Restaurants fight back against the FTC crackdown on ‘junk fees’ as diners balk at new charges

Restaurants fight back against the FTC crackdown on ‘junk fees’ as diners balk at new charges

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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 gratuities to “inflation” have become more popular on restaurant checks in recent years.

Last year, 15% of restaurant owners added surcharges or fees to checks because of 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 beginning of 2022, according to a recent report from the company.

Opponents of the practice say those fees and surcharges may surprise customers, hoodwinking them into paying more for their meals at a time when their wallets are already feeling thin. Fed-up diners compiled spreadsheets via Reddit of restaurants in Los Angeles, Chicago and D.C. charging hidden fees. Even the Onion took a swing at the practice, publishing a satirical story in May with the headline “Restaurant Check Includes 3% Surcharge To Provide Owner’s Sugar Baby With Birkin.”

The Biden administration has broadly targeted so-called junk fees, like an undisclosed service charge for concert tickets or unexpected resort fees when checking out of a hotel. This fall, the Federal Trade Commission is expected to publish a rule banning businesses from “charging hidden and misleading fees.”

U.S. President Joe Biden delivers remarks about retirement security in the State Dining Room at the White House on October 31, 2023 in Washington, DC. The Biden Administration is attempting to crack down on so-called “junk fees” in retirement accounts with a rule prosed by the U.S. Labor Department.

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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 to compensate their employees fairly in a competitive industry with razor-thin profit margins.

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

Fighting fees

Some customers might disagree with Kennedy.

While federal law makes it illegal for management to keep their workers’ tips, mandatory service charges are the property of the restaurant. Some states, like New York, have their own laws that say service charges belong to staff.

A Denver-based restaurant worker said in a public comment responding to the FTC’s proposed rule that his employer describes the fee to customers as “equitably distributed to the staff.” But he was told when he was hired that the business keeps 30% of the proceeds.

Service fees increase the risk of wage theft, because employers might claim that the money goes to workers but fail to distribute it, the National Women’s Law Center wrote in its public comment. Moreover, customers who pay a service charge are less likely to tip on top of the check, hurting workers’ income, the non-profit organization said.

The restaurant perspective

For their part, restaurant operators argue that service fees and other surcharges help them pay their employees more and provide better benefits.

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

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

“We can dictate where it all goes, so some of our service charge of 20% goes to the back of house,” Clavero said.

Moreover, higher menu prices could scare away customers, plus diners would have to pay higher sales tax. Galit would also have higher payroll taxes. And the service charge aims to address issues with tipping. The practice has grown more controversial in recent years, thanks to studies that connect it to sexual harassment and racial discrimination.

If the fees were instead baked into the restaurant’s prices, customers might choose cheaper options that don’t provide the same benefits for its employees, Clavero said.

In some cases, fees help restaurants navigate tricky legislation. 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 remain transparent with our guests, ensuring they understand the reasons behind these fees,” Kaliwa director Peter Demetri said.

For Ming-Tai Huh, the head of Square’s restaurant business and a partner of Cambridge Street Hospitality Group, service fees have helped some of his Boston restaurants pay cooks and dishwashers more.

Massachusetts law forbids sharing servers’ tips with kitchen workers. Thanks to the higher pay from the surcharges, more of the restaurant company’s workers have opted into its health-care program.

Huh said that the service charge was easier to implement at the company’s fine-dining restaurants. But CSHG ended up taking it away from a fast-casual eatery because of customer pushback. Instead, the company just raised menu prices.

Lobbyists vs. legislators

Exceptions to the rule

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