Restaurants Resist Regulatory Crackdown on ‘Junk Fees

Lawmakers are intensifying their efforts to curb “junk fees,” yet restaurants across the nation are striving to remain on the sidelines of this regulatory battle. In recent years, an increasing number of restaurants have introduced surcharges and fees on bills to cover various expenses such as credit card processing, gratuities, and even inflation-related costs.

According to CNBC, last year, about 15% of restaurant owners tacked on additional charges to customers’ checks to offset rising operational 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 rate from early 2022.

Critics of these surcharges argue that they can catch customers off guard, effectively tricking them into paying more for their meals during a time of widespread financial strain. Frustrated diners have even compiled lists on Reddit of restaurants in major cities like Los Angeles, Chicago, and Washington, D.C., that impose hidden fees. The satirical publication The Onion also lampooned the practice, highlighting the growing discontent among consumers.

The Biden administration has taken aim at these so-called junk fees, including hidden charges for concert tickets and unexpected resort fees at hotels. This fall, the Federal Trade Commission (FTC) is expected to introduce a rule banning businesses from “charging hidden and misleading fees,” a move that could have significant implications for various industries, including the restaurant sector.

However, per CNBC, restaurants are keen to distance themselves from the administration’s crackdown. They contend that these fees are crucial for maintaining their businesses and ensuring fair compensation for their employees 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 junk fees… People know what they’re paying for when it comes to most fees that are on a restaurant bill,” 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 retaining employees’ tips, but service charges are considered the property of the restaurant. Some states, like New York, have specific laws mandating that service charges belong to the staff. However, concerns over wage theft persist. The National Women’s Law Center, in its comments on the FTC’s proposed rule, warned that service fees could increase the risk of wage theft, as employers might misrepresent the distribution of these charges.

On the other hand, restaurant operators argue that surcharges allow them to offer better pay and benefits to their workers. For instance, Galit, a Chicago-based Middle Eastern restaurant, has implemented a 4% healthcare fee and a 20% service charge for hourly workers. These charges are prominently displayed on its 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 equitably among staff, particularly for back-of-house employees. Clavero also noted that incorporating these fees into menu prices could lead to higher sales taxes and potentially drive customers toward cheaper options that don’t support employee benefits as effectively.

In some cases, fees have helped restaurants navigate complex legislation. For example, service charges became more prevalent in Washington, D.C., after voters approved Initiative 82, which aims to phase out the tipped wage by 2027. In response, the city passed a bill in March that protects service fees of 20% or less.

Peter Demetri, director at Kaliwa, a Southeast Asian restaurant in D.C., noted that the restaurant introduced an 8% surcharge to address rising labor and operating costs while remaining transparent with customers about the reasons behind the fees.

For some restaurants, these fees have proven beneficial. Ming-Tai Huh, head of Square’s restaurant business and a partner at Cambridge Street Hospitality Group, shared that service charges have enabled some of his Boston-based restaurants to pay kitchen staff higher wages. However, Huh acknowledged that the implementation of such fees varies depending on the restaurant type, with fine-dining establishments finding it easier to adopt the practice than fast-casual eateries, where customer resistance led to menu price increases instead.

At the state level, restaurants have already achieved some success in staying out of the junk fee debate. According to CNBC, a last-minute amendment to California legislation exempted bars, restaurants, grocery stores, and delivery services from listing mandatory fees charged to customers. Consequently, the industry was excluded from a broad anti-junk fee law that took effect on July 1.

The Golden Gate Restaurant Association praised this outcome, noting that the exemption allows restaurants to continue supporting pay equity and contributing to worker healthcare through practices like automatic gratuities and service charges.

Source: CNBC