by Lily Belli July 1, 2024 July 1, 2024
A new law regulating service fees – mandatory charges often calculated as a percentage of the total before tax – goes into effect statewide today. It requires all service providers to disclose more than many have, with specific exceptions for restaurants.
A new California law set to take effect Monday takes aim at service fees, those sneaky surcharges that can show up unexpectedly at the bottom of your bill for everything from a latte at a coffee shop to concert tickets.
Senate Bill 478, signed by Gov. Gavin Newsom in October, will ban mandatory fees that appear at the end of a transaction and require businesses to list the complete price of the item upfront, except for taxes and optional charges like a gratuity. Basically, what customers see is what they pay.
The law is intended to prohibit “drip pricing,” or advertising a price that is less than what someone will actually have to pay for a good or service, like a live event ticket or a vacation rental, once a slew of mandatory fees are tacked on. California will be the first state to ban service fees, but others could soon follow. President Joe Biden has also signaled support for a proposed nationwide ban on junk fees by the Federal Trade Commission, aimed at increasing pricing transparency for consumers.
But outcry from the restaurant industry prompted state Sen. Bill Dodd, the bill’s author, to write an exemption for bars and restaurants. Since the pandemic, service fees ranging from 3% to 15% or higher have become commonplace, often used to help restaurants provide a living wage or health care for their employees, those businesses say.
Senate Bill 1524, essentially an amendment to SB 478, allows food service businesses to charge service fees as long as they’re “clearly and conspicuously” displayed alongside an explanation of where the money is going. The bill was approved by the state Senate on Thursday, and was signed into law by Newsom on Saturday.
With the new law, restaurants can still charge separate service fees. But they have to list them “conspicuously” and “up front” so the customer is aware of them, before purchasing. Restaurants can continue to add mandatory fees to bills – without having to disclose the specific amount in advertised prices – so long as they do disclose that they are going to add an additional charge, on any advertisement, menu, or other display that contains pricing information.
“It cannot be a surprise that only shows up when the bill arrives,” Dodd clarified in a statement in June. The law doesn’t specify how the fees should be presented, but says it will give food businesses until July 1, 2025, to meet the bill’s requirements.
There is confusion among many restaurant goers about the difference between service fees and tips.
Restaurants sometimes use the term “service fee” when referring to a gratuity. While it could benefit the server, it isn’t intended to decrease or replace the gratuity.
The “service” that these fees support varies; local business owners most commonly apply them to offset labor costs and add employee benefits. The fee – usually 3-5% of the total before tax – supplements employee wages or provides health insurance, they say, while preserving the food business’ often already razor-thin margins. A gratuity or tip is an optional, but often expected, additional payment given to the server at the end of a transaction in gratitude for their service. Tips can either be kept wholly by the server or collected – “pooled” – and distributed to other members of the staff depending on the establishment.
SB 1524 might not be enough to satisfy those who dislike the additional charges, or who are confused about where that money actually goes. Some people strongly oppose service fees, and have taken to online communities such as Reddit to share which restaurants charge them. In some cases, customers decline to leave a tip once they’re charged a service fee, either out of resentment or because they wrongly believe that a service fee and a gratuity are the same thing.
Chef Matt McNamara does not use service fees at his restaurant Pretty Good Advice, which has locations in Soquel and downtown Santa Cruz. He says he believes that the cost of the dish on the menu should be what the customer pays, and that this policy benefits restaurants as well as consumers.
“I see restaurants playing the fee game, where it’s a $14 burger but it’s actually a $17 burger, they just don’t want to charge $17 and will hit you with fees on the end of the bill,” said McNamara. “I feel like the majority of the restaurants that charge fees, it’s not an honest way to do business.”
Listing lower menu prices while charging a service fee gives those restaurants an unfair advantage over those that prefer to list everything upfront, he says, but in doing so look more expensive by comparison. “Charge what you need to charge to support your staff, and level the playing field,” said McNamara.
Ted Burke, who has owned the famed Shadowbrook restaurant in Capitola since 1978, says there’s nothing dishonest about the service fee at his restaurant. He proudly displays a 4% surcharge on Shadowbrook’s menu – in the same size font as the food choices, he notes – alongside an explanation that the fee supports the company’s generous employee health benefits, and offsets costs incurred from damage and a monthlong closure due to the storms last winter.
Burke introduced the surcharge five years ago when Shadowbrook began covering 100% of the cost of health, dental and life insurance for its full-time employees and their families, and the majority of the cost for its part-time employees. Shadowbrook employs around 170 people, around 70 of whom are full-time, Burke says.
“If we just raise our menu prices, those things that we do that we feel are extraordinary for our employees will go unnoticed,” said Burke. “I think [diners] feel better knowing that it’s not going to line someone’s pockets, that it’s really going to benefit the workers. I think that makes a difference to people who dine here, and we’re proud to do that for our employees.”
Since Shadowbrook already lists the charge on its menu and includes an explanation on what it’s for, Burke is already in compliance with the new law. But he says he’s frustrated by what he sees as hasty legislation meant to limit near-monopolies like Ticketmaster also putting the restaurant industry in its crosshairs.
“I take the position that any business, as long as they are transparent, should be able to charge what they want to charge, and government does not need to be involved,” said Burke.
Have something to say? Lookout welcomes letters to the editor, within our policies, from readers. Guidelines here.
Lily Belli is the food and drink correspondent at Lookout Santa Cruz. Over the past 15 years since she made Santa Cruz her home, Lily has fallen deeply in love with its rich food culture, vibrant agriculture. More by Lily Belli
Something went wrong. Please refresh the page and/or try again.
