Restaurant Tip Out

Understanding Tip Out Meaning: A Guide to Restaurant Gratuity Distribution

Caroline PriceAuthor

icon RESOURCE
Thumbnail 1

Tip Pooling Calculator

Use the Tip Pooling Calculator to learn how to distribute tips back to your restaurant’s employees using the tip pooling method.

Toast | BUILT FOR RESTAURANTS

In the restaurant industry, tip out refers to the practice of sharing tips among staff members. While servers depend on tips for 58.5% of their income, other restaurant staff also rely on tip out systems to ensure they’re fairly compensated for their contributions to the dining experience. Implementing a clear and transparent tip out system is essential for promoting employee satisfaction, reducing turnover, and maintaining a positive work environment. This complex system balances the needs of front-of-house and back-of-house staff while complying with labor laws and maintaining workplace harmony. 

This comprehensive guide explores the concept of tipping out, how to calculate tips, and their crucial role in fostering a fair and efficient workplace.

Understanding tip outs

Equitable tips

Tip outs are a crucial aspect of restaurant management, where tipped employees (typically waitstaff) share a portion of their total tips with support staff. This practice recognizes that successful service requires teamwork from various co-workers, including bussers, food runners, bartenders, barbacks, and sometimes kitchen staff.

Legal framework

The Department of Labor and Fair Labor Standards Act provides specific guidelines for tip sharing and tip credit practices. Restaurant owners must understand these labor laws to ensure compliance while implementing their tip out policy. The IRS also requires accurate reporting of both cash tips and credit card gratuities.

Front-of-house vs. Back-of-house

Traditional tip out policies primarily benefited front-of-house (FOH) staff, but many restaurants now include back-of-house (BOH) employees in their tip-sharing arrangements. This can include:

  • Dishwashers

  • Kitchen staff

  • Food prep workers

However, including BOH staff in tip pools must be carefully structured to comply with federal minimum wage requirements and labor laws.

Types of tip out structures

Percentage-based system 

The most common tip out structure involves servers sharing a percentage of their total tips or sales with support staff. For example:

  • Bussers might receive 1-2% of total sales

  • Bartenders often get 5-10% of alcohol sales

  • Food runners typically receive 1-3% of food sales

In this scenario, the tip out structure might work as follows:

  • Server's total sales: $3000

  • Server: If the server typically makes 20% in tips based on their total sales, and their total sales were $3,000, they would have earned $600 in tips (20% of $3,000), which they would then distribute according to the tip out structure.

  • Bartender: If the bartender receives 7% of alcohol sales, and the server's alcohol sales are $1,200, the bartender would receive $84 (7% of $1,200).

  • Busser: If the busser receives 2% of total sales, and the server’s total sales are $3,000, the busser would receive $60 (2% of $3,000).

  • Food Runner: If the food runner receives 2% of food sales, and the server's food sales are $1,800, the food runner would receive $36 (2% of $1,800).

In this example, the server would tip out $84 to the bartender, $60 to the busser, and $36 to the food runner from their total tips. This structure ensures that those who play a vital role in the service experience receive fair compensation based on their contributions.

Points system 

Some full-service restaurants use a points system for pooled tips, where different positions earn varying points based on their roles and responsibilities. This system can help create a more equitable distribution among staff members. For example:

  • Server: 6 points

  • Bartender: 4 points

  • Busser: 2 points

  • Dishwasher: 1 point

Each day, the total tip pool is calculated, and points are allocated based on the roles filled during that shift. If, for example, the total tip pool for the night is $1,000, the server, who has 6 points, would receive a higher portion compared to the busser, who has 2 points.

Here’s how the points might break down:

  • Total tip pool for the night: $1000

  • Total points for the night: 6 (server) + 4 (bartender) + 2 (busser) + 1 (dishwasher) = 13 points

  • Each point is worth: $1,000 ÷ 13 = $76.92

  • Server: The server would receive 6 points × $76.92 = $461.54

  • Bartender: The bartender would receive 4 points × $76.92 = $307.69

  • Busser: The busser would receive 2 points × $76.92 = $153.85

  • Dishwasher: The dishwasher would receive 1 point × $76.92 = $76.92

This system ensures that the staff members who are more directly involved in the service experience (like servers and bartenders) receive a higher portion of the tip pool, while still compensating other essential staff such as the busser and dishwasher.

icon RESOURCE

Tip Pooling Calculator

Use the Tip Pooling Calculator to learn how to distribute tips back to your restaurant’s employees using the tip pooling method.

Toast

Service style considerations

Each service style has unique roles and customer interactions, which influence how tips should be distributed, requiring different tip out approaches for each.

Full-service restaurants 

These establishments typically have the most complex tip out structures, involving multiple staff positions:

Quick-service and coffee shops 

Baristas and counter service workers might have simpler tip pooling arrangements, often splitting tips equally among staff working the same shift.

Peet's Coffee uses a tip pooling system where tips are collected and distributed among all staff members working during the shift. This ensures that everyone, from baristas to support staff, is fairly compensated for their contributions to creating a positive customer experience.

Implementing a tip out policy

Creating an effective structure 

To establish a fair and efficient tip out system, restaurant management must carefully design a structure that balances the needs of both front-of-house and back-of-house staff. Take these factors into consideration when developing a tip out template:

  • Service charges policies: Set clear guidelines on how service charges are collected and distributed to ensure transparency and compliance.

  • Credit card processing fees: Account for credit card processing fees when calculating tip outs to ensure fair distribution and avoid deductions from employee tips.

  • Fair distribution among staff members: Allocate tips equitably based on roles and responsibilities to ensure fairness.

  • Local labor laws: Ensure tip out policies comply with local labor laws regarding tip sharing, minimum wage requirements, and tip reporting to avoid legal issues.

  • Restaurant team dynamics: Tailor tip out structures to reflect each team member's role and contributions, fostering collaboration.

POS integration 

95% of restaurateurs agree that restaurant technology improves their business efficiency. In fact, modern point of sale (POS) systems can seamlessly help track and calculate tip outs, ensuring accurate distribution of both cash tips and credit card gratuities. Some features include:

  • Automated calculations: Automatically calculate tip out amounts based on pre-set percentages, reducing the risk of human error.

  • Real-time tracking: Track tips in real-time, ensuring that distributions are accurate and up-to-date, without manual tracking.

  • Seamless payment processing: Integrate credit card gratuities directly into the POS system for smoother processing and distribution.

  • Detailed reports: Generate detailed reports of tip out distributions, making it easier to review and ensure fairness.

  • Simplified compliance: Help ensure compliance with local labor laws by accurately tracking and reporting tip-related data through the POS system.

A few years ago, Roc-n-Ramen incorporated point of sale technology which improved efficiency and increased sales. Wayne Carrington, chef, founder, and owner, shared, “With Toast Mobile Order & Pay, the average check size is up 15%. That's another $120,000 per year when we're at full capacity. It's transformed our business.”

By integrating a POS system into their restaurant they saw a significant increase in sales. Higher sales typically lead to increased tips for servers, which then trickle down to the rest of the staff through tipping out, helping everyone earn a higher income overall.

icon RESOURCE

Restaurant POS Comparison Tool

A free, customizable Restaurant POS Comparison Tool to research and compare point of sale systems in one Excel spreadsheet.

Toast

Best practices for restaurant tip outs

Communication and transparency

Clear communication and transparency establish a work environment where staff members understand the tip out process and feel confident in the fairness of the distribution. Explaining clear tip out policies is essential for:

  • Managing expectations: Communicate tip out policies clearly to set realistic expectations and ensure everyone understands the distribution process.

  • Preventing conflicts: Foster open communication about tip out policies to address concerns early and prevent misunderstandings among staff.

  • Ensuring compliance: Regularly review tip out policies to ensure they align with labor laws and industry regulations.

  • Maintaining teamwork: Promote a culture of collaboration by ensuring tip out policies are fair and transparent.

  • Supporting staff morale: Ensure fair tip distribution to motivate employees, enhance job satisfaction, and foster a positive work environment.

Documentation 

Proper documentation of tip out distributions ensures transparency, helps resolve disputes, and upholds compliance with labor laws. Maintain clear records of:

  • Tip amount distribution: Keep records of tip amount distribution to ensure transparency, prevent disputes, and provide a clear reference for compliance and future audits. 

  • Service charges: Document any service charges applied to provide clarity in tip distribution, compliance with regulations, and fair treatment of all staff members involved.

  • Tip credit calculations: Track tip credit calculations to ensure compliance with minimum wage laws and accurately track the amount of wages covered by tips for each employee.

  • Pooled tips allocation: Log pooled tip allocations to confirm fair distribution among all eligible employees and maintain transparency in the process.

Regular review 

Regular review of tip out policies guarantees continued fairness, compliance, and adaptability to changing circumstances. Periodically assess the tip out structure to:

  • Promote fairness: Prevent discrepancies and maintain transparency in the tip out distribution process.

  • Maintain staff satisfaction: Address concerns, foster trust, and ensure that staff feel valued and fairly compensated.

  • Comply with labor laws: Reduce the risk of legal issues and guarantee fair compensation practices.

  • Support restaurant operations: Maintain transparency, promote teamwork, and align with business goals for efficient service.

  • Encourage teamwork: Foster a collaborative environment by verifying fair distribution, and motivating staff to work together and support one another.

Common challenges and solutions

Common challenges in tip out systems include discrepancies in distribution and unclear policies. Implementing transparent guidelines and regular reviews can help: 

  • Handle disputes: Clear policies and transparent reporting help prevent conflicts over tip distribution among staff members.

  • Manage different payment types: Systems must account for both cash tips and credit card gratuities, ensuring fair distribution regardless of payment method.

  • Seasonal fluctuations: Tip out policies should be flexible enough to accommodate changes in business volume and staffing levels.

The role of management

Restaurant management plays a pivotal role in developing, implementing, and maintaining effective tip out systems that serve both the establishment and its employees. Managers must strike a balance between:

  • Fair compensation and efficiency: Stay compliant with labor regulations by creating equitable tip out policies while maintaining operational efficiency.

  • Mediating conflicts: Avoid conflicts over tip distribution by maintaining detailed documentation and transparent processes to resolve disputes.

  • Fostering a collaborative environment: Create a workplace where all staff feel valued by holding regular meetings, promoting open-door practices, and monitoring tip patterns to ensure fairness.

  • Training and policy updates: Train new employees on tip out procedures and regularly update existing staff on any changes or adjustments to the system.

Future trends

The landscape of restaurant tipping is undergoing a significant transformation, driven by technological advancement and shifting social attitudes. Digital payment systems are revolutionizing how tips are collected and distributed, with sophisticated POS systems now offering real-time tip tracking and automatic distribution features. These technological solutions are reducing errors and increasing transparency in tip management while providing detailed analytics that helps restaurants optimize their operations. Other potential future trends include:

  • No-tip policies: The trend of eliminating tipping in favor of higher wages could continue to grow, with restaurants raising base pay for all employees to ensure fair compensation without the need for tipping.

  • Dynamic tip adjustments: Restaurants might implement more dynamic systems that adjust tip out percentages based on variables such as peak hours, customer satisfaction ratings, or team performance, promoting greater flexibility.

  • Revenue-sharing models: More restaurants may shift to revenue-sharing models, where employees receive a percentage of the restaurant's overall revenue rather than relying solely on customer tips.

The Little Beet in New York City implemented a no-tipping policy in 2015 as part of an effort to provide fair and consistent wages for all staff, regardless of their role. This approach ensures employees are compensated fairly without relying on fluctuating tips, promoting a more equitable and collaborative work environment.

As the industry continues to evolve, restaurants are likely to see further integration of digital solutions that streamline tip management while ensuring fair compensation for all staff members. These changes are accompanied by evolving labor laws and regulations, requiring restaurants to remain agile and adaptive in their approach to tip out policies while maintaining compliance with legal requirements.

Final thoughts

A well-designed tip out policy is crucial for restaurant operations, staff satisfaction, and legal compliance. By understanding and implementing fair tip sharing practices, restaurants can maintain a motivated team while ensuring all staff members are properly compensated for their contributions to the dining experience.

Success requires careful attention to legal requirements, clear communication, and regular policy review. When properly managed, tip outs can enhance teamwork, improve service quality, and contribute to a positive workplace culture in the restaurant industry.

Is this article helpful?

DISCLAIMER: This information is provided for general informational purposes only, and publication does not constitute an endorsement. Toast does not warrant the accuracy or completeness of any information, text, graphics, links, or other items contained within this content. Toast does not guarantee you will achieve any specific results if you follow any advice herein. It may be advisable for you to consult with a professional such as a lawyer, accountant, or business advisor for advice specific to your situation.