When to use Tip Sharing and Tip Pooling with Examples
Full transcript and images below! This video will cover how your restaurant or bar can create tip pools and tip distribution rules to best suit your operations and needs. We will review examples, the math behind tip distribution strategies, and dive into which one is best used when. Or watch this video on Youtube.
— Full Transcript and Images from video for those who prefer to read or can’t listen with sound!–
“Hey everyone, Kirk from TipHaus here answering another of the most common questions we get from restaurant owners and managers.
What is tip pooling, what is tip sharing, and which one should we use?
We automate tip distribution and calculation for thousands of restaurants across North America, and this is something we hear from operators every single day.
Lets break these two topics down into simple and easy to understand goals and examples.
Tip pooling is when one or multiple groups of employees contribute all of their tips to a restaurant fund, and then all of those tips are returned to the employees after calculations occur.
This is a bi-directional movement of money, where employees deposit into the tip pool and withdraw tips from that same tip pool.
Tip sharing is when one or multiple groups of employees contribute some of their tips to a specific group of employees who assisted them during that time, and can be based on total tips, sales, or other factors.
This is a single directional movement of money, where employees send a percentage of money to another group of employees.
And you say: Oh man that’s a lot of technical stuff, can I get this in English with some poorly drawn graphics. And I say absolutely, I just taught myself this design software, so lets see some common examples and the math behind.
Here is a common tip pool examples:
- A coffee shop that has three baristas working during their day. These three baristas work as a team to make sure the guests are happy, sometimes they work the coffee machines, sometimes the register, but they all help to make sure things go smoothly.
- Barista A works 5 hours and earned $40 in tips
- Barista B works 3 hours and earned $40 in tips
- And Barista C works 2 hours and earned $20 in tips.
The most common form of tip pooling combines all tips and then distributes those tips back to employees based on the hours that they worked relative to other employees, on a daily basis.
If we take those totals above, we would see that all employees combined worked 10 hours total, and there was a total of $100 in tips.
If we divide $100 by 10, we learn that each hour an employee worked, they earned $10 of tips.
These tips would be shared back to employees based on the hours they worked, such as:
- Barista A would earn $50 from the tip pool
- Barista B would earn $30 from the tip pool
- Barista C would earn $20 from the tip pool
It is important to note that the total tips is still equal to $100.
Depending on your operations, this could be your exact goal. Barista A worked the most hours and presumably contributed the most to the coffee stand in terms of sales, prep work, training others, etc.
This is a very simple tip pool, now let’s look at tip sharing with a slightly more realistic scenario.
Remember, in a tip pool, employees contribute all of their tips to a common pot of money and then withdraw money from that same pot. Tip Sharing, however, is a single movement of money, either depositing OR receiving to or from another group of employees.
A Restaurant has 2 servers, 1 bartender, and 1 host working, and for simplicity we are going to assume all of these employees worked the exact same number of hours in a day.
Server A earned $50 in tips
Server B earned $50 in tips
Bartender earned $40 in tips.
The host earned $0 in tips, of course, because they actually don’t serve a guest directly.
In this restaurant, there is a tip sharing rule that says hosts are tip shared 3% of all employees tips, and bartenders are tip shared 5% of all tips.
In this scenario, two money transfers are happening, but they are each in one direction.
First is the rule that hosts are shared 3% of all employees tips.
This means both servers pay the host $1.50 from their tips for the hosts work in seating guests. The bartender pays the hostess 3% of their tips, or $1.20.
Next comes the rule that bartenders receive 5% of tips. This covers all the time the bartender spent making beverages for the guests of the servers.
In this scenario both servers give 5% of their total tips, or $2.50, to the bartender.
After all this is said and done, we now end up at:
Server A earned $50 in tips but paid their supporting team members $4, so they now have $46 in tips.
Server B earned $50 in tips but paid their supporting team members $4, so they now have $46 in tips.
Bartender earned $40 in tips but paid their host $1.20, and received from servers $5, making a total of $43.80.
And the host earned $4.20 in tips for their help supporting servers and bartenders and getting guests sat on time.
Just like with tip pooling, it is important to note that the total when adding this up is $140. No money has been lost, it is simply redistributed.
Whew alright, so we have covered what tip pooling and tip sharing are, and an example of each.
Let’s recap what we have done and what
Let’s go one step deeper and see a more realistic model to the restaurant world, where we can use both tip pooling and tip sharing in conjunction.
Lets take a common full service restaurant. This restaurant has 4 servers working, 2 bartenders, a busser and a host working to support their guests.
One bartender works the bartop serving guests drinking and dining at the bar. One bartender works the well, making drinks for the guests dining at sit down tables. The four servers all work the floor, and the busser and host are helping everyone by seating guests and cleaning tables after they depart.
The tip distribution policy in the restaurant is as follows:
Servers tip out bartenders 5% of their tips
Bartenders and servers tip supporting staff (the busser and host) a total of 5% of their tips.
Bartenders pool tips among themselves.
This is dozens of calculations having to occur, so I wont bore you by walking through each one, but I will show you the starting and end results of what would happen assuming all of these employees worked the same number of hours.
So what happened, and why did we want this result.
In this case, two bartenders are working, one is serving guests at the bar, one is making drinks for the servers to get to the guests on the dining floor. Only one bartender is actually collecting tips directly, but both are critical for the restaurant to function, so they should make the same money for the same number of hours worked.
Next come the servers. All the servers contributed a small percentage of their tips to other employees who assisted them in earning those tips. This allows them to focus on bringing in revenue for the restaurant and not having to seat guests or clean.
And our supporting staff, the host and the busser, walk away with some tips. As they never interact with the payment for the guest, they don’t have an opportunity to be tipped directly. However, they are critical to a great guest experience and allow their colleagues to give great service and earn those tips, so they should take part in them as well.
What started as $400 in tips for all of the employees, ends as $400 for all of the employees, however we have successfully redistributed money to team members who were supporting their ability to earn tips.
Takeaways and what we learned:
- Tip distribution is an asset to restaurants, and when executed properly can lead to a better guest experience, a more cohesive team, and savings of hundreds of thousands of dollars per year.
- Tip sharing is best used for moving money to employees who assist other employees
- Tip pooling is best used for people performing similar jobs, or in relation to one another.
- These are simplified examples, but real world applications are much trickier. There can be dozens of rules, you have to account how much an employee worked to the minute, you have to decide how to group employees, and you can introduce point systems, where certain employees make more from the pool than others, such as a Server takes $2 from the pool for every $1 a host takes.
I hope this was helpful and educational. Check our channel for several other videos about tip pooling, common examples and analysis, and common mistakes and legal pitfalls.
Last but not least, don’t hesitate to reach out! You can visit us at tiphaus.com and schedule a demo.”