws to make sure that it’s legal. In most places around the United States, restaurant managers and owners are barred from keeping tips.

What’s fair?

Make sure that the restaurant tip out structure you create is fair and equitable. Create guidelines to define what “fair” means to your team. Does “fair” mean that everyone keeps what they earn, or that tips are split based on hours worked?

Document your tipping policy in your restaurant employee handbook as well. This way, all your employees are on the same page and there’s no ambiguity. 

Do tips incentivize good service? 

One of the arguments for keeping a tipped wage system instead of paying servers a living wage is that tips motivate servers to provide good service, and that without it, service would suffer. 

While this is certainly up for debate, if you do decide to implement a tipping structure, create a fair tip out policy that incentivizes your servers to work hard and earn a decent living. 

Employee input

Ask your tipped wage employees for their input on your restaurant’s tip out structure. How do they think tips should be distributed? Show them that you value their input and that it’s a part of your decision-making process. 

When employees know that you care about their opinion when it comes to their earnings, they will be more engaged in their work and invested in your restaurant. 

Your restaurant type

How your restaurant’s tips are distributed can depend on the restaurant type. 

For example, if you run a bar that doesn’t serve food but uses servers to take orders and bring drinks to customers, you may want to give bartenders a higher percentage of tips than the servers because they are the ones creating the drinks. 

The 4 most popular restaurant tip out structures

After you’ve thought carefully about important factors that will impact how you distribute tips, you’re ready to create your restaurant’s tip out structure. Here are a few of the most popular tip out structures for restaurants and bars: 

• Everyone keeps what they earn
• Even split-tip pooling
• Tip pooling by section
• Hybrid tip pooling

1. Everyone keeps what they earn

What: This tip out structure is simple to calculate and execute—everyone keeps the tips they earn and tips are not shared. It’s every person for themselves.

Example: A customer gets a bill of $100 and tips $15 dollars. The waiter serving the table can keep the $15 tip in its entirety.  

Pros: One of the upsides of not sharing tips is that employees are motivated to work harder because their compensation is directly tied to their work. This method is a good way of retaining successful employees because they don’t have to share with colleagues who aren’t as successful. 

Cons: When everyone keeps their own tips, there is a lack of teamwork amongst service staff, and even a competitive atmosphere. Furthermore, novice servers could earn a few tips on their own and may, therefore, want to quit, which can contribute to higher employee turnover. 

2. Even split-tip pooling

What: This method combines everyone’s tips and splits them “evenly” amongst tipped wage staff. How you define “evenly” is up to you. It could be based on the hours worked or some other measure that would make the split equitable. This method works best at smaller restaurants where servers aren’t assigned tables or sections.

Example: Five waiters bring in a total of $200 dollars worth of tips during their shift. The restaurant manager would split the $200 dollars five ways, so each waiter would keep $40 dollars. 

Pros: Evenly splitting tips fosters a collaborative atmosphere in which servers will work together to ensure good service. This method is also equitable, as sometimes tips aren’t related to server performance but to guest generosity or thriftiness. Servers shouldn’t be punished for what’s not in their control.

Cons: Tip pooling can be disappointing when you’ve earned a really big tip and can’t keep it for yourself. It’s also less motivating than keeping exactly what you earn. 

3. Tip pooling by section

What: Instead of splitting tips evenly among all tipped wage workers, this restaurant tip out structure splits the tips based on table section or department worked. 

Example: If your restaurant has different sections: All servers working in the terrace would split their tips with each other, and all servers in the dining room would split tips with each other. Or perhaps servers would receive 60% of all of the tips and bartenders would receive 40% of all of the tips. There are many different variations of how to accomplish this. 

Pros: This tip out model is a bit closer to what each server actually earned because the tips are split amongst a smaller group. This tip out structure is collaborative but on a smaller scale. 

Cons: Jealousy can occur if one team earns more tips than the other. Servers may request to service parts of the restaurant that are more lucrative, leaving others with less desirable sections. This tip out model could create competition between staff.

4. Hybrid tip pooling

What: In a hybrid tip out structure, servers retain a certain percentage of the tips they earn and share the rest.

Example: Alex earns $300 in tips in one night. Brad earns $100 in tips. The restaurant’s policy is that the servers keep 50% of their tips and share the rest. Alex keeps $150 and contributes $150 to the tip pool. Brad keeps $50 and contributes $50 to the tip pool. The total tip pool is $200. Divided by two they each get $100 added to their base. So Alexs ends up with $250 and Brad ends up with $150. 

Pros: This hybrid model is more equitable than every server keeping the tips that they earned, while still rewarding high performing servers for their work. This tip out structure subsidizes servers who are less experienced or serve cheap customers. This policy also encourages staff to work together. 

Cons: High-earning and high-performing servers might be disappointed that they have to share their tips with others and subsidize less experienced servers. 

What you need to know about tip pooling laws

If you decide to go with a tip pooling structure, here are a few laws you should be familiar with.

Valid tip pools can include untipped staff

In March 2018 a new law rolled back a previous requirement that said tip pools could not include untipped staff. Now, tip pooling can include untipped (back of house) staff. As Gov Docs explains: “The bill did roll back the 2011 regulations that prohibited sharing of tipped employees with nontipped employees, but only in cases where the employer pays the higher minimum wage. This means when workers are paid the full minimum wage, it is legal for tipped employees to share their tips with non-tipped employees. However, the bill prohibits employers, managers or supervisors from collecting or retaining tips made by employees.”

Pooled tips cannot go to the employer

An employer is not allowed to participate in the tip pool. As mentioned above, only traditionally tipped staff can participate, which explicitly excludes restaurant owners and, in some states, the same goes for managers and supervisors as well. While an employer can legally require staff to participate in a pool, they are not allowed to benefit from it themselves.

Tip pooling cannot detract from minimum wage

By law, an employer is required to pay minimum wage and tip pooling can’t detract from that. Especially if the employer takes a tip credit (ie, staff gets paid less than the federal minimum wage because they’re a tipped employee), employees should be sure to keep an eagle eye on their income each day and make sure they’re getting at least the federal minimum wage, if not more depending on your state’s laws. If contributing to a tip pool takes someone below minimum wage, that’s illegal and they are not required to participate in the tip pool in that instance.

Tips for implementing your restaurant tip out structure

After you’ve come up with your awesome restaurant tip out structure, there are a few things you need to do to keep staff happy.

• Communicate! If you’re changing your tip out structure, be transparent in how you communicate about it with employees. Set expectations by unveiling the new policy in an all-team meeting and then cement your new policy by including it in your employee handbook. 
• In most states, employees have to sign off on tip sharing. Make sure that you have the right paperwork in place for employees to sign and to present to officials if needed. 
• Use your restaurant’s tech tools to see how the new tip out structure is affecting performance. Check your restaurant POS system’s sales and employee reports to see if the new policy has improved employee performance or made it suffer. 
• If you find that employees aren’t happy with the new policy, or aren’t performing as well as they could be, you can rework your restaurant’s tip out structure. Experiment with it until you find a method that satisfies management, staff and customers.

Tip out structure cheat sheet

Creating a tip out structure that motivates servers to work hard, encourages them to collaborate and pays them fairly is difficult to do. Reference this cheat sheet of tip sharing methods as you build a policy that works well for your employees:

• Each man or woman for themselves – Every employee keeps the tips they earn
• Even split-tip sharing
• Tip sharing based on section or role
• Hybrid – Tipped staff keep a percentage of the tips they earned, and split the rest

Looking for a POS that’s easy to learn and your staff will love to use? Talk to one of our experts to find out how Lightspeed can help.