Everything You Need to Know About Tip Management
In this piece, we’ll break down the nuances of tip management in restaurants.
DISCLAIMER: This content is provided for informational purposes only and is not intended as legal, accounting, tax, HR, or other professional advice. You are responsible for your own compliance with laws and regulations. You should contact your attorney or other relevant advisor for advice specific to your circumstances.
Tipping has gone along with restaurants for as long as most of us can remember - they’ve been as connected as peanut butter and jelly, Chicago and deep-dish pizza, or Julia Child and French Cuisine. Restaurants in the U.S. almost always offer guests the opportunity to give an additional amount on top of their check total as a “thank you” for an exceptional experience, which can range from great food to unforgettable customer service.
Traditionally, these tips are distributed to certain employees in the restaurant based on their roles, such as the wait staff and bartenders, but this is beginning to change as restaurants are beginning to see the inequities baked into the tipping system, and are focusing on improving wage parity between their front-of-house and back-of-house staff.
While providing an open tip line for guests seems great as it puts the guest in control, a best practice with restaurant tips is to provide suggested tip percentages. This gives a set of guidelines for guests to act on and also ensures your staff is being compensated fairly for the service they are giving each guest.
In this piece, we’ll break down the nuances of tip management in restaurants.
Tip distribution can be a lot easier. Here's how.
What is a Tipped Minimum Wage?
In some states across the U.S., restaurants use a different, lower minimum wage for their tipped employees, called a tipped minimum wage. This form of compensation is a base hourly wage supplemented by tips. Here are a couple of items to consider when looking at a tipped minimum wage:
Tipped minimum wage regulations vary by state (and sometimes local) jurisdictions:
Restaurants need to understand the wage and hour regulations that may affect them. The U.S. Department of Labor provides a great resource to assist employers. However, it is always a good idea to check with a local labor office or trusted advisor before implementing compensation structures.
A tipped minimum wage rate must conform to federal/state/local minimum wage regulations for every hour worked:
As of June 2021, the federal minimum wage is $7.25 per hour. So if a business was subject to federal minimum wage regulations and paying an employee a tipped minimum wage, the business would be responsible for ensuring that if the employee’s earned tips coupled with a tipped minimum wage rate did not equal at least $7.25 in the hours worked, that the employer would compensate the employee with the difference owed.
It must meet not only the federal minimum wage but also the minimum wage in the employer’s respective jurisdiction. Some states or localities have a higher minimum wage than the federal minimum wage.
What is the Tip Credit?
Two components make up the tipped minimum wage: a cash wage and a tip credit. Depending on the jurisdiction, an employer may be able to take a tip credit against the difference between the applicable minimum wage and cash wage.
Minimum Wage — Cash Wage = Tip Credit
Let’s use the federal minimum wage and cash wages as of June 2021 as an example:
$7.25 — $2.13 = $5.12 per hour
What is Tip Pooling?
Collecting tips from guests is only one piece of the equation in restaurants. The next big piece to figure out as a restaurant is how you want to distribute the tips back to the employees. There are three common ways to distribute tips back to employees:
Tipped Employee Keeps Their Tips:
This one is simple enough: whatever tips the employee makes during their shift, they get to keep.
A group of tipped employees group their tips and split them, usually evenly, at the end of a certain time frame.
A group of tipped employees contributes a portion of their tips to non-tipped employees. This is most common in full service restaurants where servers have a support team, such as bussers and food runners or bartenders who have barbacks.
What is Tipping Out?
When tipped employees are paying a portion of their tips to other employees on their team, this is considered tipping out.
What is Tip Management Software?
Managing tips across your team can become a very time-consuming and confusing process quickly, often involving many hours in Quickbooks Excel. This is why finding a dynamic tip management software gives you peace of mind: you’ll know your tip policies are being systematically followed, saving you and your employees from the time and hassle of performing manual calculations.
How Does Tip Management Software Help Your Employees?
While it seems like a tip management solution would primarily benefit a management team, that’s beginning to change. Today’s solutions give employees the reporting they need to see how their tips were distributed and may even allow them the ability to receive tips before the next regularly scheduled payday. This gives employees better access to their earnings and more confidence that their tips are distributed appropriately.
How Does Tip Management Software Make it Easier to Run Payroll?
With tip management software, you’ll be looking at improved efficiency in your payroll process, less time spent on payroll each pay period, and a wide range of reporting functionalities to help you make sense of your data.
Features to Look for in a Tip Management Software
Relative Percentage by Job Rules
An important consideration is to ensure the software you’re looking for can accommodate a tip-out method where employees receive a tip pool distribution based on their job role, as configured in the POS.
Let’s walk through an example. Two bartenders working on a busy Friday night collect $500 in tips. At the end of the night, they need to tip out each other and the barbacks that assisted with orders.
This restaurant tips barbacks at 10% and the remaining amount is split between the bartenders. This means that the relative tip percentage is 10% for the barback job and 90% for the bartender job.
$500 * 10% = $50 / 2 barbacks = $25 / barback
$450 / 2 bartenders = $225 / bartender
Sales Category Rules
Another important consideration is to ensure the software solution can also accommodate a tip out method where employees receive a tip distribution based on defined sales categories, as configured in the POS. This is traditionally used for the bartender or server positions where there is an opportunity to upsell guests on food or drink items.
Shift & Day Tip Period
Another aspect of managing tip pools is considering how to pool tips according to time or frequency. A tip management solution can offer the opportunity to pool and distribute tips based on shift or by workday, which varies depending on operational models.
A workday distribution structure allows employers the ability to tip out more evenly across an entire team no matter the shift employees worked, avoiding fluctuations like dinner rushes.
One of the biggest advantages of a tip management solution is that employers no longer need to worry about exporting information into a custom spreadsheet. Instead, employers can see real-time pooled tips with ease. This means the built-out rules take the information from the POS and translate them into tip out reporting, both on an employee and job level.
Having the ability to automatically pull POS information into tip pooling calculations is one aspect of tip management, but the additional step in the process is pulling this information over to a payroll workflow.
Traditionally, implementing such a workflow requires manually importing tip pooling calculations from a spreadsheet into payroll. However, some tip management companies are beginning to take this a step further by integrating tip pooling calculations directly with a payroll provider. By implementing a solution with this capability, employers can save time throughout the entire tip management process, not just with calculations, and significantly reduce the chances of errors due to manual data entry.
Credit Card and Cash Tip Transmission
An important aspect of tip pooling is the ability to pool and distribute different types of tips received throughout the restaurant. Below is a list of common tip types:
Cash and credit card tips are variable amounts that are determined by the guest on each check, whereas gratuities are totals that are automatically applied to checks based on parameters determined by the restaurant. Below is a common example of a gratuity:
18% tip applied with a party size greater than 10.
An automated tip pooling solution allows employers the ability to manage each of these tip types independently, while still implementing the various rules previously mentioned. This gives employers more flexibility to manage tips across their team and eliminates the complex and time-consuming process of updating spreadsheets based on POS sales report information.
Employee and Job Tip Reporting
Once all tip management rules are built and define how each tip type should be pooled and distributed, the tip pooling system will take it from there! A good system should allow employers the ability to view tip outs on an employee-by-employee basis or by job type.
This helps ensure that employers can quickly verify and approve tips across employees each week and also understand how evenly tips are distributed across an entire team.
Better training for happier employees
Try Tip Management Software Today
Managing restaurant tips can be a very complex process taking you away from what you love most: serving your team and your guests. This is why it’s important to remember the following things when thinking about tip pooling and identifying a tip management solution:
Define how you want to collect tips
At this point, you likely know if tips are going to be a part of your operational model. But understanding whether to set up an open tip or gratuity policy is crucial to determining how much employees will earn in tipped wages.
Define your tip out policy
Whether it’s based on job type, sales category, or both, it’s completely up to you and the feedback you get from your team! The increased volume of digital ordering in the restaurant industry has changed how restaurants think about managing tips, so it’s worth evaluating your tip out policy.
Find a tip management solution to automate and ensure efficiency
As we all know, there’s seldom enough time to complete all of the daily tasks in a restaurant. Managing tips can be one of the most time-consuming parts of each shift, especially when a calculation isn’t done properly. Find a solution that helps take this burden off your plate, allowing you to focus on the rest of your business.
Toast Tips Manager makes it that much easier to distribute tips to the hardworking employees who earned them.