Menu prices in California are about to go up again. 

A month after the $20 minimum wage for fast-food workers went into effect—prompting a flurry of price hikes to offset higher labor costs—California Attorney General Rob Bonta’s office laid out what the state’s so-called “honest pricing” law means for restaurants. Essentially, service fees and surcharges are outlawed. 

Gov. Gavin Newsom signed the measure, labeled SB 478, into law late last year. It bans businesses from adding extra fees that aren’t included in the prices displayed to customers. Restaurants have been waiting for industry-specific guidance since then, and the AG’s office has given conflicting statements about whether the rules would apply to their add-on charges or not. 

A set of FAQs released on Wednesday cleared up the confusion. When the law kicks in on July 1, restaurants in the state will be prohibited from charging prices that are higher than what’s printed on the menu. Spun a different way, those service fees and surcharges can’t be tacked on to the end of a check anymore. A sign advertising a $20 dinner special at a restaurant that levies a 5 percent charge to help cover employee benefits will need to refer to a $21 deal instead. A $10 dish at a restaurant that has a 10 percent service fee will need to be listed at $11. 

Businesses can’t sidestep the regulation by advertising one price and disclosing that other fees will be added later. They can, however, clarify for guests how much of the total is a levy for staff and other expenses—so long as they still present one consolidated price to the customer. They can charge extra for delivery, but the fees must be a set amount and not a percentage. Third-party delivery providers will need to disclose their fees upfront before confirming orders, too. 

Also banned are the automatic gratuities that many restaurants charge for large parties. That comes with a caveat, though. The FAQs state that the AG’s office won’t target fees that go straight into an employee’s pocket. At least not at first. 

“There are many factors that we consider when making enforcement decisions, but we do not expect that our initial enforcement efforts will focus on existing fees that are paid directly and entirely by a restaurant to its workers, such as an automatic gratuity,” the document states. “However, businesses may be liable in private actions.”

The AG’s office could decide to start enforcing that part of the regulation at an undetermined point in the future, and until then, restaurants will still be subject to lawsuits from customers who are charged an automatic gratuity that isn’t folded into the price presented on the menu. 

The state has provided little guidance about SB 478 and how it will be enforced beyond the FAQs. And that document comes just two months before the law takes effect, giving restaurants a tight window to reprint menus, update advertisements, and find a new approach to both menu pricing and staff compensation.

Bonta initially said restaurants wouldn’t be banned from implementing service fees and surcharges when the bill passed last fall. But the Los Angeles Times reported they would in fact be covered under the law a few months ago, citing a source from the AG’s office. The San Francisco Chronicle ran a similar headline in April based on statements from the state’s justice department. 

The reporting sparked a wave of criticism from operators, especially those in the full-service segment, who say add-on charges help generate the extra revenue needed to cover soaring costs for food and labor. Without them, they’ll be forced to pass on costs via higher menu prices. Many fear that will create sticker shock that scares guests away. 

“Restaurateurs aren’t doing this to buy a yacht,” Laurie Thomas, executive director of the Golden Gate Restaurant Association, told the Chronicle. “They’ve been doing this to make ends meet.”

Another local operator said it feels like the state “lit the fuse to this bomb” and is standing back to see what happens. “It is terrifying,” he said. “We can’t pay the wages we’re paying now unless we dramatically increase prices and hope guests actually come in.”

The Employment Policies Institute, a nonprofit research organization studying employment growth, issued a statement saying the updated guidance will exacerbate a decline already evident in California’s restaurant industry.

“Service charges have been increasingly common tools aimed at keeping restaurants afloat and able to pay the higher minimum wages, amid rapidly rising state and local minimum wage requirements,” the organization said. “Since the state began annual wage hikes up to $16.50 per hour starting in 2017, and localities raised wages even higher, California restaurants have suffered significant losses. Now this tool will be taken away from restaurants, causing further damage to the industry and its employees.”

The California Restaurant Association took aim at Bonta’s office after the FAQs were released on Wednesday, citing previous court cases that found service fees are permissible as long as they’re properly disclosed on menus. Matthew Sutton, SVP of government affairs for the group, called the document an example of “legislating through a press release.” 

“The FAQs exhibit a fundamental misunderstanding of the restaurant industry’s standard of transparent, up-front menu pricing,” Sutton said. “We are considering all available options to block implementation of SB 478 in the manner suggested by the AG’s office.”

Legal, Story