California Legislature Serves Up Last-Minute Clarity for California Restaurants

In 2023, the California Legislature passed Senate Bill 478 to attack so-called “hidden fees” and require “honest pricing” in the advertisement of goods and services. This law, scheduled to take effect on July 1, 2024, would prohibit “advertising, displaying, or offering a price for a good or service that does not include all mandatory fees or charges,” excluding taxes or government-imposed fees. Put another way, this measure requires businesses to include all surcharges and fees in the total advertised price of a good or service.

Several months ago, the Attorney General issued guidance on SB 478 for California businesses, emphasizing that the legislative intent behind the law was to ensure transparent pricing for consumers. As the guidance noted, the law targets “drip pricing,” where the advertised price is less than the final cost to consumers. The law applies to most consumer goods and services, excluding commercial transactions and industries already regulated by other pricing laws. While SB 478 does not cap prices, it does require the displayed price to reflect the total amount a consumer will pay to promote consumer transparency and further competition in the market. Shipping charges can be excluded from the total advertised price, but handling charges must be included. Fees for optional services and contingent charges (like smoking fees in non-smoking hotel rooms) are exempt.

Of course, in a post-pandemic world, restaurants throughout the state have begun to include special surcharges, which are disclosed on the menu (“A surcharge of 4% will apply to every check,” for example), but not included in the underlying costs of menu items. Under the Attorney General’s guidance, this practice would be unlawful. The headlines were clear:

• New California Law Will Ban Restaurant Surcharges
• California Bans Most Restaurant Service Fees
• California says restaurants must bake all of their add-on fees into menu prices

In a last-ditch effort to protect restaurants from having to rewrite all of their ads and menus, the Legislature fast-tracked Senate Bill 1524 in June. This bill specifies that “advertising, displaying, or offering a price for a good or service” does not include the price of individual food or beverage items sold by restaurants, bars, or other food service providers, or those provided under contracts for banquet or catering services. This exemption only applies if the restaurant (or other provider) clearly displays and explains the service charges, mandatory gratuities, or other fees on the advertisement, menu, or other display.

SB 1524 stems from the recent trend among California restaurants to incorporate mandatory service fees to ensure greater pay equity between front- and back-of-house employees. In addition, numerous California restaurants are using an extra consumer surcharge to fund healthcare and other discretionary benefits for their employees. SB 1524 aims to protect these employee benefits that are unique to the restaurant industry.

SB 1524 moved rapidly through the Assembly and secured Senate approval on June 27, 2024. Governor Newsom signed it into law on June 29, 2024, providing a crucial last-minute lifeline to California’s restaurant industry just ahead of the July 1, 2024, deadline.