Restaurant tip-outs: fair and compliant

Tip-outs vs. tip pools

The two terms are often used interchangeably, but there is a practical difference. In a tip-out, each server gives a set share of their tips or sales to support roles at the end of a shift. In a tip pool, tips from a group of employees are combined and divided by a formula, such as hours worked. Both are “tip sharing” and follow the same core rules. Our tip pooling calculator helps with the math.

The federal rules in brief

• Tips belong to the employees. The employer may not keep any part of them, and neither may managers or supervisors, even if they also serve tables.
• If you take a tip credit, paying a lower cash wage, a mandatory tip pool or tip-out may include only employees who customarily and regularly receive tips, such as servers, bartenders, bussers and runners.
• If you pay all employees at least the full federal minimum wage with no tip credit, a mandatory pool may also include employees who do not usually receive tips, such as cooks and dishwashers, but still not managers or supervisors.
• Employees must be told about the tip credit and any required tip sharing.
• Credit card processing fees may be deducted from tips only in limited ways, and never so as to reduce wages below the minimum.

These rules come from the FLSA and its 2018 amendments. State laws can be stricter, for example by banning tip credits or limiting who may join a pool.

Common tip-out structures

Sales-based tip-outs are simple but can take more than a server earned in tips on a slow night. Many restaurants cap the tip-out so it never exceeds a share of the server’s actual tips, or use tip-based percentages instead.

A worked example

A fictional dinner shift collects $1,200 in tips in a points-based pool:

Each point-hour is worth $1,200 / 30 = $40. Each server receives $240, the bartender $240, the busser $120 and the runner $120. Accurate hours are essential: without them, the pool cannot be split correctly.

Setting up a fair structure

1. Check whether you take a tip credit and what your state allows.
2. List every role that would take part and confirm it is eligible.
3. Choose a structure that matches how your team works, and model it on a few real shifts.
4. Write the policy down, explain it to every eligible employee and get acknowledgment.
5. Pay out tips on time, with each employee’s share shown on their pay stub or a tip report.
6. Review the structure every few months with input from staff.

Talking to your team about tip-outs

Tip sharing touches everyone’s take-home pay, so changes are sensitive. Before changing a structure, show the team how the new formula would have worked on a few recent shifts, using real but anonymized numbers. Ask for feedback from both front-of-house and support staff. A structure that everyone understands, even if not everyone loves it, causes far fewer disputes than one that changes without explanation.

Recordkeeping

Keep records of tips received, how they were shared, hours worked by each participant and payouts. Employees must report tips for tax purposes, and employers have reporting obligations too. The shift tips summary template can help on paper; a digital system is easier to audit. Our article on time tracking for tipped employees covers the time side.

Common mistakes

• Including a manager or supervisor in the pool.
• Including kitchen staff in a mandatory pool while also taking a tip credit.
• Sales-based tip-outs that leave servers with less than they received in tips.
• Not telling employees the rules in advance.
• Paying tips late or without a clear breakdown.
• Splitting tips by estimated hours instead of recorded hours.

Tracking hours for tip sharing

Hours-based and points-based pools depend on knowing exactly who worked when. With EZTime, staff clock in and out on a shared tablet, the mobile app or NFC, and managers can see hours by role for each shift. Those hours give you a reliable basis for sharing tips, and the same data feeds payroll. See EZTime for restaurants.

Frequently asked questions

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