On June 29, 2024, Governor Newsom signed into law an amendment to California Code 1770, clarifying the scope of SB 478. Under SB 478 and previously published guidance from the attorney general, California restaurants were effectively prohibited from charging service fees or other surcharges, which many restaurants have implemented to offset rising costs, unless the amount of the service fee was specifically identified as part of the listed prices. In a move much welcomed by the restaurant industry, SB 1542 specifically exempts from the prohibition “a mandatory fee or charge for individual food or beverage items sold directly to a customer.”
Prior to the amendment, SB 478 prohibited businesses in California from advertising, displaying, or offering “a price for a good or service that does not include all mandatory fees or other charges” other than taxes and shipping. SB 478 purported to address “drip pricing” (i.e., advertising a lower price for a good or service only to add on mandatory fees to the final bill). However, as originally written, SB 478 left the hospitality industry in a scramble to find an efficient and compliant way to support already higher wages and inflated costs.
The amendments under SB 1542 clarify that restaurants can continue to charge a mandatory service fee or gratuity so long as the charge is clearly and conspicuously displayed, with an explanation of its purpose, on any advertisement, menu, or other display that contains the price of the food or beverage item. “Clearly and conspicuously” has already been clarified by the legislature to mean the charge must be in a larger or contrasting type, font, or color in a manner that clearly calls attention to the language.
The legislature has remarked that the implementation of SB 478 led to the realization that workers may lose wages and benefits previously afforded by services fees. Recognizing that service fees have been introduced by the restaurant industry in an effort to create greater equity between front and back-of-the house employees, the author of SB 1524 noted that eliminating service charges would upend collectively bargained benefits for equal wages, healthcare coverage, and pension payments. Thus, SB 1524 seeks to harmonize the service fee model with the benefits of SB 478 by allowing restaurants to support higher wages and benefits while clearly disclosing the charge to consumers upfront.
