Restaurant tipping may be an endless source of confusion when travelling, but they’re also a welcome addition to any hospitality workers wage slip. It’s a time-honoured practice that signals a customer’s appreciation for great service.
But how best to distribute tips among employees? That’s where tip pooling comes in. But tip pooling comes with its own set of rules and legal standards that we’ll explore in this post.
Tipping laws have changed in the UK
As of 24 September 2021, it will be illegal for employers to withhold tips from their employees. This is in response to years of unfair practices that draw tips away from the waiters, bartenders and kitchen staff who earn them.
Dodgy tipping practices became more widespread since cashless payment became the norm in the UK. 80% of tipping now happens by card, making it even easier for employers to withhold them from staff (source gov. uk). Workers now have the right to request tipping records and bring forward claims to an employment tribunal.
Tips and service charge—what’s the difference?
Now that the majority of tips are paid with cards, what can we call tips and what can we call service charge? Is the distinction even that important?
Yes, it is. Whether a transaction counts as a tip or a service charge determines how it gets paid to employees and what kind of tax you pay on it. First of all, let’s iron out the difference between the two:
- Tips—a voluntary payment made directly to the employee by the customer in the form of a cash or card payment.
- Service charge—an extra amount added to the customer’s bill for service. Can be voluntary or compulsory. If voluntary, they’re treated the same as tips. If compulsory, they’re treated as employee wages.
Processing tips with your ePOS
Processing and reporting tips from card payment is much easier with a modern restaurant ePOS. With Lightspeed ePOS, for instance, if a received payment amount is greater than the amount due, it automatically adds the difference as a tip.
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Waiters can also add manually add tips while processing a transaction or after one has been completed. They simply need to tap the ‘add tip’ button on the payment screen.
Taxes – where it gets complicated
Businesses must declare cash earned through tips on their Self Assessment tax return. You pay income tax on any revenue earned from cash tips. If a tip is given via card payment, you should pay the employee directly. In this case, you’re responsible for reporting to HMRC and paying income tax on it.
One fair and easy way to distribute tips among your staff members is by putting them all together and sharing them out. This is called a ‘tronc’ and it’s the responsibility of the ‘tronc master’ to ensure all tips are evenly distributed and that income tax is paid.
You need to let HMRC know that you’re using a tronc and who your tronc master is. The tronc master should consult the team about the fairest way to distribute tips—make sure you assign a responsible and experienced member of staff for this.
Why use a tronc?
Fairer tip distribution is one benefit of using a tronc. Another benefit is that—while you still need to pay income tax on tips managed via tronc—the system is exempt from national insurance contributions.
For all their benefits a tronc system may not be right for all businesses. You may decide on a slightly different method of tip distribution (more on this below).
Different methods for distributing tips and service charges
After you’ve thought carefully about important factors that will impact how you distribute tips, you’re ready to determine how best to distribute tips among your staff.
Using payment software like Lightspeed Payments you can access data on tips per payment type or employee—which will come in handy depending on which of the below methods to choose to implement.
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Here are a few of the most popular tipping structures for restaurants and bars:
1. Everyone keeps what they earn
This method is simple to calculate and execute—everyone keeps the tips they earn and tips are not shared. It’s every person for themselves.
One of the upsides of not sharing tips is that employees are motivated to work harder because their compensation is directly tied to their work. This method is a good way of retaining successful employees because they don’t have to share with colleagues who aren’t as successful.
When everyone keeps their tips, there is a lack of teamwork amongst service staff and even a competitive atmosphere. Furthermore, novice employees could earn few tips on their own and may, therefore, want to quit, which can contribute to higher employee turnover. Moreover, it would be hard to declare taxes to HMRC and pay income tax on them. An incomplete tip declaration could lead your restaurant to a fine.
2. Even split-tip pooling
This method combines everyone’s tips and splits them “evenly” amongst tipped wage staff. How you define “evenly” is up to you. It could be based on the hours worked or some other measure that would make the split equitable. This method works best at smaller restaurants where waiters aren’t assigned tables or sections.
Evenly splitting tips fosters a collaborative atmosphere in which front-of-house staff will work together to ensure good service. This method is also equitable, as sometimes tips aren’t related to server performance but guest generosity. Staff shouldn’t be punished for what’s not in their control.
Tip pooling can be disappointing when you’ve earned a really big tip and can’t keep it for yourself. It’s also less motivating than keeping exactly what you earn.
3. Tip pooling by section
Instead of splitting tips evenly among all tipped wage workers, this method splits the tips based on table section or department worked.
For example, all waiters in dining room A would split their tips with each other, and all waiters in dining room B would split tips with each other. Or perhaps waiters would receive 60% of all of the tips and bartenders would receive 40% of all of the tips.
This method is a bit closer to what each server earned because the tips are split amongst a smaller group. It’s collaborative but on a smaller scale.
Jealousy can occur if one team earns more tips than the other. Staff may request to service parts of the restaurant that are more lucrative, leaving others with less desirable sections. This method could create unwanted competition between staff.
4. Hybrid tip pooling
With hybrid tip pooling, staff retain a certain percentage of the tips they earn and share the rest.
For example, Alex earns £300 in tips in one night. Max earns £100 in tips. The restaurant’s policy is that the waiters keep 50% of their tips and share the rest.
Alex keeps £150 and contributes £150 to the tip pool. Brad keeps £50 and contributes £50 to the tip pool. The total tip pool is £200. Divided by two they each get £100 added to their base. So Alex ends up with £250 and Brad ends up with £150.
This hybrid model is more equitable than every server keeping the tips that they earned, while still rewarding high performing waiters for their work. This method subsidises waiters who are less experienced or serve cheap customers. This policy also encourages staff to work together.
High-earning and high-performing waiters might be disappointed that they have to share their tips with others and subsidise less experienced waiters.
Tips for implementing restaurant tip pooling
After you’ve come up with your restaurant tipping structure, there are a few things you need to do to keep staff happy.
- Communicate! If you’re changing your tip pooling method, be transparent in how you communicate about it with employees. Set expectations by unveiling the new policy in an all-team meeting and then cement your new policy by including it in your employee handbook.
- Use your restaurant’s tech tools to see how the new tip pooling method is affecting performance. Check your restaurant ePOS system’s sales and employee reports to see how new policies affect turnover per employee
- If you find that employees aren’t happy with the new policy, or aren’t performing as well as they could be, you can rework your restaurant’s tipping structure. Experiment with it until you find a method that satisfies management, staff and customers.
A tip for success
By ensuring employees get their fair share of tips, you can increase employee satisfaction and lower your staff turnover rate. If you’re team feel valued, and that they’re getting what they earned—they;’ll be more than happy to help you drive your business forward.