Food Cost

Restaurants Question Service Fees as Legal Battles Erupt

While restaurant surcharges have been around for more than a decade, it wasn’t until 2015 that diners really started seeing an increase in the number of establishments that charged a 3 to 10 percent “service fee.”

Operators turned to this strategy to offset rising labor costs and the increasing demand for health care and other employee benefits. Others implemented a service fee, often in the 20 percent range, that also covered the tip so that it could be distributed to all employees, including those in the back-of-the-house.

Now, some restaurants are experiencing a backlash.

One restaurant group, Tom Douglas’ Seattle Kitchen Inc., implemented a 20 percent service fee and eliminated tips after Seattle increased its minimum wage to $15 in 2015. Then, in December of 2018, an employee filed a class action complaint claiming that the restaurant group failed to disclose what percentage of the automatic service fee was going to the employee(s) serving the customer, and that they also failed to provide adequate rest and meal breaks.

On November 4, 2019, a King County court approved a class action settlement against Tom Douglas and his restaurant group for $2.4 million.

In 2016, Celebrity Chef Josh Henderson’s company, Huxley Wallace Collective, instituted a 20 percent service charge at their restaurants in order to help provide employees with a living wage and health care benefits as well as provide BOH employees with a share of the fee. Once again, employees sued the company, alleging that they were obscuring how the service fee would be distributed to employees, not disclosing it on menus or receipts, and not receiving the rest breaks that they were required to under law. In 2018, the group agreed to a $1 million settlement.

Both of these restaurant groups maintain that they did not do anything wrong.

Restaurants around the country are now questioning service fees as well as their standard employee regulations.

It’s not just employees that are scrutinizing the practice. A restaurant in Mission Bay, San Diego, faces a $34,500 fine after the city attorney’s office sent a warning letter regarding their nondisclosed surcharge. According to the attorney, failure to disclose the surcharge violates California’s False Advertising and Unfair Competition Law.

The restaurant did, however, disclose the fee in fine print, at the bottom of some of its menus.

NBC San Diego quoted Deputy City Attorney Mark Ankcorn, “If they are going to charge a surcharge, make that clear and conspicuous, as big a print as the price itself.”

Understanding Your Employee and Service Fee State Laws

For those operators who are looking to confirm that they are following the legal guidelines as dictated by federal and state laws, here are a few links that can help you navigate through this sometimes confusing terrain, particularly if your restaurants are in multiple states.

State & Federal Meal & Rest Break Laws

Swipeclock, a company that offers solutions for scheduling, tracking time and attendance, and HR solutions including payroll, broke down the state and federal laws regarding meals and rest breaks by state. You can see their detailed list here.

State and Federal Laws Regarding Service Fees

In most states, the restaurant has the right to keep a mandatory service charge, whether or not it includes the tip. Some states are requiring that the customer be notified in writing that the restaurant has the right to keep the money. Others, such as Washington, mandate that “employers who impose a service charge…must disclose, in an itemized receipt and in any menu provided to the customer, the percent of the service charge that is payable directly to the employee or employees serving the customer.”

For laws regarding service fees, it is best to look them up by state. Examples include California which, because a service charge is mandatory, the state does not consider it a tip and, therefore, it is up to the employer to distribute the funds as they see fit. Several municipalities, however, have adopted city ordinances and regulations regarding distribution as well as disclosure of service charges. These include the cities of Santa Monica and Oakland.

The Oregon Restaurant & Lodging Association has created guidelines for those implementing service charges in an effort to minimize the risk of litigation. These include:

  1. Provide written disclosure of the service charge before the customer orders. This disclosure should be provided in menus as well as other areas such as entry ways, checkout areas, websites, and other marketing material that contains prices.
  2. The disclosure should include the percentage of the service charge, what it is for, and what percentage employees will receive. It should be clear and concise.
  3. They also recommend consulting with an attorney.



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