Streamlining tip payouts is crucial to keep operations running smoothly for restaurants and hospitality businesses. Plus, making sure your employees receive their tips in a fair and timely manner has become essential for attracting and retaining talent in today’s continuously tight labor market. While the world of tipping can be somewhat complex, one way to streamline tip payouts is to opt for tip pooling.

What is Tip Pooling?

Tip pooling is the practice of combining all the tips that come into your business as one lump sum and then dividing them equally among all tip-eligible employees. Tip pooling can work well for businesses in the hospitality industry such as:

• Restaurants (both full-service and quick-serve)
• Coffee shops/bakeries
• Bars
• Salons/spas
• Hotels

Tip pooling can help ensure that all employees are fairly compensated for their work, even those who may not be customer-facing or have the chance to earn tips directly. For example, consider a coffee shop: there’s someone working the cash register and taking orders; someone making the drinks; and another person clearing tables after customers leave. Tip pooling makes sure each of these people has the chance to earn tips for the work they’ve performed and can foster a more collaborative environment to create the best customer service as a team. 

Tip Pooling v Tip Sharing

Though the terms sound interchangeable, there’s a difference between tip pooling and tip sharing. “Tip pooling” involves collecting tips into a lump sum pool which is redistributed by the employer among the employees. “Tip sharing” is often considered a more informal process where employees decide how to share and distribute the tips themselves.

Methods of Tip Pooling

There are different tip pooling methods your business might adopt, which are subject to different state and federal laws. These include:

Shift-Based

‍For this method, managers divide the workday into different shifts and distribute tips equally among employees who worked each shift, such as opening and closing.

Hours Worked

For the hours-worked method, managers take the sum of all tips for each day and divide that number by the amount of hours worked by tip-eligible employees. Each employee then receives that amount multiplied by the number of hours they worked. This method ensures that employees who worked more hours in a given day earn more in tips.

Role-Based

‍This method takes into account different tip-earning percentages for different roles. Managers pre-determine set tip percentages for different jobs, whether they’re customer-facing roles (who usually receive a higher percentage of tips) or roles that don’t interact as much with customers. 

Point System

‍This system is slightly more complicated, assigning a number of points for each role by how much customer-facing responsibility they have during each shift. At the end of the day, managers calculate the amount of tip money each employee receives based on their points. 

Here’s an example: Let’s say you have baristas at a coffee shop who have 10 points, and bussers who have 5. At the end of the day, managers pool the total tip earnings and also add up the total points. If you had two baristas and two bussers working on a given shift, you’d add up 30 points for that shift (10+10+5+5). Let’s say your total tip earnings for the day came to $90.  

You divide the total points for the shift by the total tip earnings, which comes to 3. Next, you multiply that number by each employee’s points to determine their take-home tip payout. Each barista would earn $30 (10 x 3) and each busser would earn $15 (5 x 3). 

Which Tip Pooling Method is Best?

The key to finding the best tip pooling method for your business boils down to finding the most reasonable process for your employees that’s compliant with state and federal laws. 

Tip Pooling Regulations

Tip pooling is legal, but there are some stipulations. The Department of Labor summarizes the most important regulations from the Fair Labor Standards Act (FLSA) as they pertain to tip pooling:

• Managers, supervisors, and business owners cannot participate in tip pools.
• An employee’s tips and base wage must add up to at least minimum wage, even when that employee participates in tip pooling.
• Tips belong entirely to the employees—not their employers.

Certain states have their own laws about tip pooling and some prohibit tip pooling altogether. If you’re unsure of what the tip pooling laws are in your area, it’s best to search for tip pooling regulations for your particular state.

Pros and Cons of Tip Pooling

Tip pooling is just one way to disburse tip payouts among your employees, and as with any method, there are pros and cons. 

Pros:

Promotes a culture of teamwork

With tip pooling, your team’s combined efforts will be what brings in tips, so people quickly adapt a mentality of “we’re all in this together.”

Equal attention to side work / back of house jobs

Depending on which tip pooling method you use, you can teach employees that their earned tips depend on the entirety of a customer’s experience, not just one interaction. This can help your staff pay more attention to side jobs or back of house details than they previously would. 

Smooths out tipping inequities

Tipping can be an unpredictable and erratic habit. A server may wait on a huge table and deliver outstanding customer service, but be tipped a few dollars, while another table may require much less effort but earn a sizable tip. Tip pooling helps smooth out these inequalities so that all of your employees benefit from tips earned, not just those who happen to interact with customers that tip well.

Cons

‍
Not merit-based
High-performers may feel resentful that they make the same amount of tips as someone else in their same role without as much experience or skill.

Potential for unfair points distribution
If you go with the point-based tip pooling method, there’s the possibility you assign an unfair percentage of points to someone who’s actually pulling more weight than someone with a higher number of points. You may have a hardworking busser who’s interacting in a positive way with your customer base and a burned out server who’s been phoning it in but earning more in tips. 

Streamlining tip payouts and tip pooling

‍Tip pooling is just one way to streamline and organize your tip payouts process. Another factor entirely is ensuring that your staff receives their share of tips in a timely manner. Branch helps hospitality businesses—from restaurants and bars to hotels, spas, and more—send instant, cashless tip payouts to their employees each day, ensuring an automated, digital process that puts money in their workers’ wallets after each shift. Plus, we partner with Gratuity Solutions to automate the preferred tip pooling process at your business..Learn about Branch x Gratuity Solutions here, or explore how Branch can streamline your tip payouts process to save you time and hassle, retain more of your workforce, and beat out the competition.