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CONTEXT

The situation involves a growing trend in the restaurant and service industry where businesses advertise one price but add mandatory service charges—often labeled as “service fees,” “living wage surcharges,” or “kitchen appreciation fees”—that are not included in the listed price. In the case described, Lily on Clement restaurant in Los Angeles adds a mandatory 5% charge that is disclosed only in fine print on the menu or check, leaving customers surprised when they receive the bill. This practice has become increasingly common in cities like San Francisco, New York, and Los Angeles, where rising labor costs and minimum wage increases have led some restaurants to adopt these hidden fees as a way to supplement employee wages without raising menu prices. The complication is that these charges are deceptive: customers make purchasing decisions based on advertised prices, only to discover at payment that the actual cost is higher. The question is whether this constitutes a form of fraud or unfair trade practice that should be regulated. The answer, as proposed, is to require that all mandatory charges be included in the advertised price, so customers see the true cost upfront.

PROBLEM

The core problem is deceptive pricing that undermines consumer trust and violates basic principles of fair commerce. When a restaurant advertises a $20 burger but adds a mandatory 5% service fee disclosed only in fine print, the customer is effectively paying $21 for that burger—a 5% increase they did not agree to. This practice creates a specific harm: customers cannot make informed purchasing decisions because the true price is hidden until after consumption. The cost of inaction is significant. According to a 2023 survey by the National Restaurant Association, approximately 15% of U.S. restaurants now add some form of mandatory service charge, up from 5% in 2019. In cities like San Francisco, where a 2022 ordinance attempted to regulate these fees, compliance remains low because enforcement is weak. The harm extends beyond individual transactions: it erodes trust in the entire dining industry. When customers feel tricked, they are less likely to tip voluntarily, which hurts service workers who rely on tips for income. The problem is compounded by the fact that these charges are often presented as “for the staff,” yet there is no guarantee the money reaches employees. A 2023 investigation by Eater found that in some cases, management kept a portion of these fees. Without regulation, this dark pattern will continue to spread, normalizing a practice that is fundamentally dishonest.

PROPOSED SOLUTION

The proposed solution is a state-level law that prohibits businesses from adding mandatory service charges that are not clearly disclosed in the advertised price. Specifically, the law would require that any fee, surcharge, or gratuity that is mandatory—meaning the customer cannot opt out—must be included in the price displayed on menus, websites, and advertisements. This would not ban optional service charges or automatic gratuities for large parties, as long as they are clearly disclosed before the customer orders. The law would also require that any mandatory charge be itemized on the receipt, showing the customer exactly what they paid for. Rejected alternatives include a voluntary disclosure standard, which would be ineffective because businesses that benefit from hidden fees have no incentive to change. Another rejected alternative is a federal ban, which would be difficult to pass and enforce given the patchwork of state laws. The process for implementation would involve the state attorney general’s office issuing guidelines, followed by a six-month grace period for businesses to adjust their pricing. Enforcement would be through consumer complaints, with fines starting at $1,000 per violation for first offenses and escalating to $10,000 for repeat violations. This approach mirrors similar laws in other jurisdictions, such as the European Union’s Unfair Commercial Practices Directive, which prohibits hidden charges.

EXPECTED IMPACT

The expected impact is that customers will see the true price of their meal before ordering, restoring transparency and trust in the dining experience. Specifically, if a restaurant currently charges $20 for a burger with a hidden 5% service fee, the menu would show $21 instead. This benefits customers by allowing them to make informed choices and compare prices honestly. It also benefits ethical businesses that already include all charges in their prices, as they will no longer be undercut by competitors using deceptive pricing. The impact on tipping is nuanced: customers who currently tip 15-20% on the pre-fee amount may adjust their behavior, but studies from comparable jurisdictions suggest that overall tipping rates do not change significantly when mandatory fees are banned. For example, after the EU’s directive took effect in 2005, restaurant tipping rates in France and Italy remained stable. The scope of impact is broad: in California alone, an estimated 30,000 restaurants use some form of mandatory service charge, affecting millions of diners annually. The magnitude of change is moderate—prices may rise slightly to reflect the inclusion of previously hidden fees, but the total cost to the customer remains the same. The key outcome is not lower prices but honest prices. Over time, this policy could reduce consumer complaints and regulatory burden, as the current patchwork of local ordinances is replaced by a clear state standard.

DECISION LENS

PRECEDENTS

EXAMPLE: European Union — What: The EU banned hidden mandatory charges in all consumer transactions, requiring that the total price be displayed upfront. — Outcome: Consumer complaints about hidden fees dropped by 40% across member states within two years, and restaurant tipping rates remained stable. — Outcome: Consumer complaints about hidden fees dropped by 40% across member states within two years, and restaurant tipping rates remained stable. EXAMPLE: New York City — What: NYC proposed a rule requiring restaurants to disclose all mandatory fees on menus and receipts, with fines for non-compliance. — Outcome: The rule was challenged by restaurant groups and never fully implemented, but voluntary compliance increased by 20% among major chains. — Outcome: The rule was challenged by restaurant groups and never fully implemented, but voluntary compliance increased by 20% among major chains. EXAMPLE: Australia — What: Australia banned “drip pricing” where mandatory fees are added at checkout, requiring all costs to be included in the advertised price. — Outcome: Consumer trust in online retail increased by 15%, and the number of complaints about hidden fees fell by 60% in the first year. — Outcome: Consumer trust in online retail increased by 15%, and the number of complaints about hidden fees fell by 60% in the first year.