California’s Junk Fee Ban Could ‘Upend’ the Restaurant Industry

As the clock ticks down to July 1, when a new California law banning so-called junk fees is set to go into effect, restaurant and bar owners across the state remain in the dark about how the legislation will impact their industry. Earlier this week, the California Attorney General’s office confirmed to the San Francisco Chronicle that the law would prohibit restaurants from tacking on any charges besides taxes to diners’ bills — but the attorney general’s office also said it would release a list of Frequently Asked Questions on Wednesday, May 1, which did not happen. Now, sources say they’re hopeful exceptions could be made that would allow for some fees to remain in place.

Eater SF contacted the attorney general’s press office by phone and email but was not able to get updated information on when business owners can expect the FAQs to be released.

The ban on surcharges would mark a watershed moment for the state’s restaurant industry, which has in recent years relied on mandatory service charges to supplement optional tips and boost staff wages. Under the attorney general’s interpretation of the new legislation, however, all charges besides taxes will become illegal. The change would effectively require business owners throughout the state to rethink longstanding financial practices in just two months.

Restaurant and bar owners have been anxiously awaiting industry-specific guidance about how the law will be enforced since Gov. Gavin Newsom signed Senate Bill 478 into law in October 2023. However, stakeholders from both the government and the restaurant industry seem to be unable to agree on how the law should apply to restaurants and bars. In mid-October, Eater SF reported that the new law seemed likely to impact restaurants, catching industry leaders — and seemingly the authors of the legislation itself — off guard. A spokesperson from the attorney general’s office confirmed to Eater SF that the law applied to all businesses in the state, including restaurants, but did not answer directly whether or not service fees would be banned.

The legislation, sponsored by Bay Area lawmakers Sen. Nancy Skinner, D-Berkeley, and Sen. Bill Dodd, D-Napa, is intended to protect Californians from junk fees — extraneous charges most often associated with hotel, car rental, and ticket sale companies. It’s an issue that’s also being taken on by the Biden-Harris administration. Specifically, the California law bans “drip pricing,” or “advertising a price that is less than the actual price that a consumer will have to pay for a good or service.” It doesn’t address restaurants explicitly but states all businesses will be prohibited from “advertising, displaying, or offering a price for a good or service that does not include all mandatory fees or charges” other than government taxes and fees and shipping. In October, spokespersons for both Skinner and Dodd told Eater SF the law was not intended to change restaurant’s ability to charge diners a service fee — in fact, as of last fall, a spokesperson for Skinner told Eater SF the law would allow restaurants to continue charging service fees so long as the fee was disclosed on the menu clearly.

The possibility of being unable to charge service fees has caused dismay and stress among many California restaurant owners. Ryan Cole, one of three owners behind San Francisco’s Hi Neighbor Hospitality Group, operates six restaurants in the Bay Area. Three of those restaurants — Mama in Oakland, and Trestle and Michelin Guide-listed 7 Adams in San Francisco – offer prix fixe menus and charge customers a mandatory 20 percent service fee. At these restaurants, customers aren’t given the option to leave a tip, as Cole says the ownership group uses the service fee to not only replace gratuities and pay staff a higher hourly wage but also to help cover the cost of benefits such as two weeks of paid vacation and paid sick time. Should the restaurant have to get rid of its service fee and replace it with optional tips, Cole says it likely wouldn’t be possible to continue paying staff the hourly rates they earn now. “All of that goes away,” Cole says, “because you can’t pay that high of an hourly rate unless you charge a service charge. You’re basically reverting back … now you’re hustling for tips.”

Cole says the group will wait to determine a path forward until they’re certain how the law will be enforced — but the diminishing number of days left before it goes into effect finds the company in a tense holding pattern. The restaurant group would likely have to raise prices should a service fee ban go into effect. But Cole worries that if the restaurant group boosted menu prices to fold in the cost of the 20 percent charge, the increased price of simply walking in the door would deter some customers from dining out. “You’re still going to pay the same amount of money,” Cole says. “But people are going to think, ‘Maybe I need to go eat fast food today because I need to save money.’”

Yuka Ioroi co-owns Cassava restaurant in North Beach. The restaurant is known for its deep commitment to achieving pay equity among the front and back of the house and for offering full medical benefits as well as a 401k — all radically progressive achievements the restaurant affords in part by charging customers a mandatory 20 percent service fee. Similarly to Cole, Ioroi says under a service fee ban she’d have to consider either raising prices to include the fee or returning to a tip-based pay model for staff, in conjunction with a smaller increase in menu prices. Ioroi says she’d take both options to her team for input, but in either case, diners’ potential reactions to higher prices are cause for concern. “We are worried about the sticker shock, essentially, to see if that discourages diners,” she says. “Our industry is having a hard time still and this is another thing that adds to uncertainty. I feel that it’s initially probably going to affect the industry negatively. We’re very worried.”

On Wednesday morning, Laurie Thomas, executive director of San Francisco’s restaurant industry lobby the Golden Gate Restaurant Association, encouraged business owners not to make any changes just yet. That’s in part because she says the group is still hopeful legislators could work with the California Restaurant Association on a deal to allow restaurants to continue using service fees in some capacity despite the new law. But there’s only a narrow path forward for any changes to be made before July; they’d have to be executed as a part of the state budget, which must be passed by the legislature before June 15 to be signed by the governor no later than the start of the fiscal year, which falls on July 1. But since the legislators behind SB 478 didn’t intend for it to affect restaurant service fees, Thomas hopes legislators and the attorney general’s office will find a way to narrow its scope or create a carve-out for the industry. It wouldn’t be the only exception; SB 478 already includes language to let third-party delivery apps like Uber Eats and Doordash charge fees beyond the listed menu price.

“I think this was well-intended policy, nobody wants to mislead the consumer,” Thomas says. “But they didn’t intend this to upend the restaurant industry.”

Thomas says the group will provide operational advice for San Francisco restaurant owners once it’s certain how the law will be implemented. If there’s no deal to create a carve-out for restaurants, she expects most restaurants in San Francisco, where it’s common practice to impose a 5 to 7 percent surcharge to cover employee healthcare, will increase menu prices on July 1. Considering the overall health of the restaurant industry, Thomas says she’s worried that even such a relatively small boost in menu prices could be catastrophic for some businesses. “It could put people out of business immediately,” Thomas says. “That’s the concern.”

This is a developing story; Eater SF will update it as new information becomes available.