Tipped wages have always been an important part of restaurant operations. But more recently, tipped wages have been making headlines due to promises of tax-free tips and movements to eliminate tip credits and the need for tip outs. If you’re now asking “what does ‘tip out’ mean?” and what do I need to know about it, you’re going to want to keep reading.
While the state of tipping in North America may be on the brink of changing, we’re exploring the ins and outs of how tipping currently works in the restaurant industry. In this article, you’ll learn:
- What is a tip?
- What does “tip out” mean?
- What’s the difference between a tip out, tip pool, and tip split?
- Common restaurant tip-out structures
- How to choose a tip-out structure for your restaurant
DISCLAIMER: This content is provided for informational purposes only. You are responsible for your own compliance with laws and regulations. Contact your attorney, accountant, or other relevant advisor for advice specific to your circumstances.
What Is a Tip?
At a restaurant, a tip is a gratuity diners pay to restaurant staff for their service. In other words, it’s an extra amount of money customers pay on top of the menu price.
With restaurant tipping in the United States, it’s customary to give between 15% and 30%, depending on the level of service. For example, diners may give 30% at a fine dining establishment, but 15% at a limited service restaurant. Generally, 20% is considered an average tip at most restaurants.
In many places in the United States, restaurants can take a tip credit, which allows them to pay servers a tipped minimum wage that is less than the state (or federal in some cases) minimum wage, as long as the server’s pay meets or surpasses the minimum wage after tips have been added. According to the U.S. Department of Labor (DOL), restaurant employees are allowed to earn a tipped minimum wage if they “customarily and regularly” receive $30 or more in tips each month.
So, what does it mean to tip out? Keep reading to find out.
Types of Tips
There are several ways that diners can leave tips, as well as several ways that restaurants can demand gratuities, including:
- Cash tip: Gratuity provided in cash. A customer might leave a cash tip with the rest of the payment and tell the server to keep the change, or they may place a cash tip in the check book after they’ve paid.
- Credit card tip: A tip added after diners pay with a credit card. Customers can write in a tip on a blank space on the receipt. The tip is added after the payment is processed.
- Auto-gratuity: Typically a mandatory service charge that’s added to checks, especially when serving larger parties. The IRS considers auto-gratuities service charges, so they count towards non-tipped wages to employees. States have different laws about auto-gratuities, so check local legislation before implementing one. It’s also important to tell customers about auto-gratuities in advance so it’s not a surprise when the bill comes.
- Service charges: Usually a mandatory fee charged for service. Like auto-gratuities, service charges also count towards non-tipped wages according to the IRS. In some places, like California, service charges must be “clearly and conspicuously displayed with an explanation of [their] purpose,” so familiarize yourself with local laws to understand what you can and can’t add to checks.
Ensure you always consult a lawyer if you have questions about regulations that govern mandatory gratuities.
What Does Tip Out Mean?
So, what does “tip out” mean? To “tip out,” meaning “to distribute tips among employees,” is a common practice in restaurants. “Tipping out” is also known as “tip pooling” or “tip splitting.”
How does tip out work? There is no one-size fits all structure for tip outs, which is why there’s a lot to consider if you’re establishing or revamping your restaurant’s tip-out policy.
What’s the Difference Between Tipping Out, Tip Pooling, and Tip Splitting?
What is tip pooling? What is tipping splitting? And are they the same thing as tipping out? These are common questions, as terms like tip pooling and tip splitting are often used interchangeably. However, there can be slight differences in what each of these terms mean, so it’s important to know the definitions.
Tip Out
To start, what does it mean to tip out? Tipping out usually involves giving servers a set percentage of the tips they earn, and giving away some of those tips to other front-of-house (FOH) staff who don’t earn tipped wages, such as bussers, hosts, and bar personnel.
For example, say your restaurant’s servers accrue $500 in tips in one night. Per your tip-out structure, 20% of these tips are distributed to bussers and bar personnel, and the remaining 80% are split among the servers.
Tip Pooling
So, what is tip pooling? In a tip pool, all tips are combined and split evenly amongst the team, or between those in the same role.
Let’s say Jackie contributes $100 to the tip pool, Andrew contributes $50, and Charlie contributes $150. The tip pool is worth $300. They split the tips evenly and each receive $100.
Tip Split
Now, let’s discuss tip splitting. “Tip splitting” is often used interchangeably with “tipping out” and “tip pooling,” and is a phrase that simply indicates sharing tips.
For example, the servers in section A may collectively gather $250 in tips and split it evenly. The servers in section B gather $350 in tips and split it evenly.
How these phrases are used varies from city to city and restaurant to restaurant, so be clear and transparent with tipped staff about how they’ll be compensated.
Common Restaurant Tip-Out Structures
So, what kind of tip-out structure should you create for your restaurant? And how does tip out work in practice?
Unfortunately, there are no laws that dictate exactly how to do this (although there are regulations for how not to do this in some areas, so look those up). Instead, you’ll have to come up with a system that feels fair to your employees and ensures they’re paid at least the minimum wage.
Use these common restaurant tip-out structures as inspiration for your establishment. Just ensure that however you choose to split tips, make sure to inform staff of how they’ll be shared.
Equal Tip Out
In this kind of tip out structure, all gratuities are pooled together then split evenly among tipped staff.
Let’s say five serves bring in a combined $350 in tips during a shift. No matter how much each server contributed to the tip pool, they’ll each bring home $350/5, or $70 in tips – an equal share for each person.
Proportion of Tips
With proportional tip outs, tips are distributed through a percentage based on roles. This tip-out structure is common if you decide to share tips with untipped employees. For example, servers may keep 80% of their tips, and then contribute 20% to a pool. Of this pool, bartenders might get 60%, bussers 30%, and hosts 10%.
Time Worked
Another way to split tips is based on shifts or hours worked.
Let’s say five servers worked 50 hours and brought in $1,000 in tips. By dividing the tip pool by total hours worked, you get to $20 in tips per hour worked. So if one server worked 10 hours, they would receive $200 of the tip pool. A server who worked five hours would receive $100 in tips.
Point System
The point system is a variation on a proportional tip-out structure. With a point system, each role is assigned a point value. These points dictate what proportion of tips an employee will receive.
For example, servers may be worth 10 points, bartenders five points, and bussers two points. If there are three servers, two bartenders, and three bussers working a shift, the entire pool is worth 46 points. Let’s say the tip pool amounts to $500 for the shift. Each point would be worth $500/46, or $10.89. Each server would therefore take home 10*$10.89, or $108.90 in tips, each bartender would take home 5*10.89, or $54.45 in tips, and each busser would take home 2*10.89, or $21.78 in tips.
Tables or Covers Served
Another common way to distribute tips is by the number of tables or covers served. This tip-out structure involves counting up total tables or people served in a shift and splitting tips based on percentage of tables or people served.
Let’s say your tipped employees serve 100 customers during a shift and bring in a combined $2,500 in tips. For each diner they helped, each server would receive $25 of the tip pool.
Alternatively, you could share tips evenly among servers based on which sections they served.
How to Choose a Tip Out Structure for Your Restaurant
As you can see, there are many ways to share tips among staff. But which tip-out structure is best for your restaurant? Here are some “tips” to help you determine just that.
Labor Law Compliance
As we mentioned, there are more tip pooling laws about what you can’t do than about what you can do. So, start by familiarizing yourself with federal regulations, and then with local ones.
For example, the U.S. Department of Labor states that if a tipped employee’s hourly pay after tips doesn’t meet the federal minimum wage, the employer must make up the difference. The DOL’s Fair Labor Standards Act (FLSA) has a number of important rules about who can and cannot benefit from a tip pool. These laws state that:
- Employers, managers, and supervisors can’t keep or receive employees’ tips or participate in a tip pool.
- Untipped employees (like back-of-house staff) are allowed to participate in a tip pool as long as they are paid at least the full minimum wage.
After you’ve familiarized yourself with federal regulations on tip-out structures, look up your state or province’s, county’s, and city’s laws, as they can be much stricter than federal regulations. For example, in Texas tipped employees don’t have to agree to share their tips with colleagues who don’t usually receive tips, like cooks, dishwashers, or janitors.
This information merely skims the surface of the complex legalities around tip-out structures and does not count as legal advice. We strongly recommend consulting a lawyer while devising your tip-out structure.
Type of Restaurant and Level of Service
After you’ve considered the legal restrictions around who can and cannot participate in your tip pool, and how you can and cannot split it up, you can get a bit creative with how you think about splitting tips. One thing to consider is what kind of tip distribution structure makes the most sense for your venue and service style.
A tip-out structure that works for a fine dining full-service restaurant (FSR) may not make sense for a quick-service, casual takeout spot. For example, a coffee shop might split tips from a tip jar and credit card tips evenly among baristas, while an FSR may have a more elaborate system based on sections worked or number of tables served.
Tip Distribution Timing
When you’re able to distribute tips can impact how you structure your tip-out system. While restaurants typically distribute cash tips at the end of a shift and card tips on pay day (usually every other week), you need to consider your own cash flow and payroll schedule, as well as FLSA regulations, to determine what tip distribution timing works for your business.
The FLSA states that if employers collect tips for a tip pool, they have to distribute the tips by the normal pay day of that pay period. In particularly tricky times when “an employer cannot determine the amount of tips received or how tips should be distributed before processing payroll, those tips must be distributed to employees as soon as practicable after the regular payday.”
A simpler tip-out structure helps staff get their tips faster. Look for tip distribution technology to help make tip out even more seamless.
Staff Feedback
It’s important to choose a tip-out method that works for your staff and is fair based on the amount of work each person does. When staff members feel that they’re participating in an equitable tip pool, they’re more motivated to keep working at your restaurant and do the best job possible. Happy servers make for happy customers who keep coming back and keep your restaurant in business.
Ask your team for feedback on the tip-out structure to make them feel like they have a voice. What is tip out to you? Does our tip-out structure feel fair? What would make it more equitable? What kind of structures have they liked from previous workplaces? Collect feedback during family meals, one-on-one check ins, or anonymously.
Flexibility and Adaptability
Your restaurant will grow and change, so you need to create a tip-out structure that’s flexible enough to succeed if your team grows or shrinks. You also need to ensure your system is flexible enough to account for both cash and digital tips. For example, you may decide to distribute cash tips nightly and then calculate card tips at the end of the pay period.
Create a tip-out structure that works well for the business you have today, as well as for what your business may become.
Wrapping Up: What Does “Tip Out” Mean?
Now that you understand what is “tip out” and are familiar with different ways of distributing gratuities among staff, you’re equipped to set up your own tip-out structure. Even as federal and local regulations around tipped wages change, establishing a tip-out structure that feels fair to staff will always be important. And if you make any adjustments to your tip pool, inform your tipped staff so they feel in control of their wages. After all, employees are the heart of any restaurant, so keeping their needs top of mind is critical.
Katherine is the Content Marketing Manager at TouchBistro, where she writes about trending topics in food and restaurants. The opposite of a picky eater, she’ll try (almost) anything at least once. Whether it’s chowing down on camel burgers in Morocco or snacking on octopus dumplings in Japan, she’s always up for new food experiences.
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