How to Choose Between Tip Pooling vs. Tip Sharing for Your Restaurant

In the U.S. service industry, tipping can be a vital part of employee compensation. Yet, the way tips are distributed can significantly impact employee satisfaction and business efficiency.

Two common methods for distributing tips are tip pooling and tip sharing. This blog post will clarify the differences between these methods and help you determine which is best for your business and employees — tip pooling vs. tip sharing.

The Case for Tipping in Restaurants

Global approaches to tipping are highly variable. As with many cultural practices, context and precedent are major factors in whether tipping is expected and even accepted.

According to Business Insider, in countries like Japan, tipping can actually come across as rude because excellent service is the expected standard.

Conversely, in the United States the practice of tipping in restaurants is a hotly debated topic. The food service industry has historically relied on customer tipping as a core component of its employee compensation model since they typically don’t make full minimum wage.

In a survey of roughly 4,000 tipped restaurant workers, 90% prefer their current compensation model to earning a higher, employer-issued wage.

Opponents of the tip credit in the United States assert that the practice puts too much pressure on voluntary contributions from diners when restaurant operators could guarantee a higher and predictable base wage. Union-backed group One Fair Wage cites third-party research that shows tips would not drop if food service workers were paid the same wage as back-of-house restaurant employees.

Wherever your restaurant stands on the on-going tip credit debate, if you accept tips today, you will want to have a firm strategy in place for how to distribute them.

What is Tip Pooling?

Tip pooling involves collecting all tips received by employees and redistributing them evenly among the staff.

So, how does tip pooling work? Usually, all tips received during a shift are placed into a common pool. At the end of the shift, the total amount is divided among the employees, often based on hours worked or a predetermined formula.

Pros and Cons of Tip Pooling for Restaurants

Compared to tip sharing, tip pooling has its own set of advantages and disadvantages.

First, let’s see how it can be beneficial. Because tip pooling redistributes all collected tips equally, it ensures that all staff — including those in less visible roles (such as bar backs or table bussers) — receive a fair share of tips. It also encourages teamwork and a cooperative environment because everyone on the shift stands to benefit from a positive guest experience. And, ultimately, pooling tips can enhance morale by reducing unfriendly competition among staff.

Now, let’s take a look at some potential drawbacks. Some may deem this distribution is unfair — high-performing employees might feel their efforts are not adequately rewarded. Also, some employees may be dissatisfied if they feel others are not contributing equally, even though they are being tipped the same.

What is Tip Sharing?

Tip sharing involves employees keeping a portion of their own tips and contributing a part to support staff who do not directly receive tips. It is also referred to as “tipping out.”

How does tip sharing work? Employees, such as servers or bartenders, keep a majority of their tips earned but share a portion with support staff like bussers, hosts, and kitchen workers. This distribution can be based on a percentage of total tips or calculated based on specific factors such as total sales, alcohol sales, or number of guests served.

Typically, your restaurant POS system will allow you to configure tip sharing, where you can specify which roles are eligible to participate in tip sharing.

Pros & Cons of Tip Sharing for Restaurants

Because tip sharing has a different distribution model than tip pooling, it has its own unique benefits and drawbacks.

Let’s start with the benefits. Because tip sharing allows employees to keep a portion of their tips and share the rest, it rewards employees directly based on their individual service quality. This motivates them to provide excellent service to increase their own tips. Also, jobs with shared responsibilities can be easily tipped equitably.

However, sharing tips may create competition rather than collaboration among staff because of how it incentivizes individual performance. It can also lead to resentment if employees feel the sharing is inequitable.

Which Tip Method is Best for Your Business?

Neither tip method is objectively superior over the other. They’re also not required to implement, and you may decide that you’d rather stick to a traditional tipping model. Or you may not want to accept tips at all. Whatever you decide, you’ll first want to consider the following factors:

• Business Type Considerations: The type of business you run may determine how you approach tipping. For example, if you want to open a pizza shop, your perfect tipping structure may be different than a table-service restaurant — service models and employee roles play a part.
• Employee Preferences: Understanding your employees' preferences is crucial. Conducting surveys or holding discussions can provide insights into what will work best for your team.
• Financial Implications: Consider the financial impact on both employees and the business. Ensure that the chosen method aligns with your overall business goals, Department of Labor, and state laws to help maintain employee satisfaction.

Legal Compliance for Tip Pooling or Tip Sharing

Different regions have specific legal guidelines governing both methods. Employers must ensure compliance with local labor laws to avoid legal issues.

In the US, the FLSA (Fair Labor Standards Act) enforces guidelines for employers to stay compliant when using tip pooling or sharing in their business. These regulations mostly depend on how your employees are paid — tipped employees who are paid under the minimum wage have a different set of rules than tipped staff who are.

The following is outlined in the FLSA guidelines:

• Employers are allowed to require employees to share or pool tips with other eligible employees.
• There is no limit on the percentage or amount of the contribution of each employee.
• Employers must notify tipped employees of any required tip contribution amount.
• Employers, managers, and supervisors are not allowed to receive tips from a tip pool or share.
• If employees are paid below minimum wage (with a tip credit), then the employer can only impose a mandatory tip pool that includes employees who are traditionally tipped (waiters, bussers, bartenders, etc.)
• If employees are paid a direct (or cash) wage equal or above the federal minimum, then the employer can impose a mandatory tip pool that includes employees who are not traditionally tipped (dishwashers and cooks, for example).
• Any tips collected in a pool or share must be distributed at the regular payday for the workweek or period.

Now, this just covers federal US guidelines. Specific US states may also have additional regulations on top of these. If you’re outside of the US, then you’ll need to do your research to find out what your local government enforces. Regardless of your location, do your due diligence to ensure compliance.

Best Practices for Implementing Tip Pooling or Tip Sharing

Whether you’ve chosen tip pooling or tip sharing as the best model for your restaurant, you should still follow the same best practices to ensure that everything runs smoothly. Keep the following in mind when adjusting your employee management to include a new tipping method.

1. Clear Policies

Establish clear, written policies to ensure all employees understand the tip distribution process. Your tip policies need to be able to answer the following questions:

• Who is participating in the tip pool or tip share?
• What percentage of tips will be pooled or shared?
• How is the tip pool or tip share percentage calculated (total tips, net sales, gross sales, etc.)?

2. Communication

Maintain transparent communication with employees about how tips are collected and distributed. Every employee should have the same understanding of how your tipping system is going to work so that they can have the right expectations.

3. Monitoring and Adjusting

Is your tipping system still working? Regularly review the effectiveness of your chosen method and be open to adjustments based on employee feedback and business needs. A POS system with real-time restaurant analytics should help you gain insight into how your sales are being affected.

Choosing the Right Method — Tip Pooling vs. Tip Sharing

As a restaurant owner, there’s no one-size-fits-all solution for tipping. The right approach for your restaurant depends on your business model, operational setup, employee preferences, and overall goals. It can also vary based on your geographical location and customer base.

Both methods have their pros and cons, and the best approach often involves considering your specific circumstances and legal requirements.

Disclaimer: This content is provided solely for informational purposes and is not intended to serve as accounting, tax, legal, or other professional advice. You are solely responsible for your own compliance with laws and regulations. You should contact your accountant, attorney, or other relevant advisors for advice specific to your circumstances.