Where do restaurant “service fees” really go?

Service charges are making dining out more expensive, but that doesn’t mean your server sees that cash.

Service charges have become commonplace for things like online delivery and concert tickets, but they’re increasingly showing up in unexpected places — namely restaurants. While there’s no formal data yet on how many restaurants are implementing service charges, industry experts say those fees are definitely on the rise, and they expect to see even more of them soon.

On the surface, service fees can be well-intentioned. They’re born out of a desire to fix what’s long been considered a broken American tradition of paying servers in tips. Increasingly, they’re also a means for restaurants to survive what’s seemed like one onslaught after another.

“You’re seeing service charges a lot very recently,” Sean Jung, an assistant professor who studies hospitality analytics at Boston University, told Recode. “It means that basically everyone in the restaurant industry is having a very hard time.”

But done poorly, these new fees can hurt the workers they’re trying to help, by causing them to lose out on tips that make up the majority of their wages. They can hurt the restaurants, too, as they rely on an emotional relationship with their customers that can be irrevocably damaged if those customers feel tricked.

Service fees also risk hurting consumers, who are constantly battling higher costs. Americans spent $87 billion at food services and drinking establishments in September alone, up 11.4 percent from a year earlier, according to census data. Prices for food at full-service restaurants rose 8.8 percent in September from a year earlier, according to the Bureau of Labor Statistics.

This week, President Joe Biden announced that his administration is cracking down on hidden fees, or “junk fees,” that he says are costing Americans billions of dollars a year. Earlier this month, the Federal Trade Commission took a similar stance on “unnecessary, unavoidable, or surprise charges that inflate costs while adding little to no value” that are “proliferating through the economy.” It’s not clear if restaurant service fees are among them, but in some cases, it looks that way.

A look at Google Trends shows that diners are nonplussed by service charges, increasingly searching online to figure out whether or not they’re a tip. But looking it up doesn’t really help, since there is no set definition.

Service charges typically range from 3 to 20 percent of diners’ bills, and what they’re used for varies from state to state and restaurant to restaurant in what Stephen Zagor, an adjunct professor at Columbia University’s business school, calls the “Wild West of fees.”

In some cases, these fees go to the server, sort of like a mandatory tip that’s taxed differently. They can go toward better pay for employees at the back of the house, like chefs and dishwashers, who have traditionally been left out of the tipping system. They can help cover employees’ tipped minimum wage, which is the low hourly wage restaurant workers get that’s supposed to be supplemented by tips, and they go toward employee health care. They can go help restaurants pay for credit card fees. They can also go to the restaurant owners themselves.

And due to infrequent explanations and a hodgepodge of state laws, it can be really hard to tell what’s happening with that money. In New York, service fees have to go to the service staff unless the restaurant explicitly states otherwise. In Florida, restaurants can use the fees for whatever they want, from credit card fees to employees’ tipped minimum wage. In California, the fees belong to the restaurant itself, though many decide to pass it on to staff. A recent ruling found in the state that they could in some cases be considered tips, so it’s best practice to specify exactly where those tips are supposed to go. And of course laws are only as strong as their enforcement.

Why service fees make sense to restaurants

Mandatory service charges have existed in some sense — usually for large parties or catered events — forever, but they started taking root in their current form about a decade ago. Extra fees really started taking off in earnest since the pandemic began.

One of the main reasons restaurants are implementing these fees so much now is a need to bring in more revenue, especially as recent headwinds have pummeled the industry. The pandemic forced many restaurants to close for months on end — or permanently, in many cases — starving the businesses and their employees of wages. It also forced restaurants into a lose-lose relationship with food delivery platforms. Services like Grubhub and Uber Eats proved essential during the early stages of the pandemic and are still crucial for attracting customers, but they’ve also locked restaurants into agreements that involve forking over upward of 30 percent of their sales to the online platforms.

Most recently, restaurants, which have notoriously low profit margins, are dealing with soaring inflation that’s driving up prices on everything from food to labor to linens.

“Costs have been astronomical because of the inflation situation,” said Laurie Thomas, executive director of the trade organization Golden Gate Restaurant Association and owner of two San Francisco restaurants. “And we’re coming off two years of hell.”

Thomas has had a 5 percent service charge at her restaurants for over a decade, to help offset the costs of local ordinances that require restaurants to help pay for things like health care and paid sick leave.

As an extra line item on a receipt, a service fee can help restaurants deal with rising costs in a way that doesn’t deter customers, who will choose one restaurant over another based on the price of an entree.

“It’s a way of disguising price increases,” Zagor said. “It’s a way of taking what’s going on in America now with inflationary and supply-and-demand price increases, and parceling it out into small, hopefully bite-size, edible bits that people will accept rather than suddenly your chicken salad has gone from $12 to $16.”

Service fees have become especially prominent in tourist destinations — places like Times Square or Miami Beach, where customers are less likely to be regulars and less likely to meaningfully complain.

“Why not charge a service charge?” Jung, the Boston University professor, said of restaurant owners’ rationale in tourist areas. “They’re not going to come back anyway.”

The problems with service charges

For service fees to work, customers have to either not notice them or completely understand and agree with what’s happening to that money. It’s not clear that either of those things is happening on a regular basis.

And when customers do notice the service charge, that can affect the tips workers get — a big problem if workers rely on tips and those service charges aren’t going to them. Even if the fees end up back with the waitstaff, they’re taxed as wages, so the workers aren’t getting all of it.

“A person would only be willing to pay, let’s say, 15 to 25 percent of what they ate, and they consider that the service gratuity,” Jung said. “If you put in a service charge, that will definitely decrease the gratuity.”

Naturally, the practice of adding extra fees is particularly upsetting to workers who are used to making a lot in tips.

Lina, a server at a high-end restaurant in Miami, told Recode that she’s already changed her job several times this year but hasn’t been able to escape what seems like a ubiquitous 20 percent service charge. Customers wrongly assume the money is going all to her, then don’t tip, said Lina, who asked that we not use her last name so she didn’t get in trouble with her job. That means that instead of taking home $50 an hour as she did at comparable restaurants before, she’s making $25 an hour, despite bringing in a similar amount in service charges as she had in tips.

“The client is thinking he’s tipping you, but in reality, you’re paying for credit card fees,” Lina said, adding that she believes the restaurant is also taking a substantial chunk. The restaurant has been very opaque about where exactly the money goes, she said, just calling it a “service charge” without explanation.

Lina also says that people typically don’t tip on top of the service charge, making a highly physically and emotionally taxing job less viable.

“It’s very rare and it takes a lot of effort,” she said one morning this week after working a late-night shift. “That’s why I don’t have a voice right now.”

Thomas, the restaurateur in San Francisco, however, says she’s been very clear about where her restaurants’ service charge goes. Therefore, her customers know that it’s not a tip, she says, and tip as they usually did. In fact, Thomas argues that the tip ends up being higher than it was before, since the service charge raises the overall price of the bill.

In addition to how restaurant workers and owners feel about it, customers have their own opinions, and they vary widely.

How service charges are perceived by customers depends on what the charges are for, how they’re implemented, and where they occur, according to Erika Polmar, executive director of the Independent Restaurant Council (IRC), a coalition of more than 150,000 bars and restaurants around that country that formed during the pandemic to advocate for relief from the federal government.

“I have an IRC member in Michigan who added a service charge for a while, and her guests came in and said, ‘What the hell is this? I’ll tip what I want. Don’t tell me what to tip,’” Polmar said. “I have a restaurant in Chicago that switched to the model and [customers] were like, ‘Oh, thank god. Just tell me how to do this and tell me what to give you so that it’s right.’”

Tipping in the US has always been broken

Service charges are also showing up more often thanks to an ongoing movement to fix tipping in the US. Many restaurants have adopted service fees in lieu of tips — and as a way to make sure customers don’t skimp on what was an optional tip — that they then pass on to workers as higher wages.

“The restaurant industry is inherently flawed in that it succeeds only in relation to not fully paying all of its workers a full wage,” said Jacqueline Ross, a doctoral researcher at the University of Bristol who is writing her dissertation on tipping in the US.

At the federal level, servers make a tipped minimum wage of $2.13 an hour. While tips are ostensibly meant as a reward for good service, they often become a “critical wage subsidy,” Ross has written, to ensure workers reach the actual minimum wage of $7.25.

Of course, the generosity — or stinginess — of strangers is uneven at best. So what these workers actually make can swing wildly, depending on a person’s inherent bias or even whether they’re having a bad day.

While some waitstaff at certain restaurants can make really impressive wages, others barely scrape by. If tips don’t hit the minimum wage, restaurant owners are supposed to make them whole, but in practice that doesn’t always happen, as it requires onerous reporting only to end up with less than a living wage.

Ross, who’s worked in restaurants for nearly 20 years and sees both the benefits of tipping and its downside, says the issue is incredibly complicated. Still, she believes that service charges that go directly to restaurant workers — and only to those workers — could make restaurant work in America better.

Such a system could mean fewer highs for well-paid servers, but also fewer lows for low-paid ones. It also means that a restaurant can pay back-of-house staff more equitably.

The longer we live with service charges, the more likely they are to become permanent fixtures. Hopefully that will also mean they become more similar state to state or restaurant to restaurant — or at least more clear.

In the worst-case scenario, Columbia’s Zagor envisions a future in which restaurants become a lot more like the dreaded airline industry. “They’re charging fees for every single thing in the universe, and it’s become the norm,” he said.

In a better scenario, restaurants will be more judicious with service fees and, importantly, more transparent about where they go. That way, service charges might feel less deceitful and maybe even make the dining — and working — experience at restaurants better.