Regulation of service fees is being left to states and municipalities. | Photo: Shutterstock
Welcome to Government Watch, a Restaurant Business column focused on politics, regulation, legislation and other governmental issues of relevance to the restaurant industry. This week’s edition looks at the industry’s big victory in convincing the FTC not to outlaw or regulate restaurant service fees, along with the demise of the 80/20/30 rule. We also look at what may be the largest settlement of a wage-related class action suit in California’s history.
Talk about an early holiday present.
The Federal Trade Commission issued final regulations Tuesday on the use of “junk fees,” the charges some businesses sneak onto their bills after customers commit to a purchase. The industry had feared the commerce watchdog would include restaurant service fees in its definition of the surcharges that would essentially be banned.
Instead, the FTC narrowed the scope of its new regulations to hotels and the sellers of tickets for live entertainment events, with restaurants expressly excluded.
The omission is a jaw-dropping reversal from what the FTC was saying a year ago. At the instigation of President Biden, the agency had drafted a proposal for regulating the use of add-on charges popularly known as junk fees. The example often cited were the “resort fees” some hotels sprang on guests even if the property is located downtown, far from a resort area. Typically those charges were not revealed until the guest checked in or out.
Following the usual regulatory process, the FTC drafted proposals for curbing the practice and then aired them to the public for feedback. The agency was flooded with what it said were more than 10,000 unsolicited complaints about service fees, the charges a growing number of restaurants were tacking onto guest checks at the time to offset soaring food and labor costs. The establishments opted to use the surcharges rather than risk alienating customers with another steep hike in menu prices.
Prompted by the feedback, the FTC said it would expand its definition of junk fees to include those charges. It also indicated that the term would be expanded to cover the extra fees some restaurants were charging to cover the processing charges for credit card payments.
The updated regulations were again submitted to the public for feedback. Once again, an inordinate volume of the comments dealt with restaurant service fees—this time voicing objections to their inclusion. The FTC said it received more than 4,600 communications from restaurants about the damage an elimination of service fees would do to their businesses.
The heroes here are the National Restaurant Association (NRA) and its state affiliates in Georgia, California and elsewhere. They found an ally in the Independent Restaurant Coalition, a party that has often been at odds with the NRA.
On one front, the groups mustered rank-and-file operators to air their opposition directly to the FTC, emphasizing the damage that would be done to their businesses.
Simultaneously, the groups’ leaders and members leaned on their elected officials in the U.S. Congress to pressure the FTC to reconsider the designation of service charges as junk fees. The issue was one of the three topics addressed in face-to-face meetings with representatives and senators during the NRA’s annual fly-in to Capitol Hill in April.
Technically, individual restaurants or chains are not fully out of the crosshairs. The FTC said in releasing its final rules on junk fees that it would be aggressive in taking legal action against individual concerns that try to sneak charges past consumers.
True to its word, the agency announced hours after it issued the final rules that Grubhub had agreed to pay $25 million to settle a lawsuit filed by the FTC and the attorney general of Illinois over the delivery service’s pricing policies. The complaint alleged Grubhub misled customers by failing to disclose all the subordinate fees that went into the patrons’ total charge for a delivered meal.
Grubhub contends it did nothing wrong and that it agreed to a settlement to push past the dispute.
The 80/20/30 rule is officially dead
The Labor Department has formally scrapped the rule-of-thumb set by the Biden administration to determine when restaurateurs using a tip credit are obliged to pay a full cash wage to employees who work for gratuities.
Known as the 80/20/30 rule, the guideline pivoted on the supposition that servers, bartenders, hosts and other tipped restaurant employees actually hold two jobs: One where they’re earning gratuities, the other where they’re compensated solely with wages paid directly by their employer. The measure was intended to help restaurateurs decide how long a worker had performed each role and therefore what should be in their paychecks.
Under the 80/20/30 rule, servers or other tipped workers were entitled to a full cash wage if their non-tipped work—tasks like rolling silverware or filling saltshakers—exceeded 20% of their weekly hours. For those excess hours, employers had to pay the full minimum wage, with gratuities not factored into the pay.
The same obligation applied if the worker logged 30 consecutive minutes in non-tipped duties.
A federal court had struck down the guideline more than three months ago, contending that the Department of Labor did not have the authority to set the requirements. Since then, operators had been in a limbo of sorts, not knowing precisely how to peg a server or bartender’s pay.
The Labor Department’s decision to clears the way for the incoming Trump administration to set a new guideline. During Donald Trump’s first tenure in the White House, the department had put forth a multi-question test to determine when restaurants owed tipped workers a full, directly paid cash wage. That standard was seen as far more employer-friendly than the Biden rule.
Disneyland isn’t such a happy place this week
The Walt Disney Co. has agreed to pay $233 million—one of the largest class-action settlements in California’s history—to settle a 5-year-old wage-and-hours dispute with past and current employees of its Disneyland resort.
The suit settles a complaint that pivoted on whether the Disney employees were entitled to the wage voters had approved for hospitality workers in California’s Anaheim County via a 2018 ballot initiative. The ballot initiative, known as Measure L, entitled some workers in the heavily-tourism-dependent county a $15 as of 2019 and $1-an-hour wages in each of the subsequent three years.
Disney interpreted the law as inapplicable to workers in its park and continued to pay a lower rate. It was sued by employees, with backing from their unions.
The settlement calls for the plaintiffs to split about $180 million of the settlement. Disney agreed to pay another $18 or so in penalties, with about $35 million reportedly going toward the plaintiffs’ legal representatives.
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