Restaurant Surcharges as a Response to Rising Minimum Wages

  • Waiter and Couple Dining

In direct response to California’s series of minimum wage increases, several San Diego full-service restaurants are introducing a 3 percent average dining surcharge to cover increased labor expenses. Voter approval back in June 2015 has increased the earnings of the lowest paid works in San Diego to $10.50 on July 11, 2016 and now $11.50 on January 1, 2017. San Diego’s minimum wage is higher than the state’s current mandated minimum of $10.50 for employers with 26 employees or more and $10.00 for employers with 25 employees or less.

San Diego Following Other City’s Footsteps

In an effort to stay afloat of already thin profit margins, restaurant owners have tried alternatives to reducing their operating costs such as cutting employees’ hours and increasing prices. They are left with no other choice but to find an alternative way of covering their added expenses. Owner of three Rockin’ Baja restaurants in San Diego County, Rick DiRienzo, states:

“Of course, I’m worried about a backlash (from diners), but I can’t think of anything else to do other than raise prices and I’ve already done that for the last two years.”

Although several other industries and services such as hotels and car rentals already have certain mandated fees, the restaurant industry in general has not implemented such policies. San Diego will follow suit of other cities which have already carved a path down this road such as San Francisco and Los Angeles.

In 2014, CBS covered a story of a Los Angeles restaurant, République, which began adding a three percent surcharge in order to pay for its employees’ healthcare. Customers quickly expressed their opinions on sites such as Yelp stating,

“It’s not MY responsibility to take care of YOUR employees’ healthcare… that’s YOUR job.”

Others patrons, however, did not mind the surcharge knowing the added costs owners took on to provide healthcare to their employees.

Surcharge advice from the State Board of Equalization

The State Board of Equalization sent out a letter to the California Restaurant Association to provide guidance on how taxation will be applied to surcharges on restaurant bills.

In the letter, the State Board of Equalization acknowledged that a lot of restaurants were considering adding a surcharge of 3% to cover the increased wages and other costs such as paid sick leave, restrictive scheduling, and contributions towards healthcare plans.

Of particular importance and relevance to restaurant owners, the letter states that gross receipts include any other expense that a retailer passes on to a customer. This means that restaurant surcharges are included in taxable gross receipts.

As the California minimum wage continues to increase over the years, we have reason to believe many other cities will follow suit on this restaurant surcharge. The good news is that this surcharge trend has only been seen at full-service restaurants. Although we might see fast-food and casual dining restaurants adjust to rising costs in other ways such as self-service ordering kiosks, the restaurant-surcharge will not likely appear on your receipt. One other place you won’t see this charge: eating at home.

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