Managing Restaurant Tip Share

Posted on January 30th, 2012

As far as a restaurant’s profitability goes, the lowest of the low hanging fruit is often found in a poorly planned tip tracking program.  Owners and operators leave money on the table when they don’t accurately plan the incomes of their support staff and schedule employees to deliver results.  They also get into lots of trouble as the government cracks down on under-reporting tips.

The support staff I’m talking about consists of positions like busser, food runner, server assistant, bar back, front desk team, etc.  These are folks that are often new to the service industry and are paying their dues in order to earn a position as a bartender, maître ‘d, or server.  Usually they’re paid a low hourly wage supplemented by a “tip out” from the servers or bartenders. In general, most state laws forbid “tipping out” positions that don’t have direct interaction with customer service – positions like cook or dishwasher - but service support positions with direct contact with guests are fair game.  A majority of states allow a “tip credit” meaning that employers can take advantage of the fact that tipped employees will regularly earn enough money in tips to offset the amount of money the employer needs to pay through wages. For example, Rhode Island allows employers to pay servers a wage as low as  $3.86; in Maryland it is $2.77/hr; and in Colorado it is $3.02 (visit http://www.payrollonabudget.com/comp_tipscreditbystate.htm to see your state’s tip credit rules).  Some states, however, do not allow tip credits for employers and, instead, force the employer to pay minimum wage regardless of tipped status (Alaska, California, Montana, Nevada, Oregon, Puerto Rico, Washinton).

Whether your business is in a tip credit state or not, employers can take advantage of laws that allow employers to require tipped employees to share some of their tips with a support staff, allowing the employer to save money on payroll expenses while still attracting talent through much higher earning potential. Because it is similar to a commissioned structure (the better you are at your job, the more money you will make), employers, employees and guests are all beneficiaries.

Then how do restaurants fail?

...because most tip pool / tip share systems are arbitrary or not philosophically sound enough to explain to their staff or to predictably/consistently deliver incomes that keep their employees happy.  It’s not uncommon to see hostesses and bussers making $10 to $13/hour in wages.  This is a problem because (tip credit rule or no tip credit rule) the employer can often reduce hourly wages by as much as $9 per hour…per employee… through thoughtfully pooling and distributing tip outs from servers to the support staff. This is not to be confused with a tip pool for service staff. The service staff still earns and keeps their own tips vs. everyone contributing to a pool and then re-distributing tips evenly (where’s the incentive in that?!)  We’re only talking about the tips shared with the support staff.

It’s sometimes easier for tipped employees to convince a manager to hire more bussers and runners for busy shifts than for managers to convince servers and bartenders to work harder when it gets busy.  Why shouldn't tipped employees work harder when it gets busy? In this scenario, the restaurant eats the lion's share of the cost for the extra support staff while the tipped employees earn more money.  We all know restaurant margins are slim enough (generally profiting about $.08 to $.12 for every dollar earned for a successful restaurant) and the biggest opportunities for operational improvement are usually found through strategies focused on improving Cost of Goods Sold and Labor.  Adding labor willy-nilly is not a luxury most restaurants can afford, yet we generally see very little effort put into analyzing the relationship between tips, tip out, and support staff.

...making the system somewhat Darwinian (support staff members don’t like to help cheap servers and/or slow support staff members don’t make much more than minimum wage). Servers and Bartenders like this system because they’re in control and can reward or punish the support staff, often harshly.  Some employers like it because active coaching, correcting, developing, and teaching is replaced by the law of the jungle.  Responsible employers shouldn’t allow it if they want to offer consistent service and to be an employer of choice to attract the best employees.   Smart support employees won’t tolerate it, leaving you with a cutthroat culture and mediocre service.

Those servers, in turn, tip out the support staff in cash or the transaction is filtered through the manager, creating another system for managers to manipulate (servers give managers their tip out, then managers sort/separate/distribute tips through little coin envelopes that need to be secured, distributed, and accounted for). The IRS is cracking down hard on restaurants and on tipped employees to ensure they’re paying taxes on everything they earn and penalties are steep… potentially in excess of $10,000 for each employee found not to be paying taxes on cash income.  Rare is the restaurant that has a reliable system for ensuring that their support staff is reporting the cash tips they receive at the end of a shift from the service staff.  Additionally, paying cash to servers when 90% of all restaurant transactions are conducted with credit/debit cards means that the restaurant is paying out more in cash tips to servers than it accepts as cash payment…creating an accounting nightmare for managers at closing time, which is usually proctored by the most junior managers who close the restaurant.  It also increases the amount of money a restaurant needs to keep in their safe to cover the deficit and increases the number of trips a manager or bookkeeper needs to make to the bank to get change.

The solution requires thoughtful and thorough planning on the front end in order to create a system that is very simple to execute.

• Determine what you WANT your support employees to make per hour.

• Determine how many support employees are needed to operate at various parts of the day for average volume levels.

• Work with your projected sales volume to estimate the amount of money in the tip pool on any given shift.

• Based on hours worked by the support staff and the lowest amount of hourly wage you can pay them, work backwards to determine how much of the tip pool should be allocated to each position to close the gap between what you WANT each position to make and what you are paying them in wages.

• If there is not enough money in the pool to make sure everyone earns what you WANT them to earn, you can cover the gap by:

-  manipulating the amount paid into the tip pool by servers usually 2.5% to 4% of sales-net-of-tax
-  increasing wages
-  reducing support personnel

• Create a labor template for each level of sales that effectively pays your support staff what you WANT them to make regardless of sales volume

• Establish labor discipline to:

-  Forecast sales every week
-  Apply the right labor template based on forecast sales
-  Track everything that is earned, paid in, paid out, and consolidate onto one summary sheet that you can reference for payroll or you can send to your payroll company for processing.

Once the labor templates are set and tip percentages for each support team workgroup are defined, it can all be programmed into a tracking spreadsheet.  All that needs to be done every week is for the General Manager to tell each work group manager which labor template to apply, then manage the staff to be sure they adhere to the written schedule.  Because the homework of allocating the tip pool percentages has already been done, payroll is a breeze. Creating labor templates and calculating the tip-in and tip-out amounts is time consuming but it yields a smart labor model that limits risk, substantially reduces labor, establishes labor discipline, encourages productivity, simplifies payroll, and protects you from the IRS.  Additionally, you’ll be armed with enough data to implement a server ranking system to reward performance and you’ll be able to accurately monitor hourly earnings in order to protect your support team.

*for help creating a thoughtful tip share system for your restaurant, contact us at www.blueorbiting.com