Restaurant service charges will disappear, but don’t call them ‘junk fees’

The 18% fee added to every bill at Oro by Nixta goes toward staff salaries and benefits. It helps equalize what servers and cooks take home in pay, ensuring that everyone on the team makes well above the minimum wage, and that public-facing servers aren’t taking home two to three times more than the people in the kitchen.

That’s hardly what one would call “junk,” said Kate Romero, Oro’s co-owner.

But when Minnesota’s new Price Transparency Law, also known as the “junk fees” law, goes into effect Jan. 1, there won’t be any extra charges on restaurant checks. Just a traditional tip line, which leaves it up to customers to assign — and for servers to decide whether to pool gratuities with other staff and distribute it across the board, or keep the money for themselves.

“We have happy staff and people who all want to take care of each other, because we take care of them,” said Romero, who with husband and co-owner Gustavo Romero operates the James Beard Award-nominated Mexican restaurant in northeast Minneapolis. “And now we have to change it all.”

The measure, which Gov. Tim Walz signed into law last May, is designed to eliminate hidden or unexpected fees that show up at the end of a transaction. It requires that the prices displayed for goods and services are exactly what people will pay at checkout and is meant to bring more transparency to things like resort fees added onto hotel bills and extra charges from ticket-sellers. The law still allows automatic gratuity to be added to restaurant checks, but those fees must go directly to workers. What it doesn’t allow is something that’s become common since the pandemic: health and wellness surcharges that go toward restaurants’ business costs.

But Minnesota restaurant owners say those fees give them the ability to offer employees competitive salaries and benefits in an industry with notoriously tight profit margins. And when they’re gone, 5% to 21% of each bill at local restaurants will vanish, leaving restaurants to make some choices: raise prices, reduce worker salaries, cut staff, switch to a counter-service model or, worst-case scenario, close.

Whatever they decide, customers will likely feel the effects.

“I think, honestly, this is going to be a little bit of an earthquake in our industry,” said David Fhima, the chef and owner of several downtown Minneapolis restaurants.

The cost of health care and paid time off at Fhima’s restaurants (Fhima’s, Maison Margaux and Mother Dough Bakery) amounts to approximately $250,000 a year, he said. The 5% service fee on his checks pays for less than half of that.

“Now, we have none of it. So do we not offer health care? That’s not an option,” Fhima said. “Do we increase the price of our menu? I believe we will lose people. So, it’s a conundrum.”

Fhima hasn’t decided how he’ll make up the difference. He’s hoping a last-minute “clarification” of the law might exempt restaurants. That’s what happened this year with a similar state law in California.

Some states had been making their own push to regulate “junk fees” ahead of a nationwide crackdown proposed by the Biden administration. But just last week, the Federal Trade Commission announced that restaurants would be excluded from its final rule on “junk fees,” after receiving 4,600 public comments from restaurant operators.

“The FTC heard us loud and clear,” said Michelle Korsmo, president and CEO of the National Restaurant Association, a restaurant advocacy organization that estimated independent restaurants would lose 10% of their income from complying with a service fee ban.

“We are extremely pleased that the FTC recognizes the role restaurants play in our economy and our communities and chose to empower operators to make important business decisions without additional financial burdens,” Korsmo said in a statement.

So while the recently passed federal rule was narrowed to live-event tickets and short-term lodging and no longer pertains to restaurants, states can further regulate these industries.

With the law still extending to restaurants in Minnesota, Jorge Guzmán is certain the menu prices at his Lake Street restaurant Chilango will go up. The only question is how much, and whether it will be enough to recover the 4.95% surcharge that now goes toward labor costs. He has already had to reduce prices since the restaurant opened last spring because of “backlash” from customers looking for more affordability, he said.

“Everybody says just bake it into the cost, bake it into the menu. But as we found out, Minnesota and Minneapolis is not a city where you can just bake the price in. You can’t do that, because people get sticker shock and then they don’t go out to eat again,” Guzmán said.

Local restaurant owners say they are bracing for customers to react to higher prices. But the fees that get added on at the end of the meal aren’t popular, either.

Harriet Horwitz, a Minneapolis retiree, said the topic of add-ons for service comes up frequently in her circle of friends. The fees caused “confusion, just basic confusion,” she said. “And then all the fine print was a little, what’s a good word, traumatic.”

Guzmán said the complaints he received at Chilango were “minimal,” but “I can definitely see the frustration. A lot of customers don’t read the fine print on menus; they just see the fee at the end and they’re like, ‘what is this?’”

But even with detailed explanations at the bottom of some bills, confusion over service fees inevitably raises bigger questions from customers. “What do you tip on? What is included? Who does get a piece of the action?” Horwitz said.

And that’s what lawmakers are trying to correct.

When it passed last May, Lt. Gov. Peggy Flanagan said the fee ban will make restaurant checks clearer for customers. “You should tip your server, and tip them well, but we need to have transparency in those bills,” she said at the time.

But Kate Romero said the 18% fee at Oro isn’t a surprise or some kind of bait-and-switch. It’s printed on the menu, which is linked on the restaurant’s website. The disclosure distinguishes the fee from a traditional tip, stating that the service charge helps the business provide “consistent” staff wages “in a way that the traditional tip system cannot.” It adds that while checks still come with a tip line, leaving extra beyond the service charge is not expected.

“It’s not some secret thing you slap on people,” Romero said. “Being compared to the additional costs and fees that come with your Taylor Swift ticket, it’s completely different.”

Come Jan. 1, the salaries for servers at Oro will go from the mid-$20s an hour down to minimum wage (around $16 an hour). But their take-home pay could reach as high as $50 to $80 an hour, Romero said, with the rest coming from traditional tips. The pay for kitchen staff will likely stay the same.

Oro’s staff has been meeting independently of the owners, trying to come up with an equitable plan to redistribute some of the gratuities to everyone, Romero said. “Even though there’s people who will benefit greatly from this, those people are still having those conversations of like, how can we make sure we don’t leave the cooks behind.”

She gets emotional thinking about it, but the fee went a long way at their restaurant toward creating a kind of harmony among the staff.

“The distribution of the monies is for everyone, and everybody just works better together,” she said. “Calling it a ‘junk fee’ is such a rude thing.”

To learn more about the new price transparency law, here is a list of frequently asked questions from the Minnesota Attorney General’s Office.

This story is part of an occasional series about the challenges facing the Twin Cities restaurant industry.