Restaurants resist FTC's efforts to ban 'junk fees' as customers express dissatisfaction with additional costs.

• The Federal Trade Commission is considering a rule to limit "junk fees," but restaurants are hoping to maintain their ability to charge fees and surcharges.
• In 2023, a survey by the National Restaurant Association found that 15% of restaurant owners added surcharges or fees to checks due to rising costs.
• Restaurant operators assert that the fees they pay maintain lower menu prices, enhance employee remuneration, and benefit customers.

Restaurants are attempting to avoid being part of the battle against "junk fees" that lawmakers want to restrict.

In recent years, restaurant checks have increasingly included surcharges or fees for credit card processing, gratuities, and "inflation."

According to the National Restaurant Association, 15% of restaurant owners added surcharges or fees to checks due to higher costs last year. Meanwhile, a recent report from Square shows that 3.7% of restaurant transactions processed by the company included a service fee in the second quarter of 2022, which is more than double the beginning of the year.

Those who oppose the practice argue that customers may be tricked into paying more for their meals due to hidden fees and surcharges, which can occur when their finances are already strained. A group of disgruntled customers in Los Angeles, Chicago, and D.C. created spreadsheets on Reddit to expose restaurants that charge hidden fees. Even the Onion poked fun at the practice in a May article titled "Restaurant Check Includes 3% Surcharge to Provide Owner's Sugar Baby with Birkin."

The Biden administration has aimed to eliminate "junk fees," such as concealed service charges for concert tickets or surprise resort fees when checking out of hotels. The Federal Trade Commission is set to release a rule this fall prohibiting businesses from using deceptive and hidden fees.

To remain unaffected by the Biden administration, restaurants are imposing surcharges and fees. They argue that these measures are necessary to maintain their financial stability and to provide their employees with fair compensation in a highly competitive industry with minimal profit margins.

The challenge for restaurants is that not all fees are junk fees, as people are aware of what they're paying for when it comes to most fees on a restaurant bill, according to Sean Kennedy, executive vice president of public affairs for the National Restaurant Association.

Fighting fees

Some customers might disagree with Kennedy.

While federal law prohibits management from keeping their workers' tips, mandatory service charges are owned by the restaurant. Some states, such as New York, have their own laws that state that service charges belong to staff.

A Denver restaurant worker responded to the FTC's proposed rule by stating that his employer distributes the fee equally among staff. However, he was informed during his hiring process that the business retains 30% of the profits.

The National Women's Law Center stated in its public comment that service fees increase the likelihood of wage theft, as employers may misuse the funds intended for workers, and customers who pay a service charge are less likely to tip, negatively impacting workers' income.

The restaurant perspective

Restaurant operators contend that service fees and other surcharges aid in compensating their staff more generously and offering superior benefits.

Galit, a Middle Eastern restaurant in Chicago, implemented an optional 2% fee to cover health-care costs for its workers when it opened in 2019. Currently, the fee is 4%, and the restaurant adds a 20% service charge to each bill for hourly workers. The fees are clearly stated on the restaurant's website, Resy page, and menu.

Andres Clavero, co-owner and general manager with an accounting background, stated that the restaurant selected this approach for multiple reasons.

Clevero stated that we have the power to decide where it all goes, and some of our 20% service charge will be allocated to the back of house.

Higher menu prices could deter customers, increase sales tax, and lead to higher payroll taxes for Galit. Additionally, a service charge aims to address tipping issues, which have become more controversial due to studies linking it to sexual harassment and racial discrimination.

Customers might opt for less expensive choices if the fees were incorporated into the restaurant's menu prices, according to Clavero.

Service charges have become more common in D.C. after voters approved Initiative 82, which will phase out the tipped wage by 2027. In March, the city passed a bill protecting service fees of 20% or less.

Kaliwa, a Southeast Asian restaurant in D.C., announced that it has introduced an 8% surcharge to cope with increasing labor and operational expenses.

Peter Demetri, Kaliwa director, stated that our top priority is to maintain transparency with our guests, so they comprehend the reasons behind these fees.

Ming-Tai Huh, head of Square's restaurant business and partner of Cambridge Street Hospitality Group, has used service fees to increase the pay of cooks and dishwashers in some of his Boston restaurants.

The Massachusetts law prohibits sharing tips from servers with kitchen staff. However, due to the higher wages resulting from surcharges, more restaurant employees have enrolled in the company's health-care program.

The company's fine-dining restaurants easily implemented the service charge, but the fast-casual eatery faced customer pushback, leading to the removal of the charge. In response, the company raised menu prices.

Lobbyists vs. legislators

Some restaurants have already achieved success in being excluded from the battle over junk fees at the state level.

In California, last-minute legislation excluded bars, restaurants, grocery stores, and grocery delivery services from having to list mandatory fees, exempting the industry from a broad anti-junk-fee law that went into effect on July 1.

The Golden Gate Restaurant Association believes that allowing restaurants to use auto gratuity and service charges instead of tips, which is more fair and equitable, will enable them to continue supporting pay equity and contributing to worker health care.

The National Restaurant Association contends that removing fees would result in customer bewilderment, increased prices, decreased transparency, and burdensome compliance. The association estimates that the expense for new menus alone would surpass $4,800 per restaurant.

Exceptions to the rule

Even restaurant operators admit that not all fees and surcharges are worth protecting.

Four years after the pandemic temporarily shuttered dining rooms, Clavero opposes restaurants that use Covid surcharges.

Being fully open and honest about where your money is going is not a cry for help, according to him.

The National Restaurant Association is advocating for the FTC to safeguard three fees commonly imposed by restaurants: large party, delivery, and credit card processing.

Kennedy stated that the trade group aims to assist operators in maintaining their razor-thin profit margins of 3% to 5%, which is challenging due to the increasing costs of doing business. For instance, credit card swipe fees have doubled over the past decade and now rank as the third-highest expense for restaurants, as per Kennedy.

Kennedy stated that our membership has been emphasizing transparency and openness in order to ensure customers are fully informed about their dining experience at their preferred restaurant.