Are "Hidden Fees" Driving People To or From Restaurants?

Over the past few years, it has become commonplace to see various fees incorporated into your restaurant bill. Is this benefitting the employees? Is it a way for businesses to offset labor costs? This article takes a glance at the "junk fees" issue facing operators, employees and patrons in the hospitality industry.

• The Federal Trade Commission's proposed rule seeks to eliminate "junk fees," but restaurants are advocating for their surcharges and service fees to remain permissible.
• In 2023, 15% of restaurant owners introduced surcharges or fees to help offset rising costs, as reported by the National Restaurant Association.
• Restaurant operators argue that these fees help them keep menu prices more affordable, enhance employee wages and benefits, and ultimately serve the best interests of their customers.

Lawmakers are intensifying efforts to eliminate "junk fees," but restaurants, facing an increasingly competitive landscape, are seeking to avoid the battle. Surcharges and fees, such as those for credit card processing, gratuities, and even “inflation,” have become commonplace on restaurant bills in recent years. According to the National Restaurant Association, 15% of restaurant owners added such fees in the past year due to rising costs. Square reports that by the second quarter of this year, 3.7% of restaurant transactions included a service fee, more than doubling since early 2022.

Since the Covid pandemic, it has been common place to see restaurant operators adding fees to guests checks, mostly to offset the high cost of labor. As we move forward, it will be increasingly harder for establishments to pay good employees a livable wage.

Critics argue these fees deceive customers, forcing them to pay more for their meals when many are already financially strained. Consumers have become increasingly vocal, compiling lists of restaurants that add hidden charges and taking their frustrations online.

Amid the Biden administration's efforts to tackle junk fees in various industries, from concert tickets to hotels, restaurants are striving to remain out of the spotlight. Restaurateurs contend that these fees are crucial for survival in a hyper-competitive industry with razor-thin margins, where smaller establishments struggle even more without the backing of large corporate structures. Sean Kennedy of the National Restaurant Association points out that many of these fees are legitimate, ensuring customers know what they're paying for, even if some remain skeptical.

Underneath the Tab

The restaurant industry’s predicament becomes clear when examining service charges, which are often meant to boost employee pay but can lead to wage theft allegations if mishandled. While federal law prevents management from keeping tips, service charges are legally the restaurant's property in most states. These charges have helped some restaurants pay their employees more, like Galit in Chicago, which adds a 20% service charge and a 4% fee for healthcare costs. However, smaller or independent establishments, especially those without corporate support, are finding it harder to balance transparency with financial necessity.

The fact is that most restaurants in the country are operating on a razor thin margin, with most independent restaurateurs barely making it. That same pressure is felt by the employees, who's wages have remained flat over the past 10 years.

For many restaurants, the fees are essential for remaining competitive in a business climate where labor and operational costs are soaring. For instance, Kaliwa, a Southeast Asian restaurant in D.C., uses an 8% surcharge to cover these rising expenses. Other restaurants use service charges to navigate complex state laws, such as those phasing out tipped wages or forbidding the sharing of tips with kitchen staff. This competitive environment has pushed smaller establishments, not linked to larger corporations, to rely on these fees to survive.

Despite pushback, operators argue these fees are necessary to support employee wages and benefits without drastically raising menu prices, which would alienate cost-conscious customers. However, while fees offer some relief, they also expose smaller, non-corporate restaurants to greater scrutiny and potential backlash from both diners and regulators.

Fighting the Good Fight?

In response, the restaurant industry has achieved some victories. In California, restaurants successfully lobbied to be excluded from a broad anti-junk-fee law that went into effect on July 1. Still, as the landscape becomes more competitive, especially for smaller establishments, many operators acknowledge that not all fees are justifiable, particularly those related to long-past events like the COVID-19 pandemic.

The National Restaurant Association emphasizes that eliminating fees could lead to higher prices and less transparency, further straining smaller, independent restaurants that lack the safety net of corporate backing. As costs rise, these businesses will need to balance transparency with financial survival, relying on fees that remain contentious but essential for staying afloat.

A Sobering Outlook

As restaurants navigate an increasingly competitive and uncertain environment, the pressure isn't only on the establishments but on their employees as well. With inflation driving up the cost of living, many workers find that their wages no longer stretch as far, even with the addition of service fees aimed at bolstering their paychecks. This is leading to higher turnover as employees seek better-paying opportunities elsewhere, adding to the strain on restaurants.

As good staff members are driven away, independent and smaller restaurants, already struggling to manage rising costs and maintain transparency with customers, find themselves facing an additional challenge: maintaining quality service and operations with a dwindling pool of talent. In this climate, both employees and operators are feeling the squeeze, leaving restaurants caught in a difficult balancing act as they fight to stay afloat.

The "junk fees" issues is yet another headwind that operators face, and will be a hotly contested topic in the coming months and years, as the workforce is rebalanced with technology and robotics.

The following works were consulted in the writing of this article:

"Data Shows Expected Softening in Restaurant Sales May Be Here." Produce Blue Book, 1 Apr. 2024, www.producebluebook.com/2024/04/01/data-shows-expected-softening-in-restaurant-sales-may-be-here/.

Luna, Nancy. "Restaurants Fight FTC Junk Fee Crackdown over Surcharges." CNBC, 24 Aug. 2024, www.cnbc.com/2024/08/24/restaurants-fight-ftc-junk-fee-crackdown-over-surcharges.html.

National Restaurant Association. "Restaurant Sales Were Flat in Recent Months." National Restaurant Association, www.restaurant.org/research-and-media/research/economists-notebook/analysis-commentary/restaurant-sales-were-flat-in-recent-months/. Accessed 26 Aug. 2024.