Restaurants resist regulatory crackdown on junk fees

Lawmakers are stepping up their efforts to curb “junk fees,” but restaurants across the country are trying to stay out of this regulatory fight. In recent years, more and more restaurants have added surcharges and fees to bills to cover various expenses such as credit card processing, tips, and even inflation-related costs.

According to CNBC, about 15% of restaurant owners added additional fees to their customers’ bills last year to offset rising operating costs. This trend is reflected in recent data from Square, which shows that 3.7% of restaurant transactions in the second quarter of this year included a service fee, more than double the amount seen in early 2022.

Critics of these surcharges argue that they can blindside customers and trick them into paying more for their food at a time of widespread financial stress. Frustrated restaurant-goers have even compiled lists on Reddit of restaurants in major cities like Los Angeles, Chicago and Washington DC that charge hidden fees. The satirical publication The onion This practice was also ridiculed, pointing to growing consumer dissatisfaction.

The Biden administration has targeted these so-called junk fees, including hidden charges on concert tickets and unexpected resort fees at hotels. This fall, the Federal Trade Commission (FTC) is expected to introduce a rule prohibiting companies from charging “hidden and deceptive fees,” a move that could have a significant impact on several industries, including the restaurant sector.

However, according to CNBC, restaurants are distancing themselves from the government’s crackdown, claiming these fees are critical to maintaining their businesses and ensuring their employees are fairly compensated in an industry known for its thin profit margins.

Read more: FTC warns franchisors about junk fees

“The challenge for restaurants is that not all fees are worthless fees… For most fees on a restaurant bill, people know what they’re paying for,” said Sean Kennedy, executive vice president of public affairs for the National Restaurant Association. Despite Kennedy’s assurances, not all customers are convinced.

Federal law prohibits management from keeping tips from employees, but service charges are considered the property of the restaurant. Some states, such as New York, even have a specific law that requires service charges to go to staff. Still, concerns about wage theft remain. The National Women’s Law Center, in its comments on the FTC’s proposed rules, warned that service charges could increase the risk of wage theft because employers could misrepresent how those charges are allocated.

On the other hand, restaurant operators argue that premiums allow them to offer better wages and benefits to their employees. For example, Galit, a Middle Eastern restaurant in Chicago, has implemented a 4% health fee and a 20% service fee for hourly workers. These fees are clearly displayed on the website, Resy page and menu.

Co-owner and general manager Andres Clavero, who has a background in accounting, explained that this approach helps distribute revenue more fairly among employees, especially back-of-house workers. Clavero also noted that including these fees in menu prices could result in higher sales taxes and potentially push customers toward cheaper options that don’t support employee benefits as effectively.

In some cases, fees have helped restaurants navigate complex laws. For example, service fees became more common in Washington, DC, after voters passed Initiative 82, which aims to phase out tipping by 2027. In response, the city passed a law in March that protects service fees of 20% or less.

Peter Demetri, manager of Kaliwa, a Southeast Asian restaurant in Washington, DC, noted that the restaurant implemented an 8% markup to account for rising labor and operating costs, but to remain transparent with customers about the reasons for the fees.

For some restaurants, these fees have proven beneficial. Ming-Tai Huh, Square’s head of restaurant business and a partner at Cambridge Street Hospitality Group, reported that service fees have enabled some of his Boston restaurants to pay higher wages to their kitchen staff. But Huh acknowledged that the adoption of such fees varies by restaurant type. Fine-dining restaurants have found the practice easier to adopt than fast-casual restaurants, where customer resistance has led to higher menu prices instead.

At the state level, restaurants have already had some success by staying out of the junk fee debate. According to CNBC, a last-minute change to California law exempted bars, restaurants, grocery stores and delivery services from the requirement to disclose mandatory fees to customers. As a result, the industry was exempted from a sweeping anti-junk fee law that went into effect on July 1.

The Golden Gate Restaurant Association praised the outcome, noting that the exemption would allow restaurants to continue to support equal pay and contribute to their employees’ health care through measures such as automatic tips and service charges.

Source: CNBC