Gov. Newsom signs new law: Restaurants and bars can continue to charge service fees, if posted

Those 3, 5 and 20% fees at the bottom of your menu could be here to stay. With little time to spare, a new law will allow restaurants and bars to continue charging service fees, healthcare costs and other surcharges when listed clearly for diners to see. The practice was set to be outlawed on July 1.

On Saturday, Gov. Gavin Newsom signed Senate Bill 1524, an emergency measure that would exempt California food and beverage vendors from Senate Bill 478: a law that goes into effect at the start of the month and targets ticket sellers, hotel and travel websites and other businesses that charge “hidden” or “junk” fees. Prior to SB 1524’s introduction in early June, restaurants and bars were included in the affected professions, with Atty. Gen. Rob Bonta advising that restaurants and bars roll surcharge fees into menu list prices to avoid the possibility of legal action.

“These deceptive fees prevent us from knowing how much we will be charged at the outset,” Atty. Gen. Rob Bonta, who co-sponsored SB 478, said in a statement the day it was signed. Bonta could not be reached for comment regarding SB 1524.

Numerous service-industry operators have been vocal against SB 478 since its passage in October, fearing that raising list prices during a tumultuous year marked by closures and inflation will only result in more loss of customers and support. Multiple restaurateurs told the Los Angeles Times that the process of revising or entirely overhauling their tipping and surcharge system could result in loss of staff benefits or all-out closures. SB 1524’s passage and the continuation of these surcharges could affect tens of thousands of restaurants throughout the state.

Read more: The shocking state of the restaurant industry: ‘We can’t afford to be open. We can’t afford to be closed.’

“We’re the most regulated of any business out there and we are struggling to survive in the broken system that has been handed to us throughout many, many decades,” said Eddie Navarrette, a co-founder of restaurant-advocacy group the Independent Hospitality Coalition. “When you add more regulations, whatever it may be, it makes things more difficult. Things are already difficult…there is a mass exodus of our small-restaurant community. I think it’s a huge relief, just to have one less thing being thrown at them right now.”

Navarrette spent weeks campaigning for SB 1524’s passage, writing letters, meeting with upwards of 35 policy advisors, legislators or their representatives, knocking on doors at the State Capitol, and explaining the usage of service fees within the tip-based restaurant industry, which functions uniquely from most other fields that will be affected by SB 478.

Surcharges, health fees and service charges are regularly used within the industry to stabilize wages across dining rooms and kitchens — where servers often receive tips but cooks and dishwashers do not — and to help offset the cost of benefits such as healthcare. Businesses with larger service fees, such as 18% or 20%, often note that tip is not expected.

“It’s confusing why the restaurants are claiming that they need to do things differently, because it just feels like they’re saying that they need to hide the cost of their food for us and that doesn’t feel right,” said Jenn Engstrom, the state director of the California affiliate of the Public Interest Research Group (CALPIRG). The nonprofit organization advocates for consumer interests and protections. “It feels like you’re being duped, that’s what it feels like: that they’re trying to trick you.”

Read more: Restaurants may be able to keep service fees if menu shows the charges

Some local restaurants have come under fire for alleged misuse of charging service fees or other surcharges, though multiple chefs and restaurateurs told the Los Angeles Times that these “bad actors” are few and far between.

“Every restaurateur that I know who cares in this industry is using it in a way that is so immensely appropriate and responsible and forward-thinking that if it was to go away, it would be really crippling to everybody,” Kato restaurateur Ryan Bailey told The Times earlier this year.

The new bill, which passed unanimously through the state Assembly and Senate in late June, was co-authored by Sen. Bill Dodd (D-Napa) — who also co-authored SB 478 — as well as Sen. Scott Wiener (D-San Francisco) and Assemblymembers Matt Haney (D-San Francisco), Jesse Gabriel (D-Encino) and Cecilia Aguiar-Curry (D-Winters).

It is supported by the California Restaurant Assn. and labor union Unite Here, both of which represent thousands of hospitality workers in California.

“This [SB 1524] will enable restaurants to continue to support increased pay equity and to make contributions to worker health care and other employee benefits,” Matthew Sutton of the California Restaurant Assn. said in a public statement. “And, importantly, consumers will remain empowered to make informed choices about where they choose to dine out.”

While some restaurateurs and bar operators are breathing a sigh of relief over the continuation of service fees, others are frustrated with the government’s quick change in tack.

An exterior of L&E Oyster Bar at night

In April, in advance of SB 478’s July 1 deadline, L&E Oyster Bar and sibling restaurant El Condor rolled its 4% service fees into menu list prices. (Ricardo DeAratanha / Los Angeles Times)

Per the attorney general’s guidance for SB 478, in April restaurateur Dustin Lancaster rolled a 4% surcharge into the menu list prices of two of his L.A. restaurants, L&E Oyster Bar and El Condor. He said that in light of SB 1524 he will not revert to a service-fee model, at least for the foreseeable future, and that it is “not so simple to just un-bake the cake.”

“This is, sadly, all too familiar territory for restaurants in California,” Lancaster told the L.A. Times this week. “Just like in Covid they jerk us around and expect us to pivot and change our model repeatedly as if it’s no big deal to small businesses. Restaurants continue to shutter [at] an alarming rate in L.A. and this sort of unnecessary about-face is why California continues to be the least small-business-friendly state in America.”

At Bell’s, a Michelin-starred restaurant in Los Alamos, ownership diligently tracked the progress of both senate bills and awaited final word before determining whether to remove their 20% service charge, which benefits all non-managerial staff. Prior to SB 1524’s passage, the Bell’s charge was already listed on the lunch and dinner menus, the website on the page for frequently asked questions, and on the homepage as it pertains to takeout orders; the new law will allow the restaurant to continue its practice without reconfiguring its business model.

Greg Ryan, an owner of Bell’s, told The Times that he is listening to and understanding of customers, legislators and his team, and that he wants to do what is best for his staff.

For months, the practice has felt like a balancing act.

As SB 1524 made its way through California’s Assembly and Senate, outcry on social media and in public forums such as Reddit has been swift and vocal, with multiple anonymous posters commenting that they will begin leaving 0% tips in retaliation to the exemption. Another Reddit user created a spreadsheet that tracks surcharges and service fees in restaurants across the state.

Read more: ‘Do y’all think tipping culture has gotten out of control?’ Inside our evolving tipping dilemma

An L.A. restaurateur who requested to remain anonymous for fear of customer retribution told The Times that they noticed an increase in $1, 0% or other low tips over the course of the month, possibly due to the 3-4% service fees charged at the restaurant.

“I’m not thrilled with the bill,” said Jenn Engstrom of CALPIRG. “I think it was better when restaurants and bars also had to have really clear upfront pricing, so that consumers could do easy comparison shopping. When I decide to go out to a restaurant with my family, I check the prices first, on the menu, online.”

That SB 1524 requires clear posting is a benefit, she said, but is not as strong a bill as SB 478 with its initial guidance from the attorney general that called for rolling service fees into list prices. Engstrom called SB 478 “a great model bill” and would love to see similar consumer-protection legislation in other states, or federally — without many carve-outs for industries, regardless of how service fees factor into their business plans.

“I think this [SB 1524] is unfortunately kind of a step backwards, but it’s still transparent,” she said. “You can still see it, you just have to do the math.”

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This story originally appeared in Los Angeles Times.

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