Two California cases probe who is pocketing those extra fees tacked onto your restaurant tab

By Mark Kreidler, Capital & Main

This story is produced by the award-winning journalism nonprofit Capital & Main and co-published here with permission.

Two recent California food service cases vividly illustrate some of the challenges facing those who make that industry hum: the workers.

In the first, a judge found that a San Francisco hotel for years illegally kept service-charge money from banquets — roughly $9 million in all — that should have gone to workers. The presiding judge ruled that “a reasonable customer” would have assumed the service charge was a gratuity for the food and drink servers.

In the other case, which is still unfolding in Los Angeles, the city attorney is investigating allegations that the operator of five upscale restaurants pocketed a 5% service fee that was added onto every diner’s bill. That would be a direct violation of a city ordinance requiring all of the money to go to the restaurants’ workers.

The cases aren’t identical, and the L.A. investigation centers on laws that are distinct to the city. But each in its way speaks to a contemporary problem facing food and drink servers and preparers across the state: Their customers often no longer understand who they’re paying.

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Recently, at a midtown Sacramento establishment, a server was asked what the “equity share” charge on the restaurant’s bill meant. “It usually means I get less of a tip,” the server, who asked that their name and place of employment not be used, replied with a laugh.

That is the state of food service — not just in California, but around the country. A years-old slow-roll change in how restaurants pay their workers, with many adding or substituting mandatory fees beyond tips, went into hyperdrive during and after the pandemic as owners tried to stay in business. The fallout is still being felt.

At many establishments, service fees have become the norm. But whether those fees are meant to replace tips is often a question left either unanswered or only partially explained. Some restaurants make clear that a mandatory fee, anywhere from 2.5% to 20%, has been added to offset the cost of providing health care to employees or to ensure adequate wages for all their workers. Others levy a “service charge” without an explanation attached, and leave in place a line for including a gratuity.

It’s often left to the customer to muddle through what to do. Increasingly, workers say, the resulting confusion leads to lower tips in a business that, despite the shift toward add-on fees, still drives significant money to employees through gratuities.

“If they add a fee to the bill, you see it one time,” the Sacramento server said. “That’s better for the restaurant than making everything on the menu more expensive. But when people see that extra charge, they’re usually going to deduct it from whatever tip they were going to leave, because to them it’s all a gratuity.”

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That makes it all the more important to know where the money is going. At Teleferic, a collection of Spanish restaurants that includes locations in Los Angeles and the Bay Area, a 20% service charge is automatically added to every check “in order to provide fair wages to all our employees, including those working in the back of the house or front desk,” the company says. Tipping on top of that charge “is not expected or encouraged,” language which appears on every check and every menu.

Other restaurants opt for a lesser service charge — sometimes called an equity share or, over the past couple of years, a COVID recovery fee — and still leave room for gratuity. Only recently has California law become clearer as to how specific the language involved needs to be.

A state appeals court ruling in 2019 found that a 21% service charge added to checks at a San Francisco banquet room was “plainly perceived by the customer to be a gratuity,” and therefore fit the legal definition of a tip. That ruling came into play last month, when a San Francisco Superior Court judge found that the city’s Marriott Marquis Hotel had held onto $9 million worth of service charges between 2012 and 2017, money that banquet customers reasonably assumed were tips for workers.

During that time, evidence at the trial showed, the hotel hosted about 1,000 banquets a year and levied a 23%-24% “service charge” on every bill. (It wasn’t until April of 2017 that the hotel began describing the fee as a “house charge” and specifying that it wasn’t really a tip.) The judge ordered Marriott to pay the $9 million to hundreds of workers who had served food and drinks at those banquets.

The Los Angeles case flows out of the city’s hotel worker wage ordinance, as the five restaurants being investigated either were located in or leased space connected to hotels, in this case both the Thompson and the Tommie hotels in Hollywood. The case began when several workers reported that they never saw evidence the 5% charge was being added to their paychecks, and it involves celebrated destinations that include Mother Wolf and Bar Lis.

In addition, the Los Angeles Times reported, three of the affected restaurant workers filed an unfair labor practice charge, alleging that they were either fired or forced to quit after they began asking questions about where the money was going. (Disclosure: The L.A. investigation was prompted by complaints raised by the service union UNITE HERE Local 11, which is a financial supporter of Capital & Main.)

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To many restaurateurs, adding service fees is a critical means of offsetting rising costs in a tough industry, especially coming out of the financial nightmare that hit the business during the pandemic. It’s also not an entirely new practice; not only have restaurants and banquet facilities routinely added mandatory fees to large parties through the years, but many other businesses include surcharges to account for things like credit card processing costs or general overhead.

Still, the food service model is in flux, and workers are the ones caught in the middle. At a time when employee turnover in the business remains in the 45% range, customer confusion over gratuities isn’t helping.

The Los Angeles hotel wage ordinance was a step in the right direction; it makes clear that all service charges must be fully paid to workers. Further, under state law, owners can’t use employee tips as a credit toward their obligation to pay the California minimum wage — something only a handful of states forbid.

But as both the San Francisco Marriott case and the appellate court ruling that preceded it show, the amount of money that flows to food service workers may ultimately depend on whether patrons “reasonably” think they’re tipping workers when they pay service fees. Without a sharper definition, the scramble for a livable wage is going to get steeper.

Copyright 2023 Capital & Main