Restaurants fight back against FTC crackdown on junk fees over surcharges

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

Surcharges, or fees, covering everything from credit card processing to tips and “inflation,” have become more popular on restaurant checks in recent years.

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

Opponents of the practice say such fees and surcharges can surprise customers, tricking them into paying more for their meals at a time when their wallets are already thin. Fed-up diners compiled spreadsheets via Reddit of restaurants in Los Angeles, Chicago and D.C. charging hidden fees. Even The Onion criticized the practice, publishing a satirical story in May with the headline “Restaurant bill includes 3% surcharge to provide owner’s sugar baby with a Birkin.”

The Biden administration has put so-called junk fees, such as undisclosed service charges for concert tickets or unexpected resort fees when checking out of a hotel, under its radar. This fall, the Federal Trade Commission is expected to release a rule banning companies from “charging hidden and deceptive fees.”

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

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

Some customers might disagree with Kennedy.

While federal law prohibits management from keeping tips from its workers, mandatory service charges are the property of the restaurant. Some states, such as New York, have their own laws stating that service charges belong to the staff.

A Denver restaurant worker said in a public comment in response to the FTC's proposed rule that his employer describes the fee to customers as “distributed equitably among the staff.” But when he was hired, he was told the company keeps 30 percent of the profits.

Service fees The risk of wage theft increases because employers can claim the money is going to workers but not distribute it, the National Women's Law Center wrote in its public comment. Additionally, customers who pay a service charge are less likely to leave a tip on top of the bill, which hurts workers' earnings, the nonprofit said.

Restaurant operators, meanwhile, argue that service fees and other surcharges help them pay their employees more and provide them with better benefits.

When Galit, a Middle Eastern restaurant in Chicago, opened in 2019, it added an optional 2% fee to cover its workers’ healthcare costs. Today, the fee is 4%, plus a 20% service charge the restaurant adds to each bill for hourly workers. The fees are clearly stated on its website, its Resy page, and its menu.

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

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

Additionally, higher menu prices could scare away customers, and diners would have to pay a higher sales tax. Galit would also face higher payroll taxes. And the service charge is intended to address problems with tipping. The practice has become more controversial in recent years, thanks to studies linking it to sexual harassment and racial discrimination.

If the fees were included in restaurant prices, customers might choose cheaper options that don't provide the same benefits to their employees, Clavero said.

In some cases, fees help restaurants navigate complicated laws. For example, service charges became much 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., said it implemented an 8% surcharge to manage rising labor and operating costs.

“Our priority is to be transparent with our guests and ensure they understand the reasons behind 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 fees have helped some of his Boston restaurants pay cooks and dishwashers more.

Massachusetts law prohibits sharing tips between waiters and kitchen workers. Thanks to the pay increase that comes with the surcharges, more of the restaurant's workers have opted to take advantage of its health care program.

Huh said the service charge was easier to implement at the company’s fine-dining restaurants, but CSHG ended up removing it from one fast-casual restaurant due to customer resistance. Instead, the company simply raised menu prices.

At the state level, restaurants have already had some success in being excluded from the fight against junk fees.

In California, a last-minute law exempted bars and restaurants (as well as grocery stores and grocery delivery services) from being required to include mandatory fees they charge customers. As a result, the sector was exempt from a sweeping anti-junk fee law that went into effect on July 1.

“We believe that allowing many restaurants that have for decades used automatic tipping instead of gratuities (which is more fair and equitable) and more recently have added service charges to help offset 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 passage of the legislation.

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

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

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

“To me, having that is a cry for help. That's not being totally open and honest about where your money is going,” he said.

The National Restaurant Association, meanwhile, said it is lobbying the FTC to protect three fees that restaurants commonly charge: large groups, delivery and credit card processing.

Kennedy said the trade group is trying to help operators preserve their razor-thin margins of 3% to 5%, which is difficult because the costs of doing business keep rising. 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 been instilling in our members is to be as open, transparent and public about it as possible, so that customers know exactly what they're getting into when they sit down to dinner at their favorite restaurant,” Kennedy said.