New on Your Dinner Tab: A Labor Surcharge
Rather than jack up menu prices, restaurateurs in California, Colorado and New York add fees to offset rising labor costs
Restaurant diners are footing the bill for rising minimum wages.
In lieu of steep menu price increases, many independent and regional chain restaurants in states including Arizona, California, Colorado and New York are adding surcharges of 3% to 4% to help offset rising labor costs. Industry analysts expect the practice to become widespread as more cities and states increase minimum wages.
“It’s the emerging new norm,” said Sharokina Shams, spokeswoman for the California Restaurant Association. She said California restaurants are adding surcharges as the state lifts the minimum wage every year until it reaches $15 an hour by 2023. It is currently at $10.50 an hour for employers with 26 or more workers.
The federal government hasn’t raised the minimum wage of $7.25 an hour since 2009, putting pressure on cities and states to boost wages locally to keep up with rising living costs. The effective minimum wage has increased in 27 states and Washington, D.C., since January 2014.
Many restaurant owners say they have added surcharges because jacking up menu prices can turn off customers who are sensitive to how much a sandwich or bowl of soup should cost. When prices do rise, “consumers often trade down in the types of menu items they order, choosing a sandwich instead of an entree, or they leave off beverages or dessert,” said Bonnie Riggs, restaurant analyst for NPD Group Inc.
As it was, the average customer check at casual-dining restaurants, which doesn’t include surcharges, rose to $14.70 last year, up nearly 11% from 2012, according to NPD.
While adding a surcharge risks turning diners away, some restaurateurs say they want customers to understand the consequences of higher wages on a business with profit margins of generally between 2% and 6%.
New York is the rare city that doesn’t allow such administrative fees due to a decades-old consumer protection law. The New York State Restaurant Association is lobbying officials in New York City to legalize restaurant surcharges after the minimum wage for most workers in the city increased this year by 50 cents to $11 an hour and rose to $12 an hour for fast-food workers.
Lawmakers approved a measure in 2016 setting a $15-an-hour minimum wage in New York City by 2019, and putting the rest of the state on a path to eventually reach that level. Some restaurants in other parts of the state have already added surcharges.
In San Francisco, most restaurants have added surcharges in recent years since the city in 2009 required businesses with 20 or more employees to help pay health-care costs, said the Golden Gate Restaurant Association. Gwyneth Borden, the association’s executive director, said surcharges have benefited workers because customers tend to tip off the total bill rather than the food price. “Servers are raking in more money,” she said.
After San Diego raised its minimum wage by a dollar an hour to $11.50 on Jan. 1, many restaurants added surcharges to their checks. Some failed to notify customers the surcharge was coming, or erroneously called it a “California mandate.”
“It was their way of speaking out politically about something they didn’t agree with,” said San Diego City Attorney Mara Elliott. Her office received formal customer complaints involving more than two dozen restaurants.
Sami Ladeki added surcharges to the menu at six Sammy’s Woodfired Pizza & Grill restaurants in San Diego and eight more across California. He said it was a mistake to call the charge a state mandate, and has changed the wording. But he remains critical of rising minimum wages.
“This is not sustainable,” said Mr. Ladeki, who says he makes a profit of around 1% charging $12 to $14 a pizza. “People are not going to pay $15 or $20 for a pizza.”
Jamie Hampton, 37 years old, walked out San Diego’s BO-beau kitchen + bar in January after seeing a notice about the surcharge. She and her boyfriend chose a restaurant across the street that didn’t charge one.
“I think they were just making a political statement,” said Ms. Hampton, who voted for the minimum-wage increase and said she was personally offended that the restaurant blamed the wage increase for higher prices.
David Cohn, who owns 15 restaurants in San Diego, including BO-beau, said his 3% surcharge wasn’t a stunt.
“We want people to understand there is a cost,” Mr. Cohn said. “How do we stay in business with margins shrinking and competition increasing?”
