Ensuring equitable and timely tip payouts is one of the biggest struggles restaurant owners and managers face when managing their team’s compensation.
Tip pooling can vary substantially across businesses, so let’s review what tip pooling is, some of the most common tip-pooling practices, and things to consider if you implement this compensation method.
What is tip pooling?
Tip pooling is a form of tip distribution where tips are aggregated into a collective pool and then divided among a group of tip-eligible employees.
Tip pooling can work for businesses where certain employees interact directly with customers while others are equally working on the order but never interact with customers. Some businesses that might consider tip pooling are:
- Quick-service restaurants
- Table service/full-service restaurants
- Coffee shops
- Any hospitality-related business that has a strong teamwork culture
Depending on the needs of the business, owners and managers will use a variety of different splits, such as split by hours worked in a workday or hours worked in a business shift. It’s also possible for owners and managers to create multiple tip pools, for example, split tips for drinks and bartenders and split tips for food orders and servers.
Tip pooling can strengthen the work relationship your employees have and lead to a less competitive and more collaborative atmosphere, as long as those employees are working together equally to better a customer’s experience.
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Tip pooling methods
There are a few different methods available for tip pooling — subject to federal, state, and local law. One may work better for your business than another, but it’s best to try the methods that distribute tips in the most reasonable manner for your tip-eligible employees and are compliant with the laws in your jurisdiction.
Tip pooling vs. tip sharing/tipping out
Let’s determine the difference between tip pooling and tip sharing, or tipping out.
According to The Balance Small Business, “tip pooling and tip sharing are similar processes for accumulating tips between employees. Tip pooling is collecting all or part of the tips received by employees into a pool, which is then redistributed, often by the employer, among tipped employees. Tip sharing, on the other hand, is a more informal, voluntary process among employees, both those who usually receive tips and those who don’t.”
The business shift tip pooling method is a form of schedule/workforce organization where the business owner or manager divides the workday into different sections and then distributes tips from each business shift among tip-eligible employees who were part of that business shift.
For example, the owner may organize their business around three “business shifts:” opening, float, and closing. For the opening shift at a coffee shop running under this style, they would always make sure they have two baristas and one prep cook. When tip pooling, tips may be pooled and calculated at the end of each business shift to share among the tip-eligible employees who worked that particular shift.
Hours worked (workday)
The hours-worked method is the method of determining the total amount of tips for the workday and dividing that total by the amount of hours worked by all tip-eligible employees. Each employee would then get that amount multiplied by the hours they worked.
For instance, say that three tip-eligible employees worked in one workday, and the total amount of tips was $220. Two employees worked eight hours and one employee worked six. You would divide $220 by 22 (the total hours all employees worked), which, in this example, equals $10. You then would multiply that amount by the hours worked to figure out each employee’s payout. The two employees who worked eight hours would each take $80 in tips, and the other employee would take $60.
Some tip pools can be distributed by job or role. In this method, certain percentages will be pre-determined and distributed for certain roles. Customer-facing roles typically receive a higher percentage versus back-of-house roles or roles that don’t interact much with customers.
For example, positions such as server or bartender may take 60-80% of the tips, while employees like a hostess or busser may take less.
With the point-system method, a number of points is assigned to each role by how much responsibility they have during their shift. For example, this could mean 40 points for servers, 20 points for bartenders, and five points for bussers.
Tips are added together, as are the number of points of the staff that worked. The tips are divided by the number of points in the pool to determine what each point is worth. To get the final tip amount per employee, you would then multiply their number of points by that amount. In the example above, if three servers, two bartenders, and two bussers are working, the total points would be 170. Say the total tips came to $340, each point would be worth $2, resulting in $80 for each server (40 points x $2), $40 for each bartender (20 points x $2), and $10 for each busser (5 points x $2).
Tip-pooling method pros and cons
Choosing which tip-pooling method is right for your business depends on staff roles, employee shift setup, the distribution of responsibilities among those tip-eligible employees, and the laws in your jurisdiction. The benefits of tip pooling can be incentivizing kitchen and back-of-house staff, an increased teamwork and a collective effort to improve every customer’s experience, and an equal sense of responsibility for all business tasks, like side work or opening and closing duties.
However, there are some cons to tip pooling methods, depending on your employees’ wants and the transparency you aim to have with them as an owner. In some situations, tip pooling can lead to less motivated employees since tips will be distributed evenly at the end of their shift, no matter the quality of their work.
This can also affect seasoned employees versus new employees. Seasoned employees may feel as though they have to pick up the slack of newer employees to make the higher tip amounts they’re used to. It’s best to have an open dialogue with all of your employees to hear their thoughts about what works best in your business’s atmosphere and company culture.
Being able to easily combine labor and sales transactions data in order to keep accurate records of hours worked and tips collected can help provide equity and transparency across your employee base.
Tip pooling in practice
To pool your employees’ tips, you’ll need to have at least the following data:
- Sales transaction and tip amounts, found on your point of sale (POS)
- Employee data, including job title, hourly wage, and tip eligibility; this includes back-of-house employees if you plan to have them participate in the tip pool
- Labor time, including timecards, timesheets, or employee shifts
- Common tip-pooling calculations, such as those described above
When adopting tip pooling, there are a few best practices to keep in mind.
First, define the policy. Then you should consider which tips will be allocated to the tip pool, the procedure for distribution, and timing. Check applicable federal, state, and local laws to determine what is permissible in your jurisdiction.
Next, it’s a good idea to provide clear communication and documentation on your tip-pooling policy. Employees should understand why their business practices tip pooling and be able to ask questions about it.
Many businesses rely on complicated spreadsheets to calculate tip payouts. But when you manually pull in timesheets and sales data there’s room for error, and it offers little visibility into your process for employees.
Automating your tip calculations and payouts can be an efficient and accurate way of paying your tip-eligible employees. Square Team Management and Square Payroll automatically calculate tip amounts and sync tip payouts to employees payroll.
Square Team Management integrates with your Square POS to bring all your sales and labor data into one place, eliminating costly mistakes and frustrating workflows. By tracking your team’s hours alongside sales and tip transactions, Square Team Management and Payroll can help reduce manual data entry and error-prone calculations.
Credit card tips can be imported, pooled, and split, all within Square. You can adjust tip eligibility for each team member by role in both the Payroll Team and the Team Member List sections of your Square Dashboard. When you select to pool tips as your tip-importing method, those credit card tips imported through Square will be pooled and split across the tip-eligible employees who were clocked in when the accompanying transactions occurred.
When tip pooling is used correctly and employees are paid on time, it can lead to a culture of teamwork and cohesiveness among your employees. No matter what method you decide on, be sure that your calculations are fair and consistent among all your staff roles. For tip pooling to be successful, it should be in place to benefit employees. With accurate data tracking, automatic payroll, and scheduling insights and flexibility, an integrated solution can ensure your employees and business are successful.
Please note that the information contained in this article is limited in scope and is only intended as a high-level overview of the topics discussed. The information is current as of the publication date only, and the laws (and associated agency and/or judicial interpretations) on the topics discussed could change at any point in the future. Block, Inc. (including its affiliates, subsidiaries, employees, officers, directors, attorneys, and tax advisors) undertakes no obligation to update this article for future changes in the law. In addition, laws vary by jurisdiction, and this article does not attempt to address all jurisdictions — for example, states, counties, or cities often have requirements that differ from federal law. Nothing in this article is or should be used as tax or legal advice. In particular, this article cannot be relied upon for the purposes of avoiding taxes, penalties, or other obligations under applicable law. For guidance or advice specific to your business, you should consult with a qualified tax and/or legal professional.