California Restaurants Must Identify Service Fees as Part of Listed Prices

California’s Department of Justice recently confirmed that California’s new law requiring businesses to disclose “junk fees” as part of the advertised price extends to California restaurants, delivering another challenge to a hospitality industry already struggling to support higher wages and inflated costs. Starting July 1, 2024, under Senate Bill 478, California restaurants will be prohibited from charging service fees or other surcharges, which many restaurants have implemented to offset rising costs, unless the amount of the service fee is specifically identified as part of the listed prices.

Signed into law by Governor Newsom last October, SB 478 prohibits businesses in California from advertising, displaying, or offering “a price for a good or service that does not include all mandatory fees or other charges” other than taxes and shipping.  SB 478 purports to mitigate “drip pricing” (i.e., advertising a lower price for a good or service only to add on mandatory fees to the final bill). According to the attorney general’s newly published FAQs, the law applies to event tickets, short-term rentals, hotels, restaurants, food delivery, and generally to most sales or leases of goods and service for a consumer’s personal use. 

The state Department of Justice claims the law is intended to be a “transparency law,” not a “price control law.” In essence, the law requires that any price listed to a consumer must be the full price that the consumer will be required to pay.  The FAQs further clarify that businesses cannot avoid the law’s requirements by merely disclosing that additional fees will be added upon final payment.

Per the attorney general’s guidance, businesses remain free to charge however much they want and provide a breakdown of the various fees that are included in its advertised price, but the listed price must include the full amount that a consumer pays for that good or service. Additionally, the FAQs specifically note that any mandatory fee charged by restaurants must be included in the displayed price. As a result, any gratuity payments that are not voluntary, such as those charged for large parties, must be included in the list price. It will no longer suffice merely to mention that an additional percentage will be added to the total bill.

This new restriction is causing anxiety and frustration for California’s restaurant industry employers, many having adopted a practice of imposing a percentage-based surcharge. Restaurants must now either eliminate that practice or wrestle with how to calculate the costs they would have otherwise received through mandatory service or gratuity charges and incorporate them into the listed prices.

To add to the concerns, the law may also ignite a new wave of lawsuits given the penalties and damages provided for under the California Consumers Legal Remedies Act (CLRA). Under the CLRA, claims alleging violations of SB 478 may be brought on an individual or class basis and, if successful, plaintiffs may recover the greater of actual damages or $1,000 per violation, as well as restitution, punitive damages, and attorney’s fees.  This will likely incentivize the plaintiffs’ bar to bring new class action claims, potentially echoing the slew of accessibility lawsuits filed under the American with Disabilities Act. Industry professionals are naturally concerned for the ripple effect on already rising costs and economic discontent. 

Although the DOJ has clarified that initial enforcement efforts will likely not focus on existing fees that are paid directly and entirely by a restaurant to its workers, such as an automatic gratuity, it notes that businesses may still be liable in private actions. Thus, California restaurants should begin reviewing their marketing, pricing, and advertising plans and practices to ensure compliance with the new law come July 1st.

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.