Tip Pooling Pros And Cons: The Complete Guide For Restaurants

If you’re wondering whether tip pooling can benefit your team and your restaurant, you’ve come to the right place.

In this article, the restaurant-management experts at Sling give you the pros and cons of tip pooling so you can decide if it’s good for your business.

Table of contents

• What is the legal definition of a tip?
• What is tip pooling?
• Is tip pooling legal?
• Pros of tip pooling
• Cons of tip pooling

What is the legal definition of a tip?

According to the Internal Revenue Service (IRS), a tip is a discretionary (i.e., optional or extra) payment determined by a customer and given to an employee for a job well done.

Under that general definition, tips include:

• Cash tips received directly from customers
• Tips from customers who leave a tip through electronic settlement or payment (including credit card, debit card, gift card, or any other electronic payment method)
• The value of any noncash tips (e.g., tickets or other items of value)
• Tip amounts received from other employees paid out through tip pools, tip splitting, or other formal/informal tip sharing arrangement

All cash and non-cash tips received by an employee are considered income and, therefore, subject to federal taxes.

It’s also important to keep in mind that:

• All cash tips received by an employee in any calendar month are subject to social security and Medicare taxes
• All cash tips received by an employee in any calendar month must be reported to the employer
• If the total tips received by an employee during a single calendar month are less than $20, then these tips are not required to be reported and taxes are not required to be withheld

If you have questions or concerns about what constitutes a tip — or about how to establish a tip pooling program — talk to an attorney who is familiar with the industry in which your business operates.

What is tip pooling?

Tip pooling is the process of collecting all tips from servers and other tipped staff together in one lump sum and distributing that money in a certain way so as to reward and inspire the hard work of those who contributed to the customer experience.

The concept of tip pooling is fairly simple — the equitable distribution of tips based on a predetermined system to everyone from prep cooks to hosts to food runners.

Dividing up that pool of tips, though, is where things get complicated.

Many managers wonder how they can sort the money fairly to reward the different levels of work done by employees in different parts of the restaurant (e.g., front of house versus back of house).

There are many ways to distribute the tips in a reasonable manner, including these three common methods:

• Hours
• Points
• Percentage

Most systems of division work by assigning weight to the participation of the various jobs that contribute to a successful customer experience.

So, while the servers do the lion’s share of the work, the hosts, bussers, and bartenders also do their part to ensure that the customer enjoys their time in your restaurant.

Not sure what weight to assign to each position?

Here’s an example from the points system — the hours and percentage systems work in a similar manner — to help you understand how it works and decide for your restaurant.

Tip pooling using the points method

For this simplified example, servers receive 15 points, bartenders receive 10 points, hosts and bussers each receive five points.

Your restaurant may have more positions involved, and, thus, would distribute points in a different way. Regardless of how many positions you have, the ones who do the most work get the most points.

During one shift, customers tipped $1,000 for three servers, one bartender, one host, and one busser. To figure out who gets what, add up the total number of points for the shift.

Servers (3×15=45) + Bartenders (1×10=10) + Host and Busser (2×5=10)
45 + 10 + 10 = 65

Next, divide the total points by the total tips to find out what each point is worth.

$1,000 / 65 = $15.38

Now, multiply each employee’s points by $15.38 to find out what they receive from the tip pool.

Servers (15 x $15.38 = $230.76 each)
Bartender (10 x $15.38 = $153.80)
Host and Busser (5 x $15.38 = $76.90 each)

Before distributing the money, add up the various increments to make sure they equal the total amount in the tip pool.

$230.76 + $230.76 + $230.76 + $153.80 + $76.90 + $76.90 = $999.88

As you can see, there’s a little bit left over ($0.22 in this case) because of rounding errors, but the remainder should seldom be more than a dollar.

Feel free to give each person $0.03 more, or perhaps put the difference into another jar earmarked for an employee party or some other reward.

Tip pooling using hours worked

Some restaurants base their tip pooling system on the number of hours an employee worked during a shift.

There is often a combination of full-time and part-time team members on the clock at the same time who work different hours during the day. It wouldn’t be fair to divide the tips evenly if one employee worked eight hours and another employee worked four hours.

Tip pooling using hours worked is similar to the points method but only takes into account the total time spent on the job.

Here’s how it works.

Total tips for the night = $800
Server #1 worked 8 hours
Server #2 worked 6 hours
Server #3 worked 4 hours

To figure out the net tips for each server:

Add up the total hours worked.

Total Hours Worked = 8 + 6 + 4
Total Hours Worked = 18

Next, divide the total tips for the night by the total hours worked to find the tip multiplier.

Tip Multiplier = Total Tips / Total Hours Worked
Tip Multiplier = $800 / 18
Tip Multiplier = 44.44

As you can see, the numbers don’t divide evenly so your multiplier may be a decimal. You can use the number as is or round it off for easier calculation.

If you round the multiplier down, you may choose to put what’s left when the distribution is done into another fund for a team party.

If you round the multiplier up, be warned, the net tips you calculate will likely exceed the total amount you took in.

Once you’ve settled on a multiplier, multiply that value by the number of hours that each server worked during the shift to find their net tips.

Server #1 Net Tips = Tip Multiplier x Hours Worked
Server #1 Net Tips = 44.44 x 8
Server #1 Net Tips = $355.52

Server #2 Net Tips = 44.44 x 6
Server #2 Net Tips = $266.64

Server #3 Net Tips = 44.44 x 4
Server #3 Net Tips = $177.76

To check your work, add up the various increments to make sure they equal the total amount in the tip pool.

Total Tips = $355.52 + $266.64 + $177.76
Total Tips = $799.92

As you can see, there’s a little bit left over ($0.08 in this case) because the Tip Multiplier is actually 44.4444444 (repeating). Despite this discrepancy, the remainder should seldom be more than a dollar.

Feel free to give each server another $0.02 and put the remaining $0.02 in another jar earmarked for an employee reward.

Tip pooling using the percentage method

Another way to calculate tip pooling for your team is with the percentage method.

This method is similar to the other two methods in that you assign a percentage to each employee based on the job they do.

For example, if you manage a delivery-only restaurant, you may assign the percentages as follows:

• Delivery driver = 50%
• Cook = 20%
• Order preparer = 16%
• Order taker = 7%
• Busser = 7%

If the delivery driver brings back a total of $300 in tips, you would figure out the net tip per position with the following equation:

Net Tip Per Position = Total Tips x Assigned Percentage

So, for the delivery driver, the math would be as follows:

Net Tip Delivery Driver = $300 x (50 / 100)
Net Tip Delivery Driver = $300 x 0.50
Net Tip Delivery Driver = $150

Then, you would use the same equation for the other positions.

Net Tip Cook = $300 x (20 / 100)
Net Tip Cook = $300 x 0.20
Net Tip Cook = $60

Net Tip Order Preparer = $300 x (16 / 100)
Net Tip Order Preparer = $300 x 0.16
Net Tip Order Preparer = $48

Net Tip Order Taker = $300 x (7 / 100)
Net Tip Order Taker = $300 x 0.07
Net Tip Order Taker = $21

Net Tip Busser = $300 x (7 / 100)
Net Tip Busser = $300 x 0.50
Net Tip Busser = $21

As you did with the other two methods, add up the Net Tip Per Position to make sure it’s as close as possible to the Total Tips (without going over).

Total Tips = $150 + $60 + $48 + $21 + $21
Total Tips = $300

If you have any leftover tip money from this method, you can divide the remainder evenly between the five positions, or put it in another jar earmarked for a special team event.

Tip pooling using the hybrid method

In a hybrid tip pooling system, employees retain a certain percentage of the total tips they earn and share the rest.

Here’re the details to help you understand how this system works:

• Server #1 receives $300 in tips during their shift
• Server #2 receives $200 in tips during their shift
• Server #3 receives $100 in tips during their shift

If, for example, your restaurant’s policy is that servers keep 50% of their tips and share the rest, here’s how to do the math.

Individual Tips Earned = Server #1 Total Tips – (Server #1 Total Tips x 0.50)
Individual Tips Earned = $300 – ($300 x 0.50)
Individual Tips Earned = $300 – $150 (keep this $150 remainder in mind for later)
Individual Tips Earned = $150

So, Server #1 will take home at least $150 in tips (50% of their total tips). But we still need to calculate the shared portion that all the servers will divide among themselves.

To do that, we need to first figure out the individual tips earned and the amount they’ll share for the other two servers.

Individual Tips Earned = Server #3 Total Tips – (Server #3 Total Tips x 0.50)
Individual Tips Earned = $100 – ($100 x 0.50)
Individual Tips Earned = $100 – $50 (keep this $50 remainder in mind for later)
Individual Tips Earned = $50

Now that you have the minimum that each server will take home, you can add up the remainder and divide it equally among the three servers.

Shared Tips = (Server #1 Remainder + Server #2 Remainder + Server #3 Remainder) / 3
Shared Tips = ($150 + $100 +$50) / 3
Shared Tips = $300 / 3
Shared Tips = $100

So, each server gets an extra $100 from the shared pool of tips.

All that remains is to combine the Individual Tips Earned and the Shared Tips to find each server’s total for the shift.

Server #1 Shift Tip Total = Individual Tips Earned + Shared Tips
Server #1 Shift Tip Total = $150 + $100
Server #1 Shift Tip Total = $250

Server #2 Shift Tip Total = $100 + $100
Server #2 Shift Tip Total = $200

Server #3 Shift Tip Total = $50 + $100
Server #3 Shift Tip Total = $150

To check your work, add up the total tips brought in (the bulleted list at the start of this section), and then add up what each server takes home for the night to see if they match.

Total Tips Brought In = $300 + $200 + $100
Total Tips Brought In = $600

Server Tip Total = $250 + $200 + $150
Server Tip Total = $600

Since the two values match, you know you’re not overpaying or underpaying your employees.

Is tip pooling legal?

Yes, tip pooling is legal. But you can’t just conduct it any way you want.

The Fair Labor Standards Act (FLSA) — which governs everything from a fair workweek to minimum compensation — sets rules and standards that all businesses must follow if they want to implement a tip pooling procedure.

Additionally, some states add their own rules to the FLSA standards. Other states have disallowed tip pooling altogether.

Be sure to check your secretary of state’s website to find out if tip pooling is even an option for your restaurant.

Then check the FLSA and other sources to find out what you can and can’t do if you want to implement tip pooling in your business.

Pros of tip pooling

1) Improved teamwork

With tip pooling, your employees quickly realize that they are all in it together.

As a result, teamwork and group cohesion improve because everyone knows a good customer experience usually results in a higher tip and more money in their pocket at the end of the day.

2) Staff more likely to help each other

Similarly, tip pooling motivates every employee, regardless of their position, to help their coworkers when the need arises.

So, for example, a host helping out with the busser’s duties when things get busy, keeps everything running smoothly. When that happens, guests will be happier and more likely to tip accordingly.

3) Fewer disputes over table assignments

Table assignments can cause bad feelings and disputes among servers that have a direct effect on the rest of the team.

With tip pooling, there are no “bad” tables, and no one feels slighted because they have to work the corner near the kitchen door.

4) Increased sense of responsibility at all positions

With tip pooling, all positions experience an increased sense of responsibility because their actions can have a direct effect on the amount of tip they’ll receive at the end of the shift.

As with the other pros on this list, that’s good for your customers, good for your team, and good for your business.

5) Equal attention to side work

During busy times, side work, such as keeping entryways clean and ketchup bottles filled, takes a backseat to getting customers seated, served, and out the door.

But, with tip pooling, employees know that their tip depends on the total experience, so they’re more likely to give this side work the attention it deserves — even during the lunch and dinner rush.

Cons of tip pooling

1) High performers take home less

One of the main cons of tip pooling is that high performers take home less than they would normally.

They may have worked hard to perfect their skills and give their customers stellar service, but they still make the same amount in tips as another server who doesn’t put forth the same effort.

2) Resentment could develop with tip pooling

Many employees will work hard under the tip pooling arrangement. Other employees may see it as a way to do a bit less work and still get paid the same.

If that happens in your team, the hard workers could start to resent the whole process and start looking for employment elsewhere.

3) Possibility of unfair distribution

As a manager or owner, you know which positions are primarily responsible for a good customer experience.

Still, there is a very real possibility that you might assign less weight (e.g., fewer points) to more-involved and integral positions and more weight (e.g., more points) to less-involved positions.

This can lead to unfair distribution of tips and a sense of ill will among those who work the hardest.

4) Low performers aren’t as obvious

With tip pooling, low performers aren’t as obvious — they don’t stand out as much — as they would be under a different system.

This can cause problems when it comes time for employee reviews because it’s hard to tell who has improved and who hasn’t.

5) Some staff may pocket a portion of their tips

If employees feel unfairly treated under the tip pooling arrangement, they may pocket a portion of their tips rather than contributing it all to the collection.

This is especially common with cash tips and leads directly to unfair distribution of money among employees.

Tip pooling and scheduling

Whether you choose to implement tip pooling or not, the success of your business depends, in large part, on how well you schedule your employees.

The Sling app can help.

Sling is a suite of tools that gives you unprecedented control over all your workforce management and optimization activities, including:

• Time tracking and reporting
• Payroll calculation
• Communication
• Planning
• Strategy implementation
• And much more…

Sling even incorporates advanced artificial intelligence that warns you when conflicts exist and provides suggestions for how you can fix them.

All of that makes Sling the best choice for managing your team’s schedule, keeping your employees engaged and focused, and making your business run better than ever.

For more free resources to help you manage your business better, organize and schedule your team, and track and calculate labor costs, visit GetSling.com today.

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This content is for informational purposes and is not intended as legal, tax, HR, or any other professional advice. Please contact an attorney or other professional for specific advice.

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