As California bans restaurant surcharges, businesses leader says layoffs coming

(The Center Square) - According to the California Department of Justice, the state’s new law banning prices that don’t include all costs and fees also bans restaurants from having service charges. Due to the high costs of living and business, restaurants charge service fees to fund greater worker pay and benefits rather than raise menu prices or lay workers off.

Businesses say that banning service charges will mean pink slips for workers, and combined with the effectively $20 statewide minimum wage, will lead to more business shutdowns in the state with the highest unemployment rate and worst budget deficit.

SB 478 was initially signed into law in 2023 with the aim of helping customers know the real price of goods such as airline and concert tickets, hotels, and short-term rentals that have tended not to include significant portions of non-government fees in the listed price. CADOJ is now saying this rule applies to restaurants as well, where service fees can range from a few percentage points to the typical amount one might tip for an acceptable level of service.

“SB 478 applies to restaurants, just like it applies to businesses across California,” said the CADOJ to the San Francisco Chronicle. “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.”

Meanwhile, businesses contend the ban is going to leave many businesses that have adopted service fees as a last resort with no option but to shut down.

“Small business owners are not imposing these service fees to fatten their wallets,” said National Federation of Independent Business California Director John Kabatek to The Center Square. “It’s the last recourse many have to offset the high cost of operating thanks to the legislature without sending their employees home with a pink slip.”

Earlier this year, California’s $20 per hour fast food minimum wage went into effect. While the wage nominally only affects major fast food joints, all other minimum wage employers must compete with fast food for employees, effectively forcing them to have to raise their wages as well in order to draw in and retain employees.

Service fees are one way businesses have been able to raise funding for worker pay and benefits without having to raise menu prices even further. Without the ability to collect service fees, Kabateck warns private sector layoffs and business shutdowns will worsen.

“Bonta said families trying to make end meet are hardest hit by these service fees but he’s not taking into consideration the small business owners, and if they can't’ make ends meet, it’s not going to do any good for the consumer or employee if that business owner has had to shut his or her doors,” Kabateck continued.

California currently has the highest unemployment rate in the nation at 5.3% and faces a $73 billion deficit.