California’s New Service Fee Ban Goes into Effect Today: How It Will Affect Your Bill at Bars and Restaurants

A new California law set to go into effect Monday targets service fees, those sneaky surcharges that can unexpectedly appear at the bottom of your bill for everything from a latte at a coffee shop to concert tickets.

Senate Bill 478, signed by Gov. Gavin Newsom in October, would ban mandatory fees that appear at the end of a transaction and require businesses to list the total price of the item up front, excluding taxes and optional fees like a tip. Essentially, what customers see is what they pay.

The law seeks to ban “drip pricing,” which is advertising at a lower price than someone would actually pay for a good or service, such as a ticket to a live event or a vacation rental, after a series of mandatory fees are added. California will be the first state to ban service fees, but others could soon follow. President Joe Biden has also signaled support for a proposed national ban on junk sales fees by the Federal Trade Commission, aimed at increasing price transparency for consumers.

But protests from the restaurant industry prompted Sen. Bill Dodd, the bill’s author, to write an exemption for bars and restaurants. Since the pandemic, service fees ranging from 3% to 15% or more have become commonplace, often used to help restaurants provide a living wage or health care for their employees, these businesses say.

Senate Bill 1524, which is essentially an amendment to SB 478, allows restaurant businesses to charge a service fee as long as it is posted “clearly and conspicuously” alongside an explanation of where the money is going. The bill cleared the state Senate on Thursday and was signed into law by Newsom on Saturday.

Under the new law, restaurants will still be able to charge a separate service fee. But they will have to state it “prominently” and “up front” so that the customer is aware of it before the purchase. Restaurants will still be able to add mandatory fees to bills — without having to disclose the specific amount in advertised prices — as long as they indicate that they will be adding the additional fee, on any advertising, menu or other display that contains pricing information.

“This can’t be a surprise that only shows up when the bill arrives,” Dodd said in a statement in June. The law doesn’t specify how the fees should be presented, but it says it will give food businesses until July 1, 2025, to comply with the bill’s requirements.

Many restaurant owners are confused about the difference between service charges and tips.

Restaurants sometimes use the term “service charge” to refer to a tip. While this may be beneficial to the server, it is not meant to diminish or replace the tip.

The “service” that these fees fund varies; local business owners typically charge them to offset labor costs and add benefits to employees. The fees — typically 3 to 5 percent of the pretax total — supplement employees’ salaries or provide health insurance, they say, while preserving the food business’s often already razor-thin margins. A gratuity is an optional, but often expected, additional payment given to a server at the end of a transaction as a thank-you for their service. Tips can either be kept entirely by the server or collected — “pooled” — and distributed to other staff members, depending on the establishment.

An exemption for food businesses will allow bars and restaurants to use service charges as long as they are clearly stated “in advance.” Credit: Kevin Painchaud / Belvedere Santa Cruz

SB 1524 may not be enough to satisfy those who resent the extra fees or are unsure where the money is actually going. Some people are staunchly opposed to service fees and have taken to online communities like Reddit to share which restaurants charge them. In some cases, customers refuse to tip once they’re charged a service fee, either out of resentment or because they mistakenly believe that a service fee and a tip are the same thing.

Chef Matt McNamara doesn’t charge a service fee at his restaurant Pretty Good Advice, which has locations in Soquel and downtown Santa Cruz. He believes that the price of the item on the menu should be the price the customer pays, and that the policy benefits both restaurants and consumers.

“I see restaurants playing the fee game, where a burger is $14 when it’s really a $17 burger. They just don’t want to charge $17 and they hit you with a fee at the end of the bill,” McNamara said. “I feel like the majority of restaurants that charge fees are not an honest way to do business.”

Posting lower menu prices while charging a service fee gives these restaurants an unfair advantage over those that prefer to post everything up front, he said, but doing so makes them look more expensive in comparison. “Charge what you have to charge to support your staff and level the playing field,” McNamara said.

Ted Burke, who has owned Capitola’s famed Shadowbrook restaurant since 1978, says there’s nothing dishonest about his restaurant’s service charge. He proudly displays a 4 percent markup on Shadowbrook’s menu — in the same font size as the dishes, he says — and says the fee funds the company’s generous employee benefits and offsets the costs of damage and a monthlong closure from last winter’s storms.

Burke introduced the surcharge five years ago, when Shadowbrook began covering 100 percent of health, dental and life insurance costs for its full-time employees and their families, and the majority of costs for its part-time employees. Shadowbrook employs about 170 people, including about 70 full-time employees, Burke said.

“If we just raise our menu prices, the things that we think are great for our employees are going to go unnoticed,” Burke said. “I think customers feel better knowing that this isn’t going to line someone’s pocket, that it’s actually going to benefit the workers. I think it makes a difference for the people who dine here, and we’re proud to do it for our employees.”

Since Shadowbrook already lists the tax on its menu and includes an explanation of its purpose, Burke is already in compliance with the new law. But he says he’s frustrated by what he sees as rushed legislation designed to limit near-monopolies like Ticketmaster, also putting the restaurant industry in its crosshairs.

“I believe that any business, as long as it’s transparent, should be able to charge whatever it wants, and the government doesn’t need to be involved,” Burke said.

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