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Lawmakers want to crack down on “junk fees,” but restaurants are trying to stay out of the fray.
Surcharges or charges that cover everything from credit card processing to tips to “inflation” have become more popular on restaurant checks in recent years.
Last year, 15 percent of restaurant owners added surcharges or fees to their checks because of higher costs, according to the National Restaurant Association. In the second quarter, 3.7% of restaurant transactions processed by Square included a service charge, more than double from early 2022, according to recent report from the company.
Opponents of the practice say these fees and surcharges can surprise customers, tricking them into paying more for their meals at a time when their wallets are already thin. Fed-up customers compiled spreadsheets via restaurant Reddit on Los Angeles, Chicago and DC charging hidden fees. Even the onion swung in training, publishing a satirical story in May titled “Restaurant check includes 3% surcharge for providing Birkin to owner’s Sugar Baby.”
The Biden administration has broadly targeted so-called junk fees, such as an unknown service charge for concert tickets or unexpected resort fees when checking out of a hotel. This fall, the Federal Trade Commission is expected to publish a rule prohibiting businesses from “charging hidden and deceptive fees.”
US President Joe Biden delivers remarks on retirement security in the State Dining Room of the White House on October 31, 2023 in Washington, DC. The Biden administration is attempting to crack down on so-called “junk fees” in retirement accounts with a rule enforced by the U.S. Department of Labor.
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Restaurants are trying to stay out of the Biden administration’s crosshairs. They say the raises and fees are necessary to keep their businesses afloat and compensate their employees fairly in a competitive industry with thin profit margins.
“The challenge for restaurants is that not all charges are junk … People know what they’re paying when it comes to most charges that are on a restaurant bill,” said Sean Kennedy, executive vice president of public affairs for National. Restaurant Association.
Competition fees
Some customers may disagree with Kennedy.
While federal law makes it illegal for management to keep employee tips, mandatory service charges are the property of the restaurant. Some states, like New York, have their own laws that say service charges belong to the staff.
Denver-based restaurant worker he said in a public comment responding to the FTC’s proposed rule that his employer describe the pay to customers as “fairly distributed among the staff.” But he was told when he was hired that the business keeps 30% of the revenue.
Service fees they increase the risk of wage theft because employers may claim the money is going to workers but not actually distribute it. Wrote the National Women’s Law Center in her public comment. Additionally, customers who pay a service charge are less likely to put a tip on top of the check, hurting workers’ income, the nonprofit said.
The perspective of the restaurant
For their part, restaurateurs argue that service charges and other surcharges help them pay their employees more and provide better benefits.
When Galit, a Middle Eastern restaurant in Chicago, opened its doors in 2019, it imposed an optional 2% fee to cover health care costs for its workers. These days, the charge is 4%, and the restaurant adds a 20% service charge to each hourly bill. Charges are clearly stated on her website, Resy page and menu.
Co-owner and general manager Andres Clavero, who has an accounting background, said the restaurant chose this approach for a few different reasons.
“We can dictate where everything goes, so a portion of our 20 percent service charge goes to the back of the house,” Clavero said.
In addition, higher menu prices could scare away customers, while customers would have to pay higher sales tax. Galit would also have higher payroll taxes. And the service charge is aimed at addressing tipping issues. The practice has become more controversial in recent years, thanks to studies linking it to sexual harassment and racial discrimination.
If the fees were built into the restaurant’s prices, customers might choose cheaper options that don’t provide the same benefits for its employees, Clavero said.
In some cases, the fees help restaurants navigate difficult legislation. For example, service fees became much more common in DC after voters approved Initiative 82, which would phase out the tipped wage by 2027. In March, the city passed a bill to protect service fees of 20% or less .
Kaliwa, a Southeast Asian restaurant in D.C., said it implemented an 8 percent markup to manage rising labor and operating costs.
“Our priority is to remain transparent with our guests, ensuring they understand the reasons behind these charges,” said Kaliwa director Peter Demetri.
For Ming-Tai Huh, the head of Square’s restaurant business and a partner at Cambridge Street Hospitality Group, service charges have helped some of his Boston restaurants pay cooks and dishwashers more.
Massachusetts law prohibits servers from sharing tips with kitchen workers. Thanks to higher pay than supplements, more of the restaurant company’s workers have opted for the health care plan.
Huh said the service charge was easier to implement in the company’s fine dining restaurants. But CSHG ended up moving it away from a fast-casual restaurant due to customer pushback. Instead, the company simply raised menu prices.
Lobbying vs. Legislators
At the state level, restaurants have already had some success getting kicked out of the trash fight.
In California, last-minute legislation exempted bars and restaurants – as well as grocery stores and grocery delivery services – from reporting the mandatory fees they charge customers. As a result, the industry was exempted from a broad anti-littering law that went into effect on July 1.
“We believe that by allowing the many restaurants that for decades have used automatic tipping instead of tips, (which is more fair and equitable) and more recently that have added service charges to help offset events like SF Health Care’s safety ordinance is possible for restaurants to continue to support pay equity and contribute to employee health care,” the Golden Gate Restaurant Association wrote in a statement after the legislation passed.
Close-up of a receipt showing a convenience fee in addition to grocery charges, Oakland, Calif., June 12, 2024. California law SB 478 would ban so-called “junk fees.”
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The National Restaurant Association argues that getting rid of the fees will lead to customer confusion, higher prices, less transparency and costly compliance. The trade group estimates the cost for the new menus alone would reach more than $4,800 per restaurant.
Exceptions to the rule
Even restaurant managers admit that not all fees and surcharges are worth protecting.
Clavero opposes restaurants using Covid surcharges more than four years after the pandemic temporarily closed dining rooms.
“Having that, to me, is a cry for help. That’s not being completely open and honest about where your money is going,” he said.
For its part, the National Restaurant Association said it is pushing the FTC to protect three fees that restaurants typically charge: large parties, delivery and credit card processing.
Kennedy said the trade group is trying to help operators maintain their slim margins of 3 percent to 5 percent, which is difficult as the cost of doing business continues to rise. For example, credit card fees have doubled in the past decade and are now the third-highest cost for restaurants, according to Kennedy.
“What we’ve really instilled or the membership is to be as open and transparent and public about it as possible so customers know exactly what they’re getting into when they sit down to dine at their favorite restaurant,” Kennedy said.
