Why the right tip out model is a make or break issue
There’s no shortage of hot debate over the ideal tip out model for a restaurant. Your investors, business partners, accountant, GM, definitely FOH staff, and even BOH staff will have opinions. And it’s no wonder. Tips are the primary source of income for FOH, and tip out models impact everything from restaurant culture to customer experience to employee retention to the bottom line.
With competition in the industry as fierce as ever and a 72.9% employee turnover rate, you can’t afford—literally or figuratively—to be using the wrong tip out model.
Here’s what you need to know about the prevailing tip out models, alternatives to traditional tip outs, new tip out regulations, and how to decide which strategy is right for your restaurant.
The Pooled House
In this model, server tips are pooled together then allocated out to supporting staff. Sometimes it’s a percentage of the server’s tips that gets pooled, sometimes it’s everything—that’s determined by management. There are lots of ways the pool can be distributed:
- Percentages: Fixed percentages are assigned to each role in the restaurant and tips are allocated based on those numbers
- Points: Each role in the restaurant is assigned a point value, with the highest number of points going to staff that interacts most with guests and a lower number of points for staff with less customer interaction
- Hours: The pooled tips are allocated based on the number of hours each person works
- Sales: Bartenders are tipped out a certain percentage of the alcohol sales and support staff is tipped out a certain percentage of food sales
Pro Tip! Most servers expect to tip out about 20% of their earned tips to others in the restaurant. You can use this benchmark for your tip out system.
Restaurant consultant and industry veteran, Cassandra Ericson, shared why the pooled system tip out works for her. “By doing [a pooled system], checks are significantly better. It allows me to be better at seeing the actual money I’m making and I’m better at budgeting.”
The model works well because it shows business appreciation to the complete FOH staff. It’s clear that everyone on the floor is important and valued. It also promotes teamwork—one team, one dream, one tip pool. If everyone works together (especially in a weeded section, for example), and guests have a great experience, tips will likely be higher and everyone benefits. Tip pooling also creates more consistent compensation for the staff and guards against uncontrollable factors like inherently busy sections (e.g., the patio in summertime, the bar on a Saturday night) that lead to unbalanced pay.
While tip pooling can work for any size establishment, some industry veterans think it works best in smaller restaurants with a tightly knit staff that is more likely to be amenable to sharing.
Proponents say the equity created by tip pooling boosts morale. But if the model isn’t set up and communicated clearly, be prepared to hear about it from FOH staff.
Pro Tip! Legally, employees need to sign off on tip sharing.
The Unpooled House
The unpooled tip out model allows servers to keep what they’re tipped in a night and tip out others in the restaurant from their individual earnings. Tip outs can be done using a predetermined percentage for each staff role or even at the discretion of the server.
Critics say it can encourage a me-myself-and-I attitude in servers that may damage restaurant morale. And it also doesn’t spread the wealth—if certain sections or shifts are more lucrative, some members of the team may not see the benefit.
But depending on your staffing model, this could be a totally viable option. Larger restaurants, who need a large number of servers on staff at all times, may benefit most from this model in terms of attracting and retaining talent. This model is especially important to consider if you have long-time servers on your staff that are used to a certain way of doing business.
Tip Outs and Minimum Wage
Regardless of the tip out method you use, minimum wage requirements, which vary by state, need to be met for all employees. According to the Fair Labor Standards Act, restaurants are only legally required to pay $2.13 an hour for tipped positions (though they can pay up to $5.12 an hour)—this is known as taking a “tip credit.” If the hourly salary plus tips don’t net out to the state’s minimum wage, the restaurant has to pay the difference.
What About the Kitchen?
Some restaurants have included BOH staff in tip out models, given the stark wage disparity between the two teams, but regulations have recently changed.
The Fair Labor Standards Act was updated in March 2018 to clarify that only restaurants that pay all employees the full federal minimum wage can tip out BOH from a pool. Restaurants that do take a tip credit, and pay tipped workers a salary lower than the federal minimum wage, have to keep the tip pool to only those people.
Alternatives to Tipping Out
There are other ways to incentivize and compensate staff that don’t involve tips at all.
Gratuity Free: While still the minority, a number of restaurants have done away with gratuity entirely, primarily to close the often-toxic pay gap between FOH and BOH. They have opted to raise menu prices to enable the restaurant to pay everyone a living wage without necessitating tips. Controversial, for sure, and the jury is still out on its effectiveness. Some restaurants have reversed course, while others, despite FOH staff loss, continue to forge ahead. This is probably best for restaurants just opening up, as making the transition could be very difficult for FOH accustomed to tips as a part of their income.
Surcharges: Not quite a tip, some restaurants have added surcharges to the bill to standardize a gratuity-like payment that can be shared across the restaurant.
Equity: Still others have opted for equity models (part ownership of the restaurant through stock or profit sharing) to create a culture of teamwork and incent the best performance from their entire team.
How to Choose the Best Tip Out Model
There isn’t a perfect answer for which tip out model is right for your restaurant. It depends on your business, your staff, your goals, and the culture you want to create.
Here’s what you should consider to make sure you get it right:
- Make sure your plan thoughtfully balances the work performed by everyone in the restaurant. Consider the flow of service and the roles on the floor. If food runners are up and down stairs or dishes are particularly cumbersome, maybe they get a higher percentage. If bussers also run food or your host also fills water and sets table, they may deserve a better cut.
- Take your type of establishment into account—if you run a beverage-heavy joint, tip out bartenders more. If the majority of your business is food sales, tip out the floor more and the bar less. Take the size of your establishment and the relationship between existing staff under consideration as well.
- Talk to similar restaurants in your area and ask how they set up their tip outs.
- Talk to your lawyer and accountant and get their take from a bottom-line perspective.
- Consult your state or local laws to be sure you know what you’re responsible for, your employees’ rights, legal necessities, and any unique complexities.
- Allow for flexibility if you run multiple locations. Consider letting each location establish their own tip out policy to be sure it satisfies the team.
Regardless of the tip out model you go with, the absolute best thing you can do is have a transparent conversation with your staff—make sure your team really understands the way it works and why—and let them know you’re open to feedback and changes.