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Do restaurants fall under the FTC’s proposed rule to ban hidden mandatory fees? California recently said no, but restaurants across the country are bracing for more confusion.
Restaurant service fees are now commonplace. As of 2023, the National Restaurant Association estimates that 15 percent of restaurants are using some form of additional charges. Frequently used to replace tips, these fees are typically in the range of 20 percent.
At their best, restaurant service fees circumvent the problem of tipping in order to more equitably compensate employees. At their worst, they’re confusing and potentially not allocated to improving wages. But however imperfect their implementation, such charges will be abolished if the Federal Trade Commission (FTC) follows through with its plans to eliminate what it calls junk fees, enshrining tipping as the custom of the land.
In February, the FTC finished soliciting public comments on its proposed regulation to ban “deceptive acts or practices concerning fees,” better known as junk fees or drip pricing. This was followed by an informal hearing in April, with a final decision expected in the fall.
In California, Senate Bill 478, a bill similar to what the FTC is proposing that makes it “illegal for businesses to advertise or list a price for a good or service that does not include all required fees or charges other than certain government taxes and shipping costs,” went into effect July 1. On June 6, just three weeks before the deadline, Senator Bill Dodd introduced SB 1524, which carved out an exemption for restaurants so long as they present fees “clearly and conspicuously.” Unanimously approved by the Assembly, it was passed through the state Senate and signed into law by the governor on June 29th, just 48 hours before the July 1 deadline. Though a reprieve for California restaurateurs, the clock is still ticking on a national scale, with many restaurants in panic mode. Here’s what you should know.
Why restaurants have service fees
The problems that tipping exacerbates — racism, sexism, harassment, and exploitation — are well established. Around the county, restaurateurs fed up with this corrupt system have turned to service fees (except for those in New York and Massachusetts, where service fees cannot be shared with kitchen staff, so there is little benefit to the model) to remove their reliance on tips to pay a living wage and the abusive relationship with diners that tipping amplifies. Many use the revenue to more evenly distribute pay between the front of house (servers, bussers, hosts) and back of house (cooks, dishwashers), who historically earn a lot less.
Under this model, servers often earn a little less than they might at their city’s highest-volume, highest-priced restaurants. But some restaurants find that servers are attracted to a workplace where kitchen staff get paid a living wage and one in which these two groups are able to work as a team because they’re not paid and treated so differently.
Some restaurants also see service fees as a way to address a chronic problem in restaurants — few employees want to be managers and 35 percent of restaurant managers quit within the first year. Front-of-house workers typically see the majority of their earnings coming from tips, not hourly wages, so many servers, even if they show leadership skills, don’t want to be promoted to management because without tips, it usually means more responsibility for less money. At some restaurants with service fees, the money is used to bump up pay for managers, provided they spend the majority of their time on the floor rather than doing administrative tasks. At many, the fees are earmarked for employee benefits.
Restaurateurs I’ve spoken with say implementing service fees helps with staff retention as well. High Street Hospitality, a Philadelphia restaurant group, operates six concepts, two of them using service fees. Between this and other High Street initiatives aimed at creating better jobs that people want to stay in, founder Ellen Yin estimates a staff turnover of under 40 percent, far below the industry average of 73 percent.
Why the FTC aims to abolish service fees
The U.S. government seems determined to stamp out this business model. The intention is to protect consumers from unnecessary or hidden fees from big companies like airlines or concert ticketing agencies. However, the proposal’s language not only encompasses restaurants, but makes clear that the FTC has considered the impact on the role of tipping. “As applied to restaurants, the proposed rule would require the prices of menu items to be inclusive of any mandatory fees,” the Trade Regulation Rule on Unfair or Deceptive Fees states. The FTC seems to acknowledge that for most, tipping is a preferable alternative to restaurants’ other option: scaring off customers with the sticker-shock of service-inclusive pricing. The statement continues: “We thus assume these restaurants will choose a return to the traditional tipping model in response to the proposed rule.”
The intentions of the California Senate and the FTC — to protect consumers from drip pricing — may be noble. For example, you go to book a flight, find a price that feels right, and only after several minutes, multiple screens, clicks, and scrolls do you see the prices for checking a bag or seat selection. That’s before the airline tries to sell you various forms of insurance. Or, you arrive to pick up a rental car to discover previously undisclosed charges. These fees do feel hidden. But restaurant service charges are not junk fees. Rather than a cash grab by owners, they actually cost restaurants more as, unlike tips, the fees are seen as revenue by the IRS and subject to payroll tax. Although the Restaurant Service Charge Tax Fairness Act, introduced to Congress in May, proposes that these fees be treated like tips (which are self-reported by employees), the FTC has cast its net too wide, and the bycatch will be restaurants that are using service fees to create better jobs.
How restaurants are reacting to the proposal
Several operators who have been using service fees to fund better jobs and benefits all told Eater that they are in favor of legislation that would require transparency around where service fees go. Where they differ is in what they expect to do if these state or federal laws cannot be stopped.
Some say that this will likely push them toward service-inclusive pricing. This is when the restaurant eliminates a dependency on tips by increasing menu pricing.
Many restaurateurs cite the Union Square Hospitality Group’s aborted attempt at service-included pricing as evidence that it can’t be done. But it’s also important to note that this group, which had good intentions and administrative expertise, was also trying to do it across 13 restaurants with over 1,000 employees. That’s a big ship to turn around. Many smaller operators have made this change and stuck with it.
Before restaurants were exempted from Bill 478, one LA restaurateur using service fees who requested she remain anonymous said that she would love to use a service-included model, but she is still concerned that customers are not ready to pay for what restaurant experiences cost without the guise of the discretionary tip that creates the illusion of lower prices. Instead, she was planning on reluctantly shifting back to a tipped model while also raising prices in order to continue covering the staff health and retirement benefits. She expected both tip percentages and earnings for staff to decrease as prices rise.
Nationally, only 32 percent of food service workers have employer-sponsored healthcare benefits. In San Francisco, where health coverage for businesses with over 20 employees is mandated by the city, it’s common for restaurants to add a 5 percent charge to cover that. Bill 478 would have made that impossible. That money has to come from somewhere. So prices would have gone up.
To be fair, it seems unlikely that the FTC was thinking about restaurants or what they use service fees for when it first proposed their legislation. Restaurants are collateral damage in a separate fight. This is made clear by a rhetorical question from Ted Mermin, director of the California Low-Income Consumer Coalition, which cosponsored Bill 478. “Why is only one of the dozens of affected industries complaining?” asked Mermin in an interview with the New York Times.
The question betrays a fundamental lack of understanding of an industry that California and the FTC are seeking to regulate. Will the FTC learn from Bill 478 and amend it now to exempt restaurants? Or will this battle go down to the last second too? A better question to ask: From the state level to federal, why would a law intended to deal with the unfair business practices of companies like Ticketmaster or United Airlines be the same one applied to a 120-seat restaurant in Austin serving braised oyster mushrooms with polenta?
Corey Mintz, a food reporter, focussing on the intersection between food with economics and labor, is the author of the 2021 book The Next Supper: The End of Restaurants as We Knew Them, And What Comes After.
