How To Split Tips Between Employees: A Complete Guide

For hospitality-based businesses, tip splitting is a common practice that ensures employees are fairly compensated for their contributions. Whether you’re managing a restaurant, bar, or hotel, creating an equitable system for distributing tips comes with benefits for your staff and your guests.

This guide will walk you through the key aspects of tip splitting, from understanding the differences between tips, gratuities, and service charges to exploring the benefits of automating the process. We’ll also cover best practices to ensure your tip distribution system is not only fair and transparent but also compliant with legal requirements. Whether you’re thinking about introducing tip splitting or looking to refine your existing approach, keep reading for valuable insights to help you create a system that works for everyone involved.

What Is Tip Splitting?

Tip splitting is a common practice in the hospitality industry, where earned tips are distributed between all non-salaried employees. At hotel properties that follow this practice, tipped employees (such as servers, bartenders, spa staff, and others) divide their earned tips based on a predetermined system.

The system used will typically vary between hotel properties, depending on their team structure and operational needs. But no matter how tips are split, the key to success is to ensure the process is fair and transparent. When done correctly, tip splitting can foster a sense of teamwork and collaboration among staff members, which leads to a more positive and productive work environment.

It’s also important to understand the differences between tips, gratuities, and service charges — terms that tend to be used interchangeably, but actually have distinct meanings:

• Tips: Voluntary payments made by customers directly to service staff, often as a reward for excellent service. Tips are normally paid either in cash or added onto credit or debit payments.
• Gratuities: Though similar to tips in purpose, gratuities are instead added automatically to a bill, especially for larger groups. Unlike tips, gratuities are not always optional for the customer.
• Service Charges: Service charges are mandatory fees added to the bill by the establishment to cover the costs associated with providing a service. As these charges aren’t considered tips, they are typically distributed at the employer’s discretion and may not always go directly to employees.

As each of these payments is subject to different legal and tax considerations, understanding the distinctions between them is crucial. When implementing a tip-splitting policy of your own, it’s essential to clearly define what counts as a tip, gratuity, or service charge to ensure compliance. 

The Importance of Fair Tip Distribution

If you choose to split tips at your property, maintaining a fair distribution process is crucial. A well-structured tip-splitting system not only benefits your employees, it also impacts the guest experience and the overall operation of your business. Let’s take a closer look at how:

1. Equitable Compensation for All Employees

Equitable tip distribution ensures that all non-salaried employees feel fairly compensated for their work. In your hotel’s restaurant, for example, the entire team contributes to the guest experience, from the kitchen staff who prepares the meals to the bussers who keep dining areas looking spic and span. When tips are equitably distributed, everyone is fairly recognized and rewarded for their contributions to good service.

2. Enhanced Teamwork and Accountability

When tips are shared amongst all team members, it fosters a sense of collective responsibility for the guest experience. Knowing that the quality of their collective work will impact the tips they receive, the entire team is more likely to work together to support one another and provide warm and welcoming service.

3. Reduced Rivalry and Disputes

In environments where tips aren’t split, rivalry amongst staff members is more likely to arise, especially when it comes to prime shifts. A fair tip-splitting system discourages this kind of competition, as the focus moves from individual gain to team success. 

4. Streamlined Payroll Management

For hotel management, implementing a clear and fair tip-splitting system with the help of tip distribution software can streamline the payroll process. By having a standardized method of splitting tips, management can reduce the administrative burden that comes with tracking and allocating individual tips, ensuring that everyone is compensated accurately and on time.

5. Avoiding the Pitfalls of Poor Tip Splitting Practices

Inequitable or poorly managed tip distribution can lead to dissatisfaction among employees, decreased motivation, and high turnover. When staff feel that their compensation is lacking, it can create a negative environment that impacts both performance and the customer experience. By establishing a fair and transparent system that makes all employees feel valued and motivated to provide top-tier service, you can decrease the likelihood of these issues occurring.

How to Split Tips: Commonly Used Methods

There are a variety of tip-splitting methods to choose from, each with its own benefits. When choosing the best fit for your hotel, it’s important to consider the culture you’ve built, as well as your business needs and structure. Below are some common systems:

• By Hours Worked: In this system, tips are combined and then divided according to the total hours worked by each person during a shift or pay period. This ensures that those who work longer shifts receive a proportionately larger share, reflecting their time and effort.  

• According to a Point System: This method works by assigning point values to different roles within the team. Depending on their role, each team member earns a certain number of points (with customer-facing roles usually earning a higher point value) for each hour worked. At the end of a shift, the total tips are divided by the total points accumulated, and each employee receives a share based on the points they earned. This practice is a good way to balance the contributions of different roles while acknowledging their varying levels of responsibility.

• Based on a Percentage: In a percentage-based tip splitting system, tips are divided according to a predetermined percentage for each role. Continuing with the restaurant example from earlier, servers might receive 60% of the pot, bartenders 25%, and kitchen staff 15%. This method ensures that each individual is compensated according to their contributions to guest experience.

• Tip Pooling: Tip pooling involves collecting all tips received during a shift and then redistributing them evenly among eligible employees. It is often used in environments where the overall guest experience is the result of multiple roles working closely together. In the right environment, this method is great for fostering a strong sense of teamwork as everyone shares in the success of the shift.

• Tipping Out: In the tipping-out system, employees who receive tips directly from customers are required to “tip out” a portion of their earnings to support the rest of the team. The amount to be tipped out is usually calculated as a percentage of the total tips earned or sales made, ensuring that support staff who contribute indirectly to the guest experience also share in the rewards.

5 Tip Splitting Best Practices

Implementing a fair and effective tip-splitting system requires careful planning and attention to detail. Here are some best practices to help create a system that works for you and your team:

1. Create a Clear Policy

Every successful tip-splitting system begins with a policy that’s well-defined and clearly communicated. At the very least, your policy should outline how tips will be distributed, who is eligible to receive tips, and the method of distribution. Make sure that the policy is easily accessible for all employees and take time to explain it thoroughly during onboarding or other training sessions.

2. Ensure Your Policy Is in Line With Legal Requirements

Tip- splitting laws and regulations vary depending on a business’ location, so it’s crucial to have a thorough understanding of the requirements that apply to yours. This includes who can and cannot participate in tip pools, how service charges are treated, and any mandatory reporting requirements. It may be worth consulting with a legal expert or HR professional to ensure your policy is above board. 

3. Automate Tip Distribution To Ensure Accuracy

Like we mentioned previously, manual tip distribution can be prone to errors. Automating the process with tip distribution software ensures accuracy and consistency in how tips are allocated, reducing the risk of mistakes,; saving time and energy,; and ensuring that all employees are paid exactly what they’re owed, on time.

4. Prioritize Transparency and Communication

Transparency and maintaining open lines of communication are key to building and maintaining trust with your staff. First and foremost, make sure that your team understands how your chosen tip- splitting method works and how it benefits them. Also, be sure to keep them updated on any updates or changes to the policy and be, staying receptive to any feedback they may have. When your employees feel included in the process, they’re more likely to support and trust the system.

5. Keep Detailed Records

Maintaining thorough documentation of tip distributions is essential for both legal compliance and internal records. Automated software can generate comprehensive reports that track how tips are allocated, making it easier to review and audit distributions. With these records on file, you’ll be better equipped to resolve potential disputes and have the necessary documentation on hand for tax reporting and compliance with labor laws.

Tip Distribution & Automation

When managed manually, tip distribution is a tedious and time-consuming process. But with automated tip distribution software such as Tips+Gratuities from Evention on your side, it doesn’t have to be. By streamlining the process, our solution offers numerous benefits for both your management team and staff members:

• Reduces Time Spent and Errors: The biggest perk of automated tip distribution is that it eliminates the need for spreadsheets and manual data entry. Manual processes such as data entry, cross-referencing, and verification are not only time consuming, but also prone to errors. Automated software removes these risks by accurately calculating and allocating tips and gratuities with minimal human involvement.

• Automatically Calculates and Allocates Tips: Tips+Gratuities is designed to handle the intricate calculations involved in distributing tips to your staff, according to your rules. Whether you split tips by hours worked, a point system, or any other method, our solution automatically applies the rules you set — ensuring that every dollar is allocated correctly.

• Ensures Scalable and Consistent Distribution: As your business grows, so does the need for scalable and consistent tip distribution. Using an automated software solution ensures that the same distribution rules and calculations are applied uniformly, no matter the size of your team or your business volume.

• Offers In-Depth Reporting: Automated tip distribution systems also offer robust reporting capabilities. Whether you need to review past distributions, analyze trends, or provide documentation for compliance purposes, these reports offer transparency and insight into how tips are allocated.

FAQs

What is tip splitting?

Tip splitting is a common practice in the hospitality industry, where earned tips are distributed between all non-salaried employees. At hotel properties that follow this practice, tipped employees (such as servers, bartenders, spa staff, and others) divide their earned tips based on a predetermined system.

What is the best tip splitting method for hotels?

There are a variety of tip splitting methods to choose from, each with its own benefits. When choosing the best fit for your hotel, it’s important to consider the culture you’ve built, as well as your business needs and structure. Common methods include: by hours worked, according to a point system, based on percentage, tip pooling, and tipping out.

Are there legal requirements for tip splitting?

Yes. Tip splitting is governed by laws that determine who can and cannot participate in tip pools, how service charges are treated, and any mandatory reporting requirements. These laws vary by location, so it’s important to understand the requirements that apply to your business.

How can I ensure transparency in tip distribution?

Transparency begins with clarity, so it’s crucial to make sure that your tip splitting policy is well-defined and clearly communicated. It should outline how tips will be distributed, who is eligible to receive tips, and the method of distribution. Take time to thoroughly explain your tip distribution system during employee onboarding and training and make sure the policy is easily accessible at all times.

Why is fair tip distribution important?

If you choose to split tips at your property, maintaining a fair distribution process is crucial because it:

• Ensures equitable compensation for all employees
• Promotes teamwork and accountability
• Reduces rivalry and disputes
• Streamlines payroll management
• Helps avoid the pitfalls of poor tip splitting practices

Ready to Try Tip Splitting for Yourself?

Implementing a fair and transparent tip-splitting system is essential to creating a positive work environment and ensuring that all employees feel valued for their contributions. By understanding the various methods of tip distribution and leveraging automation, you can streamline the process, reduce errors, and foster a stronger sense of teamwork within your staff.

Tips+Gratuities has been the number-one gratuity reconciliation solution in the hotel industry for nearly 20 years. With features like complete gratuity distribution automation, configurable rules and reporting, and unlimited distribution capabilities, you can rest assured that you’re choosing a tip distribution software solution that provides the support you need for your hospitality business.

To learn more about the benefits of automation in gratuity distribution, our free eBook, The Win-Win of Automation, has everything you need to know about automating your gratuity management. Download your copy today or get in touch with our team to schedule a demo of our Tips+Gratuities solution to see how automation can transform your distribution process.