Governor Newsom signed SB 478 into law last October, banning what the government has recently dubbed “junk fees” in most consumer settings. The law is intended to ensure that consumers are aware of the total price of a purchase, by requiring all additional fees, surcharges, and extra costs be included in the total price of a good or service before the decision to buy is made. Most of us agree with the concept, but as with everything, it comes down to how the sausage gets made.
The statute itself clarifies how the law will impact certain industries and excludes some altogether. But one of the open questions has been how SB 478 will apply to the restaurant industry, which is addressed specifically in the bill. Shortly after the start of 2024, California Attorney General, Rob Banta, released a statement indicating that his office intended to enforce this law with respect to the restaurant industry, even though the drafters of the bill have stated restaurants were not the target of SB 478. Consequently, the industry has spent the last several months attempting to get confirmation and clarification about what exactly this bill would mean to restaurants.
Last week, the Attorney General answered these questions, at least about his office’s intentions. He released another statement, doubling down on his commitment to enforce SB 478 against restaurants, in advance of the FAQs soon to be promulgated by the state. A slew of articles emerged, declaring the “end of surcharges” in the restaurant industry.
As both operators and consumers know well, the advent of surcharges and service charges has been one way in which many restaurants have attempted to still turn a profit in light of the ever-increasing minimum wage, utility and food costs, federal and state mandated benefits, and other unexpected overhead (such as employment related lawsuits). While some restaurants swallowed the hard pill and raised their menu prices, others felt that the sticker shock of such price hikes would scare off their customers. Consequently, they packaged the increases into a “surcharge” to help defray these endlessly mounting expenses. Other restaurants have included “service charges” in known tourist locations or for large parties, in an effort to protect their staff who may not get tipped as expected. These restaurants usually distributed all or most of this service charge to its employees. However, these services charges sometimes generated confusion with consumers and even staff, especially when some restaurants lacked transparency about how the service charges were handled. In some situations, both a service charge and tip line were included, and public pushback grew, feeling pressured to leave a 20% gratuity in addition to the imposition of a 20% service charge. Employee lawsuits also followed, by staff believing that they were entitled to 100 % of the service charges that appeared like “gratuities,” claiming their tips were being stolen.
It is against this backdrop of confusion that SB 478 was signed. And it is considering all this backlash that the Attorney General has decided to point his new weapon at restaurants.
Articles published by outlets such as the SF Chronicle have hailed this latest statement “the death of surcharges,” proclaiming that SB 478 makes such charges “illegal” as of July 1, 2024. That is not quite an accurate statement, but given Attorney General Bonta’s interpretation of this bill, it may well be the outcome. It appears from the AG’s statements that since SB 478 requires that the price of all goods and services reflect all fees and costs, that each MENU ITEM would have to include a total purchase price, including the surcharges. Short of requiring menu items to carry two prices, one with and one without the surcharge, it would be impractical if not impossible for restaurants employing a surcharge to comply. It does not seem that putting the PERCENTAGE number of the surcharge or service charge in big, bold fonts everywhere is going to solve the problem, because the total cost to the consumer would not be presented until close out.
Catering and event planners may still be able to include these fees, since most event contracts include a “total price” which consumers could see before they signed an agreement. But it may well be that most restaurants will have to abandon traditional end of the meal surcharges or service charges in order to comply with SB 478.
While some consumers will celebrate the end of these sometimes perplexing extra charges, expect menu prices in many places to surge in response. Restaurants, even seemingly very busy and “successful” ones, run on a notoriously low profit margin.
For those of you who may be considering abandoning service or surcharge models and returning to tipping for the first time in a while, there is more flexibility to include your kitchen employees in tip pool or tip share arrangements. However, California and federal law still have tricky rules about tip pools, and they are often the subject of lawsuits when managed incorrectly. If you want to talk about instituting a tip pool model, please feel free to reach out for guidance. It’s what we do.
For the rest of you, SB 478 obviously impacts industries other than hospitality, and many of you may be similarly hit.
