Question: I own a restaurant, and we include a service charge or automatic gratuity on serving large parties. I heard that restaurants will not be able to charge service charges anymore. Is that true?
Answer: Starting on July 1, 2024, California’s “Hidden Fees Law,” SB 478, will become effective. Under this new law, service charges are not banned, but the price listed for goods or services must include all amounts the customer is required to pay (excluding government taxes or fees and certain delivery fees.)
Initially, it was unclear whether SB 478 would apply to the hospitality industry, where it is common to include a 15-20% service charge or automatic gratuity. Such charges are usually listed on the menu or event contract as a 15-20% service charge, and these funds are often distributed to servers and back of the house staff, and/or used to offset the operational costs of serving large parties.
Recently, California Attorney General Rob Bonta made it clear that SB 478 applies to the hospitality industry, telling the San Francisco Chronicle: “SB 478 applies to restaurants, just like it applies to businesses across California … The law is about making sure consumers know what they are going to pay and requires that the posted price include the full amount that a consumer must pay for that good or service.” On May 8, 2024, the Attorney General’s Office published FAQs stating SB 478 applies broadly throughout the service industry, including hotels and restaurants. The FAQs state, “a business is generally free to charge whatever amount it wants for a good or service, to provide a subsequent breakdown of the various fees or charges that are included in its listed or advertised price, and to tell the consumer about those fees and charges.” See https://oag.ca.gov/system/files/attachments/press-docs/SB%20478%20FAQ%20%28B%29.pdf
Restaurants and other hospitality businesses will therefore need to eliminate service charges, include them in the price of the goods or services being sold, or itemize the amount of the service charge in dollars and cents that will be added to the base price of the goods or services. For example, a restaurant owner who wishes to charge a service charge could comply with the law by listing the price of a menu item ($28.00) plus the service charge ($5.60) and show the total cost of the item on the menu as $33.60. The customer is then informed of the total price of the menu item. Or, the restaurant could simply eliminate the itemized service charge and charge $33.60 for the item. The Attorney General has clarified that SB 478 does not apply to tips, which are not mandatory fees, or discounts.
SB 478 does not place a cap on prices. As the Attorney General has repeatedly said, “SB 478 is a price transparency bill. The statute does not change what price a business can charge or what may be included in that cost.”
There is confusion about the meaning and application of this new law, and it is anticipated the hospitality industry will lobby for changes and/or clarification of how it applies. Violations of this new law carry mandatory fees of $1,000 per violation, and successful plaintiffs may recover attorneys’ fees if they win.
Business owners should consult with their legal counsel prior to the July 1 effective date to ensure they are compliant with SB 478.