What you need to know about tip pooling

Tips are an integral part of the restaurant industry. They motivate employees to provide exceptional service, creating an experience that brings customers back time and again. For employers in many states, tips can also make up the difference between the server minimum wage and the federal minimum wage. If you’re looking for ways to distribute tips more fairly among employees, tip pooling is one option.

What are the tips for pooling?

Tip pooling is a practice where restaurant employees put all or part of their tips into a communal pool. The employer divides the total funds among eligible workers, either equally or using a predetermined ratio. This method is an alternative to tip sharing, where servers and bartenders voluntarily hand over part of their tips to other employees who help with service but don’t receive tips.

As you might guess, tip pooling can be a polarizing tipping method. It’s usually beneficial for employees such as bussers and expediters, but servers who tend to receive higher tips may find the practice unfair. And if certain employees work harder than others, either in perception or reality, tip pooling can create conflict among the staff.

For some employers, tip pools are the most sensible option. Take coffee shops, for example — multiple people are involved in taking orders and making drinks, but customers only tip once. By pooling tips, everyone receives their fair share. The same goes for any counter-serve restaurant where cashiers and kitchen employees work together to prepare orders.

Tip pooling is less common in traditional table service restaurants, but that’s not out of the question. As an employer, you might use this method to promote a collaborative rather than competitive atmosphere. If you’re currently using a tip credit system to satisfy minimum-wage requirements, you can still use a tip pooling system as long as you stay compliant with any applicable laws.

How are pooled tips calculated?

The way you calculate pooled tips depends on local, state and federal laws. All restaurants are subject to the Fair Labor Standards Act (FLSA), which allows employers to mandate a tip pooling arrangement for staff members. If you take a tip credit, the FLSA only permits your tip pool to include employees who traditionally receive tips. When you pay a minimum wage for all employees, you can also include non-tipped workers such as chefs or dishwashers. According to employment law, employers, managers and supervisors may not accept money from a tip pool.

The tip pooling method and timeline you choose also affects the calculation. If you pool tips for each shift and distribute them evenly, the process is simple. Add together all the tips at the end of the shift and divide them by the number of employees working. If the tips total $1,000 and you have 10 employees, each person will receive $100.

When you choose a percentage or points-based system, the process is slightly more complex. Imagine you have two servers that receive 40% each, a host that receives 15% and a busser who gets 5%. For a shift with $1,000 in tips, each server would get $400, the host would receive $150, and the busser would get $50.

Federal tip pooling law requires you to distribute the tip pool by payday at the latest. For card tips, you’re permitted to deduct the credit card company’s transaction fee percentage — unless doing so pushes the employee’s compensation below the minimum wage.

At tax time, your employees must report 100% of the tips they receive. The IRS also monitors employee tips as a percentage of your restaurant’s income. If tips make up less than 8% of your gross receipts, you must make up the difference and split it among tipped employees.

Tip pooling methods to try

Tip sharing is rarely a one-size-fits-all solution; as an employer, you can customize the process to fit your operations and employee preferences. Keep in mind that tip sharing doesn’t require you to pool 100% of tips. If servers and other tipped employees are good at the prospect, consider creating tip pools from 20% to 50% of the total gratuities.

Common tip-splitting methods include:

Even distribution. The tip pool is split evenly between all employees. This method is useful for bakeries, fast food outlets, coffee shops and counter-serve restaurants where employees work together to prepare orders, serve meals and clean up after customers.
Percentage-based. Employees receive a percentage of the tip pool based on their contribution to service. Because servers handle the bulk of the customer-facing duties, they typically get a majority of tips. Bussers, hosts and bartenders usually receive smaller percentages.
Points. This tip-pooling method is similar to the percentage system, except employees receive a certain number of points depending on their role. Add up the points for everyone who’s working, then divide the total tips by the number of points to get a per-point dollar value. The point value changes every shift, helping to account for variations in staffing and order volume.

After you choose a tip-pooling method, you must decide whether to calculate tips at the end of each shift or at the end of the day. Shift-based distribution requires more accounting work on the employer’s side, but it offers fair compensation for employees who work the busiest shifts. You might choose a workday distribution method — where employees receive tips based on the number of hours they work — if you’re open for a limited number of hours or if your orders tend to be stable across shifts.

The pros and cons of pooling tips

Not sure if tip pooling is right for your restaurant? The pros and cons can help you make a decision.

Pros of pooling tips

All service employees receive tips from the tip pool.
Employees aren’t penalized when they’re assigned to a low-tipping table.
Tip pools can encourage teamwork.

Cons of pooling tips

Tip pooling laws can complicate your tip credit system.
Employees are compensated equally even if they put in less work.
It can create conflict between average and high-performing workers.
Pooling tips adds complexity to employer accounting procedures.

When in doubt, ask your restaurant employees how they feel about pooled tips. Experienced, highly skilled workers may be strongly opposed; if they’re forced to pool tips with new or lower-performing workers, they’ll almost certainly make less money. When employees rotate positions in a counter-serve restaurant, however, the system can benefit the entire team.

Keep employees happy while growing your business

If your employees are happy with it, a tip pool can boost morale across the entire team. But employee appreciation shouldn’t stop there. Taking time to show your employees you appreciate their work will help foster a healthy work environment. Keeping employee practices consistent and fair will help minimize turnover.

Don’t forget to include your delivery tips, too. With Grubhub, you can opt to self-deliver orders within your preferred radius to ensure all tips remain with in-house staff. To learn more or try the system for free, get started with a Grubhub account.