The Federal Trade Commission in October identified restaurants as a target industry in what it’s calling the “Unfair or Deceptive Fees” rule, a proposal that would force certain businesses to eliminate the use of “hidden” and “misleading fees.” Instead, operations (like restaurants) would be required to post total prices for a service or good that reflects all costs outside of shipping and government charges.
As the proposed rule is presently written, Sean Kennedy, EVP of public affairs at the National Restaurant Association, explained in a recent note, it would prevent restaurant operators from including “common, accepted surcharges” on a customer’s bill. It would ban delivery, larger party, and credit card processing surcharges. Kennedy believes doing so would lead to restaurants overhauling menu prices so that the listed price was the total price a customer must pay. In other terms, guests would see higher prices upfront on the menu versus at checkout. It’s a scenario, Kennedy said, destined to amplify inflationary challenges of late, where higher menu prices are sagging guest traffic across the industry and reducing income for employees and operators.
The FTC’s proposal also directs restaurants to create separate menus for large parties where service fees would be incorporated into food prices, “setting them up for questions from consumers about why the same dish costs less for a smaller party,” the Association said.
The FTC outlined the plan could cost restaurant operators $3.5 billion to implement. “Without changes, the proposal could force restaurants to rewrite their compensation models, increase menu prices, and overhaul established business practices,” Kennedy said.
The $3.5 billion breaks down as nearly $5,000 ($4,818.27, to be exact) per operator for menu updates. Small independent operators, Kennedy added, run on a 3–5 percent margin and make an average of $45,000 per year. “The cost of making this change would be approximately 10 percent of their total income,” he said.
Summed up, there are three proposals at work in the rule:
- 1. Remove any separate fees or surcharges—including service fees and large group surcharges.
- 2. Overhaul menus so that the listed price is the total price a customer must pay.
- 3. Eliminate the use of surcharges for dynamic costs such as credit card processing or delivery fees.
Additionally, the Association said, the rule would create a fresh wave of litigation and federal fines for noncompliance. Roughly 70 percent of U.S. restaurants are independents. A good deal could struggle to afford compliance. If so, it’s a decent bet a sizable section simply wouldn’t.
“This change would take away the operator’s choice in determining the best compensation model for their business,” the Association said. “Higher menu prices often lead to a drop in traffic, resulting in fewer hours and less jobs for servers.”
And for operators who have replaced tipping with a service fee, the FTC is directing a return to tipping to eliminate the fee.
Would the FTC’s rule lift transparency, as it aims to do? The Association said it’s not so clear. “Diners like to know what they are paying for, but by eliminating the use of fees and surcharges, the FTC is preventing diners from seeing the costs that are impacting the operation of the restaurant, like credit card processing fees, which are outside the operator’s control,” it said.
For some operators, the Association continued, it’s easy to include credit card swipe fees into menu prices. However, independents and smaller concepts, who operate on the line and are most impacted by rising credit card swipe fees, would struggle to incorporate that cost into menu pricing because it’s a percentage of each transaction, not a fixed cost. Unbanked consumers would also pay higher prices that incorporate swipe fees, even though they pay in cash, the Association added.
“The questions the FTC asks in its proposed rule make clear that the rule’s impacts on restaurants were not fully understood or quantified,” it said. “While it calls restaurants out as one of the three ‘example’ industries, the FTC clearly doesn’t understand that the industry has more than 70 segments that will be impacted differently by their mandates. The rule is unworkable as written.”
Restaurants can voice their thoughts through a portal set up by the Association here.