Exploring the Rise of Restaurant Service Charges and Their Impact on the Hospitality Industry
With inflation impacting food and labor costs and the mounting tension around our industry’s systemic social and economic inequities, running a restaurant is more challenging than ever. It can feel impossible to get ahead and be a good employer.
Without support from our local or national government in solving these major industry issues, restaurants are left to their own devices.
Many are getting creative in bringing forth the changes they want to see. One of the more recent innovations is the expanding use of service charges to stay afloat amid shrinking profit margins.
While it seems restaurant service charges are catching—they’re also creating a lot of confusion between consumers and employees. Are service charges tips? Where do the funds go? Are service charges even legal?
If you’re wondering these things too but also considering adding a service charge or already using one—here are a few insights to help you do it more tactfully.
What Is a Restaurant Service Charge?
Service charges are nothing new—think corkage fees, automatic gratuity, or bottle service fees. You likely have a service charge in place or worked for a restaurant with one.
And these types of charges aren’t unique to our industry either. Banks tack on a service charge for non-members using their ATMs. Travel and accommodation sites typically charge a service fee, the same as concert ticket sites like Ticketmaster.
After the pandemic, some restaurants have expanded the service charge to encompass the whole experience—simply adding a fee for providing service.
The Difference Between a Service Charge and a Tip
A service charge is not a tip. Revenue from a service fee goes directly to the business; owners can use the funds however they want. Additionally, if a service charge is in place, customers must pay it.
A tip is a gratuity to compliment stellar service paid to the worker or distributed to tipped workers from a tip pool. While it’s certainly a social norm for consumers to leave a tip, it’s not required, and the amount a customer tips is discretionary.
Tipped income is also heavily regulated by federal and state laws, determining who can receive tips or participate in a tip pool—which is not the case for service charges, but more on that later.
How Restaurants Use Service Charges
Beyond the more traditional fees I mentioned earlier, like corkage fees or automatic gratuity, employers can use revenue from an overarching service charge in many ways.
Restaurant service charges are used to:
- Pay a Livable Wage
More commonly, service charges are used to raise the wages of all employees, whether to offer livable wages, create more pay equity between FOH and BOH positions, or meet mandated minimum wage increases in certain cities.
- Remove Tipping
Tipping has a pretty dark history in the US and contributes to many toxic aspects in our industry. Some employers use a service fee to eliminate tipping and offer a livable wage.
- Offer Benefits
Other employers use the added revenue to support employee wellness and offer benefits like health insurance, childcare, or paid time off.
- Offset Rising Food and Equipment Costs
Some businesses offset financial challenges from the pandemic or the rising food costs due to inflation. When the service charge goes toward the company rather than employees, it’s more common to see a lower percentage to avoid dissuading customers from leaving a tip.
Are Restaurant Service Charges Legal?
The short answer is yes, for now. Additionally, there aren’t many states that regulate how revenue from these charges can be used.
It’s up to employers to decide how much they want to charge (we’ve seen anywhere from 3 to 22%) and how they want that revenue distributed, whether back to the employees, to the business, or to line their own pockets.
The lack of regulation around service charges means it’s a Wild West out there.
Inconsistency in how service fees are being used is one of the pain points for consumers and employees affected by them.
- Some restaurants remove tipping entirely and use the fee to raise wages.
- Some restaurants raise wages but leave the option to tip for extra generous customers.
- Some restaurants don’t use the revenue on labor costs, so tipping is still very much expected in addition to the fee.
Everyone has to think more when it comes time to pay the bill. Often, the fee can decrease how much a customer tips, impacting the earnings of those who still depend on gratuities.
Additionally, it’s often up to employees to awkwardly explain the breakdown.
While most states don’t regulate restaurant service charges, it makes sense that state and federal governments will step in at some point.
The Biden administration is already aggressively calling for more transparency and regulation on what they claim are “junk fees” — though restaurant fees have yet to be listed.
Best Practices When Adding a Service Charge
Though these charges stir up confusion and frustration—it doesn’t have to be that way. As an employer, if you follow some best practices and keep an empathic mind, rolling out a service charge will be much easier and create a better experience for everyone.
When Implementing a Service Charge:
Simplify the Experience
When deciding how to use the service charge, try to make it as simple as possible. For instance, if you use the funds for the business, keep the percentage small so it’s obvious it’s not a tip.
Determine what you’re trying to solve if the funds will go to employees. If it’s to provide health insurance, consider calling it an employee wellness charge—again, so it’s obvious it’s not a tip. If you’re trying to offer a livable wage, it’s probably better to do away with tipping to avoid confusing the customer.
Avoid confusing your employees at all costs. There is already a lot of distrust out there since many workers get the short end of the stick too often. You want to be as straightforward as possible with them.
Some businesses, like Kachka in Portland, Oregon, implemented an ‘open book’ policy when bringing in a service charge. This allows them to show their employees where the funds are going and the actual cost of doing business. This is a great way to gain the trust and respect of your staff and teach them something new.
Communicate to Customers Clearly (and often)
As mentioned above, there’s a lot of confusion around the service charge, so create a clear and concise message about the charge and what it’s for. Then, put that message everywhere—literally. Don’t worry about being redundant when explaining your service fee because customers will need and appreciate it spelled out for them.
Add your messaging to your physical and digital menus, website, and reservation site descriptions. You can also train your staff to inform new customers upon greeting and seating them. You can add it to the bill or put it in newsletters. Plenty of opportunities exist to create clear communication between you and your customers.
You want to be very thoughtful about why you’re implementing a service fee and how much you’re charging—then leave it alone for a long time.
Changing your service charge will often perpetuate staff confusion and a poor customer experience. This could increase employee turnover and cause you to lose customers, which is bad for business.
Keep an Eye on Local Legislation
As the service charge gains popularity, more states will likely implement regulations to ensure employees and consumers are treated fairly. To stay compliant, research and stay ahead of the legality of the service charge in your area.
Maybe check in with a lawyer or HR consultant periodically, although if any significant changes come, it’s sure to be in the news.
Should You Add a Service Charge?
Service charges aren’t the best solution to our industry woes, but for now, they’re proving helpful for many restaurants.
In an ideal world, restaurants could raise the prices of their menus to meet the realities of inflation and the rising costs of living—but consumers have been trained to expect experiences at a specific price.
Restaurants often keep the prices of their menus well below the actual cost, which is not very sustainable.
At least with the service charge, customers are forced to stop and think about why it’s there and its reason. Maybe they’ll grow so fed up with it that they’ll accept rising menu prices instead!
We can only wait and see.
For now, if you’re trying to stay ahead and offer more for your employees, I think a service charge could be a good step. Remember that you want to take your time and ensure your implementation is thoughtful, transparent, and doesn’t turn away your employee or customer base.