Restaurants fight back against unwanted FTC charges over surcharges

Lawmakers want to crack down on “garbage tariffs,” but restaurants are trying to stay out of the fight.

Surcharges or fees that cover everything from credit card processing to gratuities to “inflation” have become more common on restaurant checks in recent years.

Last year, 15% of restaurant owners added surcharges or fees to their checks because of higher costs, according to the National Restaurant Association. In the second quarter, 3.7% of restaurant transactions processed by Square included a service charge, more than double from the start of 2022, according to a recent report from the company.

Opponents of the practice say these extra fees and charges can surprise customers, tricking them into paying more for their meals at a time when their wallets are already feeling thin. Fed-up students compiled spreadsheets via Reddit of restaurants in Los Angeles, Chicago and DC charging hidden fees. Even the Onion took a swing at the practice, publishing a satirical story in May headlined “Restaurant’s check includes 3% extra to give Birkin to owner’s sugar baby.”

The Biden administration has widely targeted so-called unwanted fees, such as an undisclosed service charge for concert tickets or unexpected resort fees when checking out of a hotel. This fall, the Federal Trade Commission is expected to publish a rule prohibiting businesses from “imposing hidden and deceptive fees.”

Restaurants are trying to stay out of the sights of the Biden administration. They say the surcharges and fees are necessary to keep their businesses afloat and to compensate their employees fairly in a competitive industry with thin profit margins.

“The challenge for restaurants is that not all charges are frivolous charges … People know what they’re paying for when it comes to most of the charges that are on a restaurant bill,” said Sean Kennedy, executive vice president of public affairs for National. Restaurant Association.

Some customers may disagree with Kennedy.

While federal law makes it illegal for management to withhold tips from their workers, mandatory service charges are the property of the restaurant. Some states, such as New York, have their own laws that state that service charges belong to the staff.

A Denver-based restaurant worker said in a public comment responding to the FTC’s proposed rule that his employer described the charge to customers as “evenly distributed among the staff.” But he was told when he was hired that the business keeps 30% of the revenue.

Service charges increase the risk of wage theft because employers can claim the money goes to workers but fail to distribute it, the National Women’s Justice Center wrote in its public comment. Additionally, customers who pay a service charge are less likely to tip on the check, hurting workers’ incomes, the nonprofit said.

For their part, restaurant operators argue that service charges and other payments help them pay their employees more and offer better benefits.

When Galit, a Middle Eastern restaurant in Chicago, opened its doors in 2019, it implemented an optional 2% fee to cover health care costs for its workers. These days, the tip is 4%, plus the restaurant adds a 20% service charge to each bill for hourly employees. The fees are clearly stated on its website, Resy page and its menu.

Co-owner and general manager Andres Clavero, who has an accounting background, said the restaurant chose that approach for several different reasons.

“We can dictate where everything goes, so a portion of our 20% service fee goes to the back of the house,” Clavero said.

Additionally, higher menu prices may scare away customers, plus diners will have to pay higher sales taxes. Galiti would also have higher payroll taxes. And the service charge aims to address tipping issues. This practice has become more controversial in recent years, thanks to studies linking it to sexual harassment and racial discrimination.

If the fees were built into the restaurant’s prices, customers could choose cheaper options that don’t offer the same benefits to his employees, Clavero said.

In some cases, fees help restaurants navigate complicated legislation. For example, service charges became much more common in D.C. after voters approved Initiative 82, which will phase out tipped wages by 2027. In March, the city passed a bill protecting service charges of 20% or less.

Kaliwa, a Southeast Asian restaurant in DC, said it implemented an 8% surcharge to manage rising labor and operating costs.

“Our priority is to remain transparent with our guests, making sure they understand the reasons for these fees,” said Kaliwa director Peter Demetri.

For Ming-Tai Huh, head of Square’s restaurant business and a partner at Cambridge Street Hospitality Group, service charges have helped some of his Boston restaurants overpay chefs and dishwashers.

Massachusetts law prohibits servers from sharing tips with kitchen workers. Thanks to the higher pay from the additional payments, more employees of the restaurant company have chosen its health care program.

Huh said the service charge was easier to implement in the company’s fine dining restaurants. But CSHG ended up dropping it from a fast-casual restaurant due to customer backlash. Instead, the company just raised the menu prices.

At the state level, restaurants have already had some success getting out of the garbage fee fight.

In California, last-minute legislation exempted bars and restaurants — as well as grocery stores and food delivery services — from having to list the mandatory fees they charge customers. As a result, the industry was exempted from a sweeping anti-waste tax law that went into effect on July 1.

“We believe that allowing many restaurants who for decades have used automatic payment in lieu of tipping, (which is fairer and fairer), and recently added service charges to help compensate for things like The SF Health Care Security Ordinance will make it possible for restaurants to continue to support pay equity and contribute to workers’ health care,” the Golden Gate Restaurant Association wrote in a statement following the legislation’s passage.

The National Restaurant Association argues that getting rid of the fees will lead to customer confusion, higher prices, less transparency and costly compliance. The trade group estimates the cost for the new menus alone would reach more than $4,800 per restaurant.

Even restaurant operators admit that not all fees and charges are worth defending.

Clavero opposes restaurants using Covid surcharges more than four years after the pandemic, dining rooms temporarily closed.

“Having that, to me, is a cry for help. That’s not being completely open and honest about where your money is going,” he said.

For its part, the National Restaurant Association said it is pushing the FTC to protect three fees typically charged by restaurants: large parties, delivery and credit card processing.

Kennedy said the trade group is trying to help operators maintain their slim 3% to 5% margins, which is difficult as the costs of doing business continue to rise. For example, credit card swipe fees have doubled over the past decade and are now the third-highest cost for restaurants, according to Kennedy.

“What we’ve really put in place or the membership is to be as open, transparent and public about it as possible so customers know exactly what they’re getting into when they sit down to eat at the restaurant their favorite,” Kennedy said.