California restaurants to further hike prices over junk-fee ban

California restaurants are poised to further hike prices after a junk-fee ban in the state mandated that restaurants and bars fold mandatory fees into listed menu prices.

On Wednesday, the California Attorney General’s office laid out how the junk-fee ban, dubbed SB 478, will affect restaurant service fees when it goes into effect on July 1.

According to an FAQ document on the legislation, now-banned fees include service fees — which some establishments use on top of tips to cover costs like healthcare for their workers — as well as automatic gratuities, which has become an industry standard for larger parties to protect staff from stingy tippers, Eater San Francisco earlier reported.

Restaurant owners have already warned that the bill’s passing will send its prices higher, further discouraging patrons from dining out.

“It could put people out of business immediately,” said Laurie Thomas, the president of the Golden Gate Restaurant Association, San Francisco’s restaurant lobby, according to Eater SF.

“That’s the concern,” Thomas added.

The latest ban on junk fees comes as President Joe Biden has spearheaded an effort to crack down on the costly ad-ons, which the White House has referred to as “corporate rip-offs.”

Already, California’s restaurant industry is struggling with offsetting rises in labor costs.

The state rang in the new year by lifting hourly wages 50 cents, to $16.

Then in April, California implemented a further wage bump for fast-food workers, bringing their hourly rate to $20.

The sum, which is 25% above the state’s general minimum pay, applies to limited-service restaurant chains — or eateries with at least 60 outposts nationwide where diners pay before eating and there is either no or limited table service.

As a result, franchisees across the Golden State have lifted menu prices at staggering rates, including Jack in the Box owner, Shane Paul, who owns seven outposts of the fast-food chain in San Diego.

He said last month that he’s lifted prices at his restaurants by as much as 11% in the previous six to 12 months in anticipation of the higher wages, versus a 4% rise in the year prior.

Franchisees had been worried that price disparity between fast-food and casual-dining restaurants could shrink, meaning consumers would opt for fast-casual options like Chili’s and Applebee’s over places like McDonald’s and Wendy’s for a sit-down dining experience for only a couple of dollars more.

However, with SB 478, that may no longer be the case.

The AG’s office noted that restaurant and bar owners will get one minor reprieve to the law: When it first goes into effect, the state will focus more on enforcing bans surrounding service fee add-ons than additional costs related to automatic gratuities, according to Eater.

“There are many factors that we consider when making enforcement decisions,” the FAQ reads.

“However, businesses may be liable in private actions” as of July 1, the AG’s office warns, referring to potential lawsuits from diners regarding automatic tips added onto diners’ bills.

Last year, the restaurant industry had fought against SB 478 being implemented, insisting that it deserved a carve-out and should only apply to airline, hotel, car rental and ticket sale companies, Eater reported.

Restaurants and bars believed that service fees would not be impacted so long as they were clearly disclosed to customers, which has not turned out to be the case, per Eater.

The Golden Gate Restaurant Association has also said that the law “will create significant challenges for the restaurant industry moving forward” — specifically that diners will not pay less but will instead see significant menu price increases. 

“Ending the ability for restaurants to use service charges (even if clearly and legibly listed on their menu) will have a very negative impact on the survival of this still struggling industry,” the group’s statement said, per Eater. “Not only will restaurants struggle, but workers will lose hours and jobs.”