California’s Updated Surcharge Pricing Transparency

A new law introduced in California will shift requirements for menu pricing in restaurants. Senate Bill 478 was introduced to promote “price transparency” and help consumers avoid hidden fees. The law, taking effect on July 1st, 2024, would require businesses to advertise all mandatory fees on their menu or website, the only exceptions being taxes or fees imposed by a government on the transaction or fees on delivery items placed directly from the restaurant. The primary goal of this bill is to provide consumers with clarity over surcharge pricing. Many establishments in California have implemented a 3% fee on all charges to account for increasing the minimum wage and higher costs. SB 478 would require this to be clearly outlined on a restaurant’s menu or posted in the business. The law is pushing restaurants to decide whether they want to advertise their mandatory fees or increase menu prices to supplement rising costs. In many cases, it can be useful to disclose raising prices to customers with the reason being higher labor costs or adding a healthcare plan for employees. The Department of Justice has created a Frequently Asked Questions page regarding the law.

One grey area of the law is automatic gratuity for restaurants. The Department of Justice’s FAQs questions disclose that via SB 478, “mandatory gratuity payments that are not voluntary must be included in the list price.” Although this is outlined in the law, the DOJ claimed they would not enforce SB 478 on mandatory tips at first. Although this focus may shift, mandatory gratuities often do not impose the same transparency issues that other service charges do. Mandatory gratuities are important to many restaurant owners because they provide wage protection for servers who work with large parties and events. This often includes a mandatory gratuity section with an optional section on top of that if the party wishes to add more to the charge. Failure to comply with these terms can result in significant legal action against businesses, including a minimum of $1,000 in class actions. Additionally, restitution, punitive damages, injunctive relief, and attorneys’ fees can all incur charges for the restaurant.

The law was introduced to protect consumers and many advocates are celebrating its passing. Some claim the law will allow customers to know the true price of a product up front so they can engage in comparison shopping, leading to strong competition in the marketplace. Despite positive consensus from consumers, many restaurateurs in California are worried that this will lead to an increase in prices overall and push customers away. Following the pandemic, people are spending less money at restaurants, and some owners claim this law will further add to the financial disparity between eating out and saving. Restaurant owners were forced to add surcharges after the pandemic to compete with rapidly changing labor and rent costs.

Additionally, other operators claim that the law is inconsistent in its implementation, leading to general confusion from owners. Despite mixed reactions, California’s SB 478 is gaining traction for transparent pricing across the US, with the federal government proposing a similar law. Other states, including Colorado and Pennsylvania, have drafted laws protecting hidden fees in businesses, but neither have earned final approval. Lawmakers claim the push for transparent pricing is a bipartisan issue.

Conclusion

California’s SB 478 marks a significant shift toward price transparency in the restaurant industry. While consumer advocates celebrate the ability to make informed decisions based on true costs, restaurant owners grapple with potential price increases and implementation confusion. The law’s impact on mandatory gratuities remains unclear, but it has undeniably sparked a national conversation about hidden fees and fair pricing in the service industry. With similar legislation proposed at the federal level and in other states, SB 478 could pave the way for a more transparent dining experience for consumers across the country.