I am currently doing the same thing with yellow labs and I just recently became successful and pulled four fry from my tank about two weeks ago or so and I also just had a female spit about 30 fry and so I am about to be pretty over crowded. I also have at least two more females that are holding right now.
Just to be clear, you do not need the second 10 gallon tank in order to breed per say, but only to hold the fry and keep them away from their parents and other fish who would eat them. I found that it is very advantagous to leave all the breeding fish in the main tank and once you notice that a female is holding eggs in her mouth, count forward 23 days or so and then move that female into the smaller tank so that she can spit the babies out when they are ready. Of course, right after that, but the mom back in the big tank. This may or may not work for you at first since the female is more apt to spit her fry too early if stressed from being chased and caught by you. Some females also take a couple of practice batches before she will hang on to the eggs long enough to get fry.
I would use a substrate and maybe some dense fake plants for your fry tank. I would probrably get a larger substrate and put just a thin layer of it in the tank. The larger substrate will let the fry hide from her mom in case she spits them out when you are not around and the plants are going to be good cover so it will make the fry feel safe and be less stressed out.
You can USUALLY tell males from females by looking for eggspots on their anal fins. The look just like they sound...like eggs. The male uses them to ensure that the female keeps following him in order to catch the eggs on his tail, thus increasing the amount of sperm that the female collects. This is not a fool proof method though and some females do have eggspots. You will know for sure when a fish's cheeks look like a chipmunk with food it in its mouth. Those will be the females for sure.
My labs are two to three inches as well and I am getting fry from them at a rapid rate all of a sudden. Just keep an eye out for the aggressive male just before and after mating occurs. Also, keep plenty of hiding places in your tank so that the female can stay calm and not get chased by the male, again, making her stressed and increasing the liklihood of her spitting too early.