California Customers Can Soon Sue Restaurants Over Pricing

May 25, 2024
Dining & Wine
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The Southern California restaurateur Kwini Reed has spent years tying herself — and her business model — in knots trying to meet the competing needs of her customers and her staff.

Sometimes it seems like everything from state law to inflation is conspiring to force her to charge $35 for a hamburger, which Ms. Reed says she won’t do, even if it means she and her husband, the chef Michael Reed, take a financial hit.

The only fee at their Los Angeles restaurant, Poppy and Rose, is a 20 percent automatic gratuity for large parties, which helps ensure her servers are fairly compensated for tables that demand more skill and time. Now, a new state law in California, which goes into effect July 1, makes those charges illegal. If Ms. Reed continues the practice, a customer could sue her.

“It’s a slap in the face for business owners in California,” Ms. Reed said. “We have so many other ways we can be sued for no reason. We don’t need another lawsuit that is just going to incur more fees, which could put someone on a path of closing. As a human being, why would you do that?”

The law, Senate Bill 478, is aimed at fees tacked onto a bill beyond the listed prices, whether a resort fee at a hotel or a service charge that inflates the cost of a concert ticket. The law also bans restaurant service fees, which small restaurateurs across the country say they’ve come to rely on in a historically challenging market, but which many consumers say they find bewildering and unfair.

Since the pandemic, small restaurant owners in California have faced the same array of disruptions as restaurateurs nationwide: a challenging labor market, rising inflation and the attendant consumer skepticism about higher menu prices. Many small restaurateurs are seeing more dollars go out the door than come in, while restaurant goers expect more than ever as dining out becomes a pricier occasion. Now the service fee, already the subject of Yelp complaints and Reddit diatribes, could spark legal conflict between a business and a patron.

Ted Mermin, director of the California Low-Income Consumer Coalition, which cosponsored the legislation, said combining civil suits with more direct enforcement from the attorney general’s office actually makes the law more fair.

“What we want is an across-the-board, relatively easy enforcement mechanism that will encourage businesses to adopt these new standards,” he said. “It’s going to be good thing for everybody if enforcement is frequent and uniform.”

A number of laws are enforced in this manner, including the Americans with Disabilities Act.

But some restaurateurs say that is exactly the issue. Over the past decade, A.D.A. suits have proliferated in California, often pitting individual disabled customers against small businesses.

“Attorneys prey on small restaurant owners. Adding another piece to that is our biggest issue on this bill,” said Eddie Navarrette, executive director at the Independent Hospitality Coalition, a Los Angeles restaurant advocacy group formed in April 2020.

You You Xue, a Bay Area restaurateur himself, has already brought suits against a number of other restaurants for what he characterizes as fraudulent fees. He believes the bill represents an opportunity for consumers to speak up and take back control.

“I would consider suing anybody in violation of the law,” he said, adding, “Relief will start in the streets.”

Unlike the A.D.A., S.B. 478 does not require complex inspections or expensive build-outs for compliance. Restaurants can still charge whatever they like, but those charges must be reflected in the menu prices, according to the state attorney general office’s latest guidelines. Restaurants will also have an opportunity to correct errors, according to Elissa Perez, a spokeswoman for the California Department of Justice.

Vanda Asapahu, who is the second-generation owner of her family’s restaurant Ayara Thai in Los Angeles, said she understands that consumers find the fees opaque, and only charges them for catering orders. But she worries that if she has to do away with the fees, she’ll lose staff.

“The system itself as we know is clearly broken,” she said. “I wish I did not have to depend on service charges to give my team a living wage.”

Raising menu prices, even if many businesses do so at the same time on July 1, may hurt some restaurants more than others, since consumers are willing to pay higher prices for European and Japanese cuisines than they will for food from other cultures around the world.

Genevieve Hardison, the director of operations at Bar Amá, a Tex-Mex restaurant in downtown Los Angeles, said the restaurant’s service charge offers more transparency about why a meal costs what it does. “If you just see a $12 taco, there’s no context.”

Kwini Reed said the idea of categorizing her service charges as “junk fees” demonstrates a larger misunderstanding of the economics of running an independent restaurant.

“Everybody believes everyone who owns a restaurant is making millions of dollars like the McDonald’s C.E.O.,” she said. “It’s Friday night, I’m at your table — if I was making all this money, would I be here? We have to start sharing the narrative of separating small business from big business.”

Even Mr. Xue believes the bill misses how his restaurant’s service fees work. He currently charges a 7 percent surcharge on take out orders and an 18 percent surcharge on dine-in meals. On July 1, he too will have to adjust his menu prices. “It really puts a dent into what operators are trying to do to eliminate a backwards thing — we know tipping is very antiquated and very inequitable,” he said.

On his compliant menu, he plans to list a menu item’s base price, its “S.B. 478 takeout price” and its “S.B. 478 dine-in price.”

The outcry from small restaurant owners has prompted some in the state legislature to take another look at the bill. As part of the state’s budget process, bills can be “cleaned up,” according to Scott Wiener, the chair of the Senate Budget Committee.

“The idea that restaurants would be prohibited from putting an automatic gratuity or any kind of fee, even if they disclose it transparently, that could be very harmful to restaurants,” he said.

“There are quite a few of us in the legislature who very much want to support small restaurants, and in terms of the S.B. 478 issue, we are taking this very seriously.”

In a statement, state senator Bill Dodd, who cosponsored the original bill, said: “My motivation in authoring the bill was to stop deceptive advertising in sectors that have ‘drip pricing’ and hidden fees that appear at time of payment, so menus with clearly disclosed fees weren’t my intended target. Certainly I’d be happy to see that clarified in the law.”

Mr. Mermin, of the consumer coalition, said he believes the legislation as it stands will make consumers happier, and give them a greater sense of control, seeing all costs folded into a menu price. He pointed out that the law applies fairly across several industries, and all restaurants have to do is present transparent prices.

“This applies across the board, and it’s going into effect July 1,” he said. “Why is only one of the dozens of affected industries complaining?”

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