On July 1, California restaurants must change the way they bill customers. They’ll be unable to add service charges or other surcharges to the customers’ final bill.
But this move is worrying a lot of restaurant owners, who see the ban on “junk fees” as problematic. If their businesses lose money over this, they may have to start laying off workers.
Senate Bill 478
Senate Bill 478 (SB 478), signed into law by Governor Gavin Newsom in October 2023, aims to crack down on “junk fees”—surcharges most often associated with hotel, car rental and ticket sale companies.
However, the legislation won’t only concern resort fees and service charges from hotels and ticket sellers. It’s also going to change the way restaurants and bars in California operate.
Replacing Voluntary Gratuities
At restaurants and bars, these fees usually complement or replace voluntary gratuities. These fees also address some long-standing inequalities that result from the traditional tipping system.
In some cities, like San Francisco, the fees are even used to offset the cost of a city mandate of setting aside funds for staff health care.
Raising Prices and Reverting to Old System
Since restaurants and bars won’t be able to add these fees to the customers’ bills, many restaurant owners say they must raise prices.
Those who’ve been implementing mandatory service fees in lieu of tips say they may have to return the old tipping system. But the old tipping system certainly has its own problems as it can encourage racism, sexism, harassment and exploitation.
How the Changes Will Take Effect
When the law takes effect, restaurant menus will be required to list comprehensive prices for each item and all mandatory charges will be included. Only optional fees — like the tip for staff — can be left out of the printed fee.
If a business breaks the new law, a consumer is allowed to seek “actual damages of at least $1,000.” The state says it won’t focus initial enforcement efforts on “fees that are paid directly and entirely by a restaurant to its workers, such as an automatic gratuity. However, businesses may be liable in private actions.”
A Bid for Transparency
The lawmakers’ intent is to provide transparency for all consumers, whether they are buying tickets or eating at a bistro. California Attorney General Rob Bonta, who co-sponsored the bill, said, “The law is simple: the price you see is the price you pay. Laws work when everyone can comply. I am pleased that we can offer this guidance to help facilitate compliance with the law and make a more fair and level marketplace for businesses and consumers.”
To help the businesses affected by the law, the AG’s office has issued guidance about the law “to facilitate compliance with the law and make a more fair and level marketplace for businesses and consumers.”
Customers’ Reaction
The reactions, at least from the consumers’ side, have been largely positive. Joseph Chiarucci, a San Francisco resident, told NBC Bay Area that it felt good to see prices advertised as the actual price. But Katie Brown-Davis of Walnut Creek stated her choice of restaurant or hotel wasn’t based on price, but on experience.
Furthermore, consumer advocacy groups like California Public Interest Research Group, a LA-based nonprofit, support the law. “People deserve to know the true price of products upfront so that they can do good comparison shopping and so that there’s just good competition in the marketplace,” its state director, Jenn Engstrom, told NPR.
Clarity Is a Priority
Consumers deserve clarity about their expectations, which can come from laws like SB 478. The director of consumer production for the Consumer Federation of America, Erin Witte, certainly thought so.
Uncertainty over whether their dinner will cost an extra few bucks could have negative effects if it ends up being out of their budget. “You’re thinking about late fees and increased interest and things like that. So it’s not just annoying, it’s harmful for many folks,” Witte said.
Opposition From Restaurant Associations
The objection comes mostly from restaurant owners, through various associations, who expressed their concern for the new law. Matthew Sutton, senior VP of government affairs and public policy for the California Restaurant Association, argued that Bonta’s guidance on the new law shows “a fundamental misunderstanding of the restaurant industry’s standard of transparent, up-front menu pricing.”
“CRA strenuously disagrees with the AG’s expansive interpretation of the law to outlaw restaurant service fees,” he said in a statement. “We are considering all available options to block implementation of SB 478 in the manner suggested by the AG’s office.”
Tipping and Sticker Shock
Other restaurant owners worried about having to encourage tipping instead of charging a mandatory fee. Tipping, they said, would lead to “inequitable” pay for workers.
Another San Francisco restaurant owner, Yuka Ioroi, worried about the sticker shock that might discourage diners. Talking to Eater SF, she elaborated, “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.”
Radical Changes
Those opposed to the law agreed that the sticker shock concern was very real and could discourage customers from dining out. Others also suggested that mandatory service fees, often at 20% or higher, might promote ambiguity and confusion among diners over whether they should give additional tip on top of the fee.
But whatever the argument is, Laurie Thomas, executive director of the Golden Gate Restaurant Association, said the new law is “radically changing long-acting ways of doing business.” Her worry was that “if the operators can’t function, people will lose jobs. We will go back to what is perceived to be a less equitable model, the tip model.”
California Isn’t Alone
Unlike when the state hiked up the minimum wage for fast food restaurant workers, California is not alone in pushing for pricing transparency. A dozen states (Colorado and Pennsylvania included) have taken up similar legislation, although those bills haven’t been approved yet.
“So it really behooves states to be very active on this issue,” said Witte of the growing momentum behind the law. “We’ve seen consumers across political lines.” Price transparency, she said, was “a really bipartisan issue.” But she and other advocates want to underline the need to protect the one party caught up in between all this: the staff. May they never lose their jobs.
