$2.13 per hour plus tips. That’s the “standard” wage for servers in most American restaurants. While some states may have a higher minimum wage, the actual wage amount is less relevant than the tip-compensation business model that has been around since the Fair Labor Standards Act of 1938. While I’ll avoid the historical controversy of the history of tipping, the reality is that the traditional system is broken as it creates a misaligned incentive structure between the front and the back of the house. Servers make more money when they sell more stuff. The kitchen does more work for the same money when servers sell more stuff. Why not create a system where both front and back of the house are incentivized to sell more and increase guest happiness?
The Traditional Server Compensation Model
Traditionally, servers make $2.13 an hour plus tips. Servers then “tip out” customer-facing employees such as the busboys and bartenders. The dishwashers don’t get tips. Cooks don’t get tips. The hostess doesn’t get tips. Which, in my mind, is absolutely ridiculous.
The busboy clears the dirty dishes and takes them to the kitchen where the dishwasher washes them. The dishwasher then provides clean dishes upon which food is served to the guest by the server.
What if those dishes had spots on them? Would a dirty dish potentially affect the tip provided by the customer? Probably. Would sparkling clean dishes affect the tip? How about perfectly cooked food? How about badly cooked food? You get the point. The entire chain of events that happens in a restaurant has a direct and material impact on the guest experience. If you don’t believe me, serve an overcooked steak on a dirty plate and see what happens.
However, if a server is only getting $2.13 per hour, they’re rightfully going to resent having to share that tip with a dishwasher making $10 per hour. I certainly would! But, there’s a solution to this.
Pay everyone a similar wage and pool all the tips. The Fair Labor Standards Act, specifically a 2018 amendment, allows for distributing pooled tips to all employees, excluding managers, owners, and supervisors. That means the dishwasher can be in a tip pool. Previously, only employees that were “customarily tipped” or, in other words, those that interact directly with guests could be in a tip pool.
In order to do a tip pool, you can’t take the tip credit, which means that everyone must be paid the federal minimum wage (not the reduced $2.13, but the full minimum wage.) As long as you’re not paying anyone $2.13 per hour, you can pool tips among the entire non-management staff. That’s a great thing because it reduces some of the inherent tension between the front and back of the house. It aligns incentives which can provide a very powerful boost to your team effectiveness.
How does tip pooling benefit servers?
There are several benefits for servers — and we’re talking about servers specifically because they’re the most likely to revolt against any tip pool arrangement unless they’re sold on the value.
Servers no longer have to compete for the “best sections” in the restaurant. If they have one table or five, it’s not going to matter. So there’ll be less resentment or drama around who gets what sections.
The kitchen is going to be far more willing to help out servers. A good example is when a sever needs a particular item in a hurry. If the kitchen has no incentive to improve the guest experience, they’re less likely to disrupt their workflow for the benefit of a specific table.
Servers will be more likely to work as a team rather than the “every person for themselves.” If a teammate’s table needs something, everyone in the restaurant is incentivized to help. Servers become invested in the overall guest experience, not just their own tables.
How does tip pooling benefit back of the house?
Typically line cooks are paid between $10-20 per hour depending on the location, cuisine, and skills of the employee. Dishwashers make between minimum wage and $15 per hour. (Obviously these numbers could vary greatly for your market.) No matter how hard or well they work, they’ll make the same wage. What’s the incentive to go above and beyond for a guest? There isn’t one. It might be part of their job, however in order to inspire better performance, you have to potentially threaten to fire the employee. You don’t really have a tool to incentivize the back of the house. With the carrot and stick approach, typical kitchens only have a stick.
We need more carrots.
By including the back of the house in the success of the restaurant, you’ll create an intrinsic desire to go the extra mile. There’s a real incentive to do so because a bigger tip from the table results in more money in their pocket.
What’s the benefit of tip pooling?
If you do $1 million in sales annually, and the national average tip percentage is 15%, that means that annual tips come out to roughly $150,000, or $410 per day assuming you’re open 365 days per year. If you have 10 employees on a shift, each making $10 per hour, and each employee works a 6 hour shift, that’s $60 per day in wages + $41 additional in tips. Clearly I’m averaging and generalizing. But that $41 in tips is roughly worth $10,000 in additional annual income per employee.
Now, let’s look at the same scenario under the traditional restaurant labor model. 5 front of the house employees working 6 hours for $2.13 per hour + $82 in tips ($410/5 employees.) That’s $94.78 in total pay for the day. Under our new restaurant labor model, they’d make $101 per day. Clearly, I’m simplifying the specifics, but the general idea is that servers will make the same or more than they do under the old system. They benefit financially. And the back of the house? They also benefit financially.
Tip Pooling Costs for Operators
However, as an owner, operator, or manager, you’re likely cringing at increasing your server pay from $2.13 to $10 per hour. What’s difficult for some operators to grasp is that the actual cost of wages isn’t the actual cost of an employee. How much does having a short-staffed kitchen cost? What’s the cost of employee turnover? There are also ways to mitigate the increased costs of servers. In my article A New Service Model for Restaurants, I detail how using technology can reduce staffing requirements while increasing sales. (Be sure to subscribe to get more articles like that in your inbox when they are published!)
The simple truth is that the average employee turnover for restaurant employees is over 60% and that turnover costs the average restaurant $150,000 per year. If you can reduce that turnover by half, you’ve just saved roughly $75,000 per year. While you’ll need to do your numbers yourself, the important lesson is that your labor costs are more than just the wages. Reducing employee turnover, especially in the kitchen, will ultimately save you more money than moving to a tip pooling system will cost you. And, you get the additional benefit of a stronger, more cohesive, and happier team — which will drive more sales and profits.
Ultimately, as an industry, we need to find a way to get the back of the house paid more. We also need to find ways to improve the guest experience. With the labor shortages and high turnover common in the industry, labor model innovation can become a competitive advantage. If you want to win in this business, you can’t continue to do things the way they’ve always been done.