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By Hrant Ayvazayan
As California’s new “hidden fee” ban approaches, restaurants and consumers are preparing for significant changes in how charges are presented and calculated. Governor Gavin Newsom signed this legislation into law in October, which will go into effect on July 1st. It aims to prohibit so-called “junk fees” across various sectors, including online ticket sales, restaurants, bars, and delivery apps.
What are the “Hidden/Junk Fees”?
The hidden fee ban targets undisclosed charges that appear unexpectedly on bills. For example, it would ban various restaurant service charges, including the 18% traditionally added to parties of six or more. Moreover, it mandates that delivery app fees be clearly disclosed, eliminating practices such as advertising “free delivery” while tacking on hidden costs at checkout. Furthermore, the restaurants must set menu prices on delivery apps, preventing service providers from inflating prices.
Why Implement This Ban?
The primary motivation behind this legislation is consumer protection. Restaurants have been known to add hidden surcharges for various purposes, such as covering employee benefits or wages, without making these charges explicit to customers. Such practices have led to multiple lawsuits and class-action cases, with allegations of restaurants misleading customers with fees and withholding tips from servers. By enforcing transparency, the law ensures consumers know exactly what they are paying for, fostering trust and fairness in transactions.
For instance, many restaurants add a flat service charge to bills, which can be ambiguous and sometimes substantial. The ban will require these surcharges to be included in menu prices upfront, providing a clearer picture of the total cost.
Potential Effects on Restaurants
While the hidden fee ban aims to protect consumers, it poses significant challenges for restaurants. One of the primary effects will be the need to incorporate surcharge fees into menu prices rather than adding them at the end. This change could result in noticeable price increases, potentially deterring price-sensitive customers, especially those already experiencing financial fatigue.
Concerns exist that such price hikes could lead to declining customer visits, negatively impacting revenue. In extreme cases, some restaurants might face closure if customer loss is significant. Additionally, the lack of clear guidelines for implementing these changes has confused restaurant operators, further complicating the transition.
Federal Action and Broader Implications
The ripple effects of California’s legislation may extend beyond the state’s borders. Just days after Newsom signed SB478, the Biden administration and the Federal Trade Commission (FTC) indicated potential interest in implementing similar regulations at the national level. This broader federal action could explain why California legislators have hesitated to provide detailed implementation guidelines, preferring to wait for a possible nationwide standard.
Conclusion
As the July 1st implementation date approaches, the future of California’s restaurant industry under the hidden fee ban remains uncertain. Restaurant groups and operators still await detailed instructions on complying with the new regulations. Given California's already challenging restaurant environment, the added pressure of adapting to these changes could exacerbate existing difficulties.
However, the push for greater transparency and consumer protection could ultimately lead to a fairer market, benefiting both customers and businesses in the long run. How these changes will play out nationally and whether other states will follow California’s lead in banning hidden fees remains to be seen.
Hrant Ayvazayan is the head of business development for Orders.co, which empowers restaurants with online ordering, menu management, and AI-powered marketing solutions to boost growth.
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