#FTC | KRG Hospitality

FTC Targets Restaurant Fees and Surcharges

by David Klemt

The Apex Building, also known as the Federal Trade Commission Building in Washington, DC.

Well, that didn’t take long. Less than two months after asking for the public’s input, the Federal Trade Commission is proposing legislation targeting additional fees and surcharges.

The proposed rule is known as the “Unfair or Deceptive Fees” rule. As one may imagine, the FTC is going after hidden and so-called “junk” fees.

As it stands, according to multiple outlets, this rule would prohibit restaurant and bar operators from surcharges that are commonplace. For example, larger-party fees, delivery surcharges, and even credit card processing charges would be banned by the rule.

Instead, operators would be compelled to list total prices on menus, whether for goods or services. Further, the FTC is directing operators to provide larger groups with “larger group” menus. These separate menus would show total prices calculated to include any surcharges.

Even further, it’s being reported that the FTC is also addressing tips. The Commission’s rule directs operators who charge service fees in place of tips to remove the fee and return to tipping.

Interestingly, the National Restaurant Association is reporting that the FTC never identified restaurants as a targeted industry when asking for public comments about junk fees. However, other sources claim that restaurants were indeed included when the FTC put forth the request for public feedback.

Regardless, it’s a fair statement to say that the Commission doesn’t understand restaurant operation and costs. It appears that the FTC either didn’t work with any operators when drafting these proposed rules. Or, if they did seek out restaurant operator input, they put very little stock into it.

Costing Independents

One thing that’s clear is these proposed rules will cost operators. In particular, compliance will cost independent operations, which account for nearly 70 percent of American restaurants.

According to the NRA, the cost of changing menus will cost nearly $5,000 per operator, for starters.

“The FTC doesn’t take the realities of the restaurant industry into consideration,” reads the Association’s fact sheet. “Its estimated compliance cost—$3.5 billion—would equal a cost of $4,818.27 per operator for menus alone. Small independent operators run on a 3-5% margin and make an average of $45,000/year. The cost of making this change would be approximately 10% of their total income.”

As independent operators can attest, credit card swipe fees are a dynamic cost that affects them disproportionately in comparison to their chain restaurant counterparts. Since these fees are calculated on a per-transaction basis and not fixed, adjusting menu prices to comply with the FTC’s rule puts them at a costly disadvantage.

Then there’s the simple fact that when restaurants raise prices, traffic tends to drop. When traffic drops, revenue goes with it. And when traffic and revenue drops, hours are cut back, and people lose their jobs.

Harmful Legislation

As far as I can tell, this is another example of a government agency attempting to impose rules on an industry it doesn’t understand.

When drafting legislation that affects restaurants, a group of operators and industry advocates that truly represents those who will be impacted should be impaneled. Input should be taken into thoughtful consideration before drafting rules, and drafts should be provided to the panel to receive feedback.

Unfortunately, the past few years have made it clear that our industry has very few friends the federal government. Our lobby, such as it is, simply isn’t respected as valuable enough to warrant consideration before imposing harmful rules on the industry.

This, despite the fact restaurants and bars in America employ more than 12 million people. That’s a lot of voters too many elected lawmakers are willing to dismiss as unimportant.

Image: ipse dixit on Unsplash

Restaurant Fees Facing FTC Scrutiny

by David Klemt

The focus on rising costs and hidden or “junk” fees over the past few years is bringing the Federal Trade Commission’s attention to the restaurant space.

Really, it was only a matter of time. Consumers are quite clearly fed up with being hit with unexpected fees. Whether purchasing concert tickets or popping into a QSR for a quick bite, they’re over the perceived nickel and diming.

That’s to say nothing of the other businesses that consumers feel are going too far with fees.

However, much of the public conversation about junk fees revolves around restaurants, and in some instances bars, as well. A common refrain on social media and online communities is, to paraphrase, “Just tell tell us what it costs on the menu!”

Of course, there are consumers who don’t want businesses to raise their prices at all. There’s no reasoning with these people, and they see all increases and fees—even those that aren’t hidden or bogus—as ripoffs.

But there are those who understand the challenges operators are facing. Understandably, these people just want transparency. And they want to have a clear idea of what it will cost to dine and drink somewhere before they plan their visit or are handed their check.

These consumers now have allies in state and federal governments.

FTC Focuses In

Some people may be surprised to learn that the FTC’s focus on junk fees isn’t entirely new. In fact, the agency has been digging into this topic for nearly a year.

Last November, the FTC asked for the public for their opinions on deceptive and unfair practices. Specifically, practices that relate to junk fees. Per the FTC, American consumers are paying tens of billions of dollars in junk fees annually.

According to the agency, they received 12,000 comments.

Now, with the support of the White House, one would assume, the FTC is asking for public input again. This time, the agency is seeking comments about a rule their proposing to address junk fees.

Last week, both the White House and FTC proposed rules that will make it mandatory for businesses to disclose all fees up front. Additionally, the White House wants to curtail “excessive” bank fees for basic services.

Put simply, the FTC’s proposal will ban hidden fees, require transparency regarding all fees, and allow the agency to impose penalties.

And now, after zeroing in on airlines, landlords, utilities, entertainment, and banking, the FTC is looking at hospitality.

Restaurants Under Scrutiny

As they did in November of last year, the FTC is once again asking for the public to comment on fees. This time, however, restaurants have been included by the agency.

To be sure, this focus isn’t exactly new. Washington, DC, for example has addressed junk fees in the restaurant space. As with other jurisdictions that have tackled this topic, restaurants must be conspicuous and make guests aware of all fees before their checks arrive. Additionally, operators must be clear about their intended use for fees.

In Washington, DC, a violation of these rules can lead to a $5,000 fine for a first-time offense. That penalty can rise to $10,000 for additional violations.

California has also passed Senate Bill 478, signed into law by Governor Gavin Newsom. This law, which also targets hidden fees, takes effect on July 1, 2024.

Most likely, the FTC is seeking comment to make adjustments to their proposed junk fee rule in order to include restaurants. From what I’ve seen, restaurant delivery fees in particular are drawing the ire of consumers and attention of state and federal agencies.

“All too often, Americans are plagued with unexpected and unnecessary fees they can’t escape. These junk fees now cost Americans tens of billions of dollars per year—money that corporations are extracting from working families just because they can,” says Lina M. Khan, FTC Chair.

Consumers will have 60 days to submit their comments to the FTC.

Takeaway

Proactive operators who haven’t already done so should make their in-person dining and delivery fees obvious.

Best practices for fee transparency include highlighting them on menus; announcing them via table tents or talkers; including fees on websites; and including a notice or disclaimer on reservation pages.

However, operators should avoid viewing being transparent about fees through a lens of compliance. Rather, being clear and upfront with guests is just good business. In fact, it’s in keeping with the spirit of hospitality and service.

If the final experience a guest has with a restaurant is being unpleasantly surprised by their check due to junk fees, how should be expected to respond? Their perception of the venue or brand will plummet, and they won’t return. How long can a restaurant sustain that guest reaction before the damage is irreparable and an operator has to close their doors?

Operators are being asked to thread a needle every day. Costs are rising and there are only so many solutions available to most operators that can keep their doors open, keep guests and staff happy, and pull the business toward long-term success.

To be clear, fees are generally fine—if consumers feel they know what to expect ahead of their visit. Nobody wants to be surprised, and that shouldn’t be difficult to understand.

So, operators need to be transparent about fees. They need to consider dynamic pricing for menus. That requires an absolute understanding of costs, guest tolerances for pricing, and the market.

The payoff, however, is happier guests who are far more likely to return for in-person dining and to place delivery or takeout orders. Savvy operators will put the work in now to get ahead of the junk fee fallout.

Image: Ian Hutchinson on Unsplash