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California says restaurants must bake all of their add-on fees into menu prices

If a California restaurant violates a new law requiring transparent pricing, it allows a consumer to seek "actual damages of at least $1,000."
Photobuff / Getty Images
If a California restaurant violates a new law requiring transparent pricing, it allows a consumer to seek "actual damages of at least $1,000."

Service charges; resort fees; "surcharge" add-ons: If you've been startled by unexpected fees when you pay your check at a restaurant — or book a hotel room or buy a ticket to a game, you're far from alone. But if you live in California, change is coming. A new state law requiring price transparency is set to take effect in July.

"The law is simple: the price you see is the price you pay," Attorney General Rob Bonta said on Wednesday, as his office issued long-awaited guidance about a law that applies to thousands of businesses in a wide range of sectors.

When it takes effect on July 1, the law promises to upend how many restaurants operate. Their menus will be required to list comprehensive prices for each item, with all mandatory charges baked into one figure. Only fees that are entirely optional — like leaving a tip for staff — can be left out of the posted price.

If a business violates the mandate, the law allows a consumer to seek "actual damages of at least $1,000." In its new guidelines, 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."

Many business owners — and restaurant owners in particular — have been dreading the change, which is poised to ban separate surcharges that restaurateurs have increasingly relied on to pay higher wages to staff, and to absorb discrete costs such as San Francisco's mandatory health care payments for workers.

Consumer advocates applaud the change

Consumer advocacy groups have celebrated the law, SB 478, calling it a simple matter of common sense that will bring much-needed clarity and transparency to retail transactions.

"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," Jenn Engstrom, state director for the California Public Interest Research Group, a Los Angeles-based nonprofit, told NPR.

"I think this guidance is great for consumers," Engstrom said, adding that in her view, the attorney general's interpretation tracks with legislators' intention.

Laws like the one in California would give consumers something they need: clarity about their expectations, said Erin Witte, the director of consumer protection for the Consumer Federation of America.

"It feels all over the place" right now, she said. And for a lot of people, she adds, uncertainty over whether their dinner will cost an extra $20 could have cascading effects if it's more than they budgeted.

"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.

Restaurant owners warn of higher prices and fallout

Restaurant owners like Laurie Thomas, who heads the Golden Gate Restaurant Association, say the changes will bring higher prices and sticker shock, which could then raise a psychological hurdle in customers' dining habits. That, in turn, will hurt restaurants and their workers, she warns.

"If it's in the core price of the menu, there will be a pullback" in patrons' spending, she told NPR shortly before the attorney general released the guidelines. "There are some people, I think, that are hoping that the restaurants will just absorb that cost, because we've seen people say, 'Oh, it's too expensive with the service charge.' "

Under the new guidelines, Thomas' organization said in an email to NPR, restaurants will be forced to impose "significant menu price increases." And if customers eat out less, it warns, "Not only will restaurants struggle, but workers will lose hours and jobs."

Thomas says she has always advocated for restaurants to be clear about any additional fees they charge.

"We as a restaurant organization have never been a proponent of not fully disclosing any additional fees," she said, citing longstanding practices like charging a mandatory gratuity for large parties.

"It should always be listed," she said. "You should never mislead a customer."

At her two restaurants, Thomas said, longtime staff prefer a traditional tipping method. She plans to use the time before July 1 to consult with her employees about how to adjust to the new rules.

The California Restaurant Association "strenuously disagrees with the AG's expansive interpretation" of the law, said Matthew Sutton, the group's senior vice president of government affairs.

Sutton accuses the attorney general's office of a "bait-and-switch," saying its interpretation "is clearly inconsistent with the Legislature's intent." Courts have allowed service fees as long as they're properly disclosed, he said, adding that the industry group is "considering all available options to block implementation" of the law in the way the guidelines describe.

Momentum is building for transparent pricing

It's hard to predict all of the potential effects of California's new law, partly due to the disparate industries it affects and also because it would be the first such ban enacted in the U.S. The federal government has proposed a similar rule, and a number of other states are also weighing legislation.

A dozen states, including Colorado and Pennsylvania, have taken up legislation similar to California's this year, although as of now, none of those bill have gotten final approval, according to the American Economic Liberties Project, a progressive nonprofit that campaigns against junk fees.

At the federal level, the Federal Trade Commission is reviewing thousands of comments it received after publishing a proposed rule about "unfair or deceptive fees" that mislead customers about the total costs of goods and services last November. But federal rules are subject to change whenever the White House changes hands.

"So it really behooves states to be very active on this issue," said Witte, noting the growing momentum behind junk fee legislation.

"We've seen consumers across political lines," she said. "This is a really bipartisan issue," to push for transparent pricing.

But another important consideration, Witte and other advocates say, is to ensure changes don't harm employees.

Why do restaurant patrons react so strongly to fees?

The restaurant-patron relationship is personal by nature: you are, after all, putting their product in your body. For millions of Americans, the COVID-19 pandemic interrupted that dynamic. And when they returned to restaurants, things were different. It was common to see eateries struggle to attract and retain enough staff; to sweeten the deal, many added surcharges that helped them raise workers' pay.

"Nationally, the restaurant industry has been one of the largest employers in the U.S., but the absolute lowest paying employer for generations," Saru Jayaraman, the president of One Fair Wage and the director of the Food Labor Research Center at the University of California, Berkeley. "Really in part due to this sub-minimum wage for tipped workers that is a direct legacy of slavery."

But for many patrons, those changes were a surprise.

"It feels a bit sudden," Witte said, citing the lingering effects of the pandemic and high inflation.

"You know, folks understand that inflation affects everyone, right? But feeling like you had fees added on to already increasing prices across the economy sort of felt like a double punch for consumers," said Witte.

Another factor, she said, is that restaurants didn't always make clear to diners what kind of fees it would tack onto their final bill — or what the money was for.

"Someone feels like, well, I'm already paying a tip in the form of a 20% service fee, why would I also have to pay a tip to the server if they're already getting it? That disconnect and that lack of transparency makes consumers feel angry. It makes them feel deceived, and it can harm people who rely on that income."

If a restaurant adds service charges to your bill, "you have the right to inquire what they're being used for if it's not spelled out," Jayaraman said.

And if a restaurant offers the option of tipping, you should use it, Jayaraman said.

"We definitely encourage you to tip," she said, adding that cash is best.

"The reason for tipping in cash is that a lot of businesses deduct credit card processing fees from tipped workers tips, which is very difficult for the tipped worker and not what the consumer expects to happen."

How pervasive are hidden fees?

The California law applies to both online and in-person transactions, covering "the sale or lease of most goods and services that are for a consumer's personal use," the attorney general's office said, from short-term rentals and event tickets to hotels, restaurants, and food delivery services.

"I think it's more common in in online purchases," Engstrom said, adding that she has seen ticket sellers for events tack on fees that add 20% to 30% more to the advertised price.

Part of the law's goal is to ensure a level playing field, whether companies are trying to attract a concert-goer or a diner. It also targets hotels that might add a "resort fee" to a customer's check-out price, for the use of fairly standard amenities.

"We know that this is an enormously lucrative opportunity for businesses and not just because of the fee itself," Witte said, "but because of the way that it allows them to take business from other honest businesses who transparently disclose a higher price up front."

"One place that we've seen a lot of junk and hidden fees is with car dealers, and that is certainly not limited to larger franchised car dealerships, Witte said, describing strategies such as dealers advertising a car at an enticing price — only to tack on expensive fees during an hours-long process.

Car dealers are the subject of their own pending rule from the FTC, which says the change could save U.S. consumers more than $3.4 billion — and an estimated 72 million hours worth of time spent shopping for vehicles. The rule was due to take effect in July, but it's now in limbo after a legal challenge from the auto dealer industry.

Copyright 2024 NPR

Bill Chappell is a writer and editor on the News Desk in the heart of NPR's newsroom in Washington, D.C.