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San Francisco Restaurants Blindsided by Possible Ban on Service Fees

Bay Area restaurant owners and workers say a ban on additional service fees would make it “almost impossible” for small businesses to survive

Chef Anya El-Wattar, owner of Russian fine dining restaurant Birch & Rye, was surprised to learn that the California Attorney General’s Office may interpret a new law as a ban on service fees.
| Patricia Chang
Paolo Bicchieri is a reporter at Eater SF writing about Bay Area restaurant and bar trends, coffee and cafes, and pop-ups.

California’s newly signed Senate Bill 478, a law banning hidden fees usually associated with hotel, car rental, and ticket sale companies, might be hard enough for citizens to understand. But it appears to be challenging for state officials to interpret as well. The bill was signed into law last week by Gov. Gavin Newsom. Yet according to the California attorney general’s office, whether the legislation will outlaw restaurant service fees when it takes effect on July 1, 2024, is still up in the air — despite Attorney General Rob Bonta’s sponsorship of the bill. The uncertainty around the legislation’s impact surprised representatives from the Northern California restaurant industry on Wednesday.

Service fees — typically added to a bill as a percentage of the total charges — are regularly used by restaurants to cover various costs outside of ingredients and labor. For example, Reem’s in San Francisco uses a worker resilience charge to replace tips, while Mission Chinese instituted a carbon emission offset fee. Now, however, it appears those financial levers could be taken away from business owners. Service fees have also been utilized to improve workers’ compensation and cover a portion of health care costs, and are broadly seen as a more secure alternative to tipping for guaranteeing workers’ compensation. By and large, such fees have remained the preferred antidote to several issues — while allowing business owners to avoid raising menu prices.

But the fees remain controversial. In recent months, customers have turned to online forums to complain about the widespread practice of service fees, and some San Francisco restaurants have received criticism for lacking transparency in how they distribute the fees’ proceeds among staff.

Dylan MacNiven is on the board of the Golden Gate Restaurant Association, an industry lobbying group, and co-owns Woodhouse Fish Co. and Mission District bar and restaurant West of Pecos. He initially read the bill as a ban on restaurant service fees but found himself alone in waving a red flag to friends in the industry. “Everyone thought if you indicated it on the menu, it’d be okay,” MacNiven says. “But I read it, and it doesn’t read that way.”

MacNiven also owns a music venue, and when he realized he might not be able to continue charging an SF Mandate fee — a charge to offset the cost of providing city-mandated employee health care for businesses with more than 20 employees — he says he called AG Rob Bonta’s office. MacNiven claims the aide who picked up the phone told him that things could continue as normal. However, MacNiven remained skeptical, pointing out that the language of the law appears to ban all charges beyond taxes and shipping fees. “It says the price has to be the price,” MacNiven says. “I don’t see anything in there that says you can even add a percentage fee to a price. If a hamburger is $10 I can’t even say a 2 percent delivery fee.” (Notably, the law does provide an exception for third-party delivery apps, allowing companies like Uber Eats and DoorDash to include service fees.)

If additional fees are eliminated under the law, MacNiven says he’s generally okay with it. At Woodhouse, he charges a small fee to cover San Francisco taxes; he says if he folded that into the menu price, customers would take a moment to calibrate to sticker shock. Removing service fees ultimately puts the costs of things like health care and higher wages back on business owners. “Most restaurants won’t just take the fees off,” MacNiven says. “They’ll raise prices.”

Chef Anya El-Wattar, owner of Russian fine dining restaurant Birch & Rye, was surprised to learn that the AG’s office may interpret the law as a ban on service fees. El-Wattar removed her restaurant’s 20 percent mandatory gratuity a few months ago as many one-star online reviews of the restaurant referenced the charge. That said, she still applies a 4 percent fee to diners’ bills, which is designed to offset the cost of providing health insurance for employees. If service fees are restricted under the new legislation, she says she might have to swallow that cost. She wants Birch & Rye to remain accessible — higher prices might result in too sharp a pushback. “That’s a tough spot for us,” El-Wattar says. “It makes it almost impossible for a restaurant. It’s just one more weight for us to carry.”

She’s not alone in that worry. Azalina Eusope, chef and owner of Azalina’s in the Tenderloin, says because the restaurant just opened and is already more expensive than most of her neighbors can afford, there’s no way she can raise prices. Removing the ability to charge service fees is just another way the government makes it excruciating to draw any profit out of a restaurant, she says. Running a restaurant requires overhead costs that customers don’t understand, she says, and minimum wage is higher than ever.

Restaurant and bar workers would also be impacted by the law change. Tanaya Joshi has been in the service industry for about five years. She’s worked, on and off, at coffee shops including Verve, and recently completed a two-month internship at lauded Berkeley restaurant Chez Panisse. She says she feels service fees provide protection for workers. “People tipped a lot during the pandemic, but now they’re tipping less,” Joshi says. “These fees protect against inflation-induced reduction in tipping.”

Darren Criss owns Malibu’s Burgers, a plant-based restaurant in Oakland. Criss says the change could have a big impact on his restaurant. While his Piedmont Avenue burger joint doesn’t charge fees for on-site dining, he does charge a fee anytime food is delivered. He and other restaurants pitch up fees to cover the additional costs associated with using third-party delivery services such as DoorDash and Uber Eats; under this law, that could become illegal, even though third-party apps will be allowed to charge additional fees thanks to a specific exception in the legislation. “This will definitely eat into our bottom line,” Criss says.

Industry professionals will continue to nervously await answers while California’s attorney general’s office finds its footing. “We already can’t fill all our seats on a daily basis,” Eusope says of her restaurant. “It’s an unknown answer until shit really hits the fan. It’s just so hard.”

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