“Junk Fee” Bans are Gaining Traction Across the Country. Here’s What They Mean for Restaurants.

California restaurants were on the edge of their seats in June as the decision around the state’s “junk fee ban” loomed over them. Senate Bill 478, also known as the “Honest Pricing Law” or “Hidden Fees Statute”, went into effect July 1, 2024 — but not without controversy. When senators first proposed the new law, it wasn’t clear whether it would outlaw restaurant surcharges like service fees and wellness fees. Two months before the bill went into effect, California’s Department of Justice confirmed restaurants would need to fold fees in their menu prices.

Restaurant associations were not happy. At the eleventh hour, lawmakers pushed through a new bill (SB 1524) that allowed service charges as long as restaurants displayed them clearly. Minnesota followed suit with a similar law exempting restaurants from the ban, set to take effect on January 1, 2025.

Junk fee bans are gaining traction across the country, spurred on in part by Ticketmaster’s fiasco with Taylor Swift’s Eras Tour. The White House introduced a bid for a nationwide ban in October 2023. The Federal Trade Commission’s Rule on Unfair or Deceptive Fees would “require businesses to show the full price up front”. If it passes, restaurant surcharges may be nationally banned — including service fees and large party fees.

What is the junk fee ban?

Laws targeting “junk fees” aim to prevent businesses from tacking hidden fees onto the end of a consumer’s bill. The intent is for the advertised price to match the final price (excluding tax, of course). It targets companies that often add surcharges to goods and services like concert tickets, hotels, utility bills, flights, car rentals, and apartment rentals.

Out of the 14 states that have introduced bills to mark these as “deceptive trade practices,” California was the first to pass one into law.

Junk fee laws by state

Last updated July 15, 2024

State	Bill(s)	Bill status	Exceptions for restaurants
California	SB478 and SB1524	Passed: Went into effect on July 1, 2024	Surcharges must be displayed clearly and conspicuously
Minnesota	SF3537 and HF3438	Passed: To take effect January 1, 2025	Automatic and mandatory gratuities must be disclosed clearly and conspicuously
New York	S7783B and A9192	Pending	Automatic and mandatory gratuities must be disclosed clearly and conspicuously
Pennsylvania	HB636	Pending	Only applies to food delivery, ticketing, and lodging platforms
Illinois	SB3331 and HB4629	Pending	Restaurants must provide notice of a consumer fee or charge prior to the purchase of the food or beverages
Ohio	HB537	Pending	Does not specify
North Carolina	HB714	Pending	Only applies to ticketing and lodging platforms
Virginia	SB388 and HB1320	Pending	Mandatory gratuities for tipped restaurant employees are exempt
Arizona	HB2122	Pending	Does not specify
Connecticut	SB15 and SB201	Pending	Does not specify
Rhode Island	S2257 and H7284	Pending	Does not specify
Alaska	SB180	Pending	Does not specify
Hawai’i	SB2020	Deferred	Does not specify
Colorado	HB24-1151	Failed	Restaurants must provide notice of all mandatory or nondiscretionary fees or charges on the menu, signage, or website

Why is the government instituting junk fee bans?

While lawmakers primarily point to hidden fees on concert tickets and hotel stays, they also name restaurant surcharges as offenders. It’s not uncommon to see things like service, large party, and kitchen appreciation fees at the end of restaurant checks. Wellness fees have grown in places like San Francisco in response to health care mandates for employers. Other charges have popped up too, like carbon fees for climate change and food quality fees.

Consumers’ reactions to these costs range from acceptance to outrage. Reddit users have compiled lists of restaurants in various cities that charge extra fees. 81% of respondents to a San Francisco Chronicle poll said they supported the ban on restaurant fees. Some restaurants have even removed their service fees and reverted to tipping in response to the controversy.

Some guests simply prefer tipping because it gives them control over how much they spend. Over half of diners said they prefer to choose their own tip amount, and they tip just under 19% on average. That suggests the typical 20% automatic charge is steep for some. And when customers don’t find out about mandatory fees until the bill comes, they feel deceived.

It isn’t only about avoiding the surprise of an extra cost. Service charges and other fees are not regulated the same way as tips. According to the Fair Labor Standards Act, employers cannot keep employee tips — managers can only take gratuities that they earned from serving their own tables. However, many states like Texas and Florida don’t require employers to pay out service fees to staff. Though many restaurants do in fact use the service fee to pay staff more, offer healthcare, and contribute to retirement, diners often express confusion about where that money goes.

So why do restaurants charge service fees?

The concept of a service fee isn’t new — Berkeley’s Chez Panisse introduced theirs in 1989. But the pandemic was a turning point for many restaurants whose staff were no longer earning tips.

“A lot of our staff were like, ‘Oh, no. We don’t have tips. What do we do?’ And we really wanted to take care of them,” said Kelly Phillips, Founder of Destination Unknown Restaurants. “To make it more sustainable, we shifted to what we call a professional wage. And we call it that because there’s this term living wage and whatever, but we want to treat this as a career.”

Destination Unknown Restaurants comprises three concepts in Washington, D.C. One of those, Destino, has a 20% service charge in lieu of tipping. It creates a consistent pay check for staff that has helped lower turnover and keep their online reviews high.

“Just like any other career, if you show up for work, you get paid…It’s raining, snowing outside, they’re okay, they’re getting paid… We really wanted to create stability for people,” Phillips told us on The Pre-Shift Podcast.

 

 

Diners’ generosity with gratuities can vary based on the weather, the day of the week, or their mood. Even factors like gender, race, or hairstyle can affect how many tips a server will receive. A 2022 report from One Fair Wage found that Black women working in tipped positions made $5.68 less per hour than their white male colleagues.

Tipping can create an unsafe power dynamic between the guest and the worker as well. A study from Social Science Research Solutions reported that tipped workers were significantly more likely to have been sexually harassed in states with a tip credit and subminimum wage. (The tip credit allows employers to pay tipped staff an hourly rate lower than minimum wage as long as they earn back that difference in tips. It’s still active in 43 states, while seven states, like California and Washington, have dissolved it in recent years.)

Recommended Reading: The History of Tipping in Restaurants: The Complicated Past, Present, and Future

It’s worth mentioning that using a service fee to pay higher wages is not a cost-saving or money-making ploy. When servers make the bulk of their income in tips, the restaurant doesn’t need to pay employer taxes on those tips. However, if the restaurant opts to pay their staff a higher wage instead of relying on tips, their payroll taxes could double.

“It costs us more as a business to have a service charge than it does if we did regular tipping,” said Stella Dennig, Co-Owner of Daytrip. “Because there’s additional employer taxes that we need to pay on them, which we don’t need to pay for tipping.”

Daytrip is an Oakland fermentation-driven party restaurant that Bon Appetit heralded as one of the Top 10 Best New Restaurants in 2022. They use a 20% service charge that goes directly to employees, divided by the hours they work. Note the equal split by hours and not position — so a server that works 10 hours will receive the same allocation as a dishwasher that works 10 hours.

“There are other restaurants in the Bay that you can work at where the service charge or the tip split is not equal, and front of house can make a larger percentage than back of house. We deeply believe in not doing things that way because, you know, I would never want someone to earn more off the backs of anyone else in the restaurant,” said Dennig.

That’s a sentiment many restaurateurs echo. Since the law prohibits the kitchen from participating in the tip pool in restaurants that use the tip credit, there’s often a large pay disparity between the front and back of house. Yes, kitchen staff tend to earn a higher hourly wage, but with tips, servers typically bring home much more.

Ron Hsu told us on the Pre-Shift Podcast, “Servers came in and worked four and a half hours, [whereas] my chefs started working yesterday. That doesn’t seem right to me.”

Hsu runs the Michelin-starred Lazy Betty in Atlanta with a prix-fixe tasting menu and a 20% service charge. “People are committing to the food before they even step into the restaurant…so there’s less burden or less responsibility on the server to have to sell.” While there were initially kinks to iron out with guests and staff, Lazy Betty has seen lower turnover and a better team culture.

 

 

Why don’t restaurants include service charges in the price?

It sounds easy enough — fold the service fee in and raise menu prices. An Instagram user on Daytrip’s account commented: Raise your prices and include everything in the price reflected on the menu. It’s not that complex! Be honest and transparent. Why is that so hard?

“I think what diners don’t understand is in asking restaurants to do that, they’re kind of asking restaurants to fail,” Dennig said. “Even when there’s transparency on the menu saying there’s no additional tipping, it’s still going to lead to a higher sticker shock. We’ve seen that happen many times in history.”

Indeed, a slew of restaurants in the 2010s attempted to participate in the no-tipping movement, including Faun and Ops Pizza in Brooklyn. Many of those businesses have since shuttered their doors (Aster and Trou Normand in San Francisco; Homestead and Camino in Oakland; Fedora and Huertas in New York). Faun owner David Stockwell told Eater in 2020 that the sticker shock was too high for guests, even if they understood gratuity was included. Business improved when the restaurant switched to a tipping model 15 months later.

Recommended Reading: Why 4 Restaurants Opt for a Service Charge Instead of Tips

Perhaps the most notable player of the tip-free campaign was Danny Meyer’s Union Square Hospitality Group. They shifted to a “Hospitality-Included” menu and raised prices in 2015, but conflict with staff and with customers caused them to revert back to tipping in 2020. Servers simply left to work at other restaurants where they could bring home more cash with tips.

“[They were] in a position where they could do a national campaign that put a lot of dollars into this ‘Let’s raise menu prices and eliminate tipping hospitality model’. And it still failed. So we’re just not there,” Dennig explained.

That isn’t to say operating with a service-inclusive menu is impossible. In California, Zazie and its sister restaurant, Lovina, are tip-free. Staff earn a percentage of every menu item as a revenue share (25% at Zazie and 30% at Lovina). According to owner Jennifer Bennett, the team makes a living wage and has access to PTO, paid parental leave, a 401(k) with 4% employer match, and a 50% contribution to health and dental plans.

Similarly, Chicago restaurant Thattu factors gratuities into the menu price. They tested a tip screen option when Thattu was just a pop-up, and it didn’t feel right. “We just want to be fully transparent to the customer…that’s how they do it in India,” Chef Margaret Pak told us on The Pre-Shift Podcast.

Thattu pays staff a base rate plus revenue share based on hours worked. When customers do leave the occasional cash tip, they let staff vote on how to use it. Caffeine and food are the most popular choices.

 

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The junk fee debate rages on

The question at hand is whether restaurant surcharges should be considered junk fees. Yes, they are an additional cost to the menu price. So are tips.

Tipping culture is what distinguishes the restaurant industry from ticketing, lodging, airline, and rental agencies. You don’t tip the car rental desk. You do tip your waiter. That may be why Minnesota, New York, and Virginia have carved out exemptions in their bills to allow for automatic and mandatory gratuities. (Surcharges that don’t go to staff, like food quality fees, are not exempt).

Ultimately, restaurants who raise menu prices to account for service charges will look more expensive than those who rely on tipping. 84% of restaurants don’t use surcharges, according to the National Restaurant Association’s 2024 State of the Restaurant Industry report. The fear is that the business decline will force the majority of those restaurants to revert back to tipping and undo the gradual progress that has been made to create equity and stability among team members.

“It’s already a minority of restaurants that use service charges, so an even smaller percentage are gonna raise prices,” said Dennig. “Including restaurants who are similarly super values-aligned against tipping to us and have been fighting for service charges for a long time.” It’s risky for an independent business to go against the grain, especially when profit margins for small restaurants average 3-5% before tax.

The FTC conducted a hearing on their proposed rule in April, and the government could pass it this year. They do mention restaurant surcharges as part of the ban. Since Biden introduced the bill, there’s no telling whether Republicans will approve it if they win the November election. (Interestingly, Trump promised to remove income taxes on tips if he becomes president, doubling down on the U.S. tipping practice. Saru Jayaraman of One Fair Wage thinks the tax break should also extend to service charges.)

There’s no easy solution to the fraught topic of how restaurant owners should compensate their workers. Tipping is so ingrained in American culture — 69% of diners believe gratuities encourage better service. But with soaring inflation in groceries, housing, and gas, consumers are keeping a closer eye on where their money goes.

With tip fatigue hitting a breaking point and the controversy around surcharges, Dennig believes the ideal scenario is national legislation to end tipping and service charges altogether.

“The outcome is that all restaurants are required to raise their prices,” she said. “The reality is that we’ve had a massive gap in what diners understand the cost of food to be, and parentheses, the cost of labor is actually one of the biggest pieces of that…So we’re going to need a whole shift across the entire industry.”