In larger, progressive cities, restaurants are enlisting guests to help offset employee costs like healthcare and other benefits.

Kim Bartmann has subsidized employee healthcare for her Minneapolis restaurant employees since 1993. But that longstanding commitment only received widespread attention last year when she rolled out a 3 percent surcharge at all her restaurants and plainly told customers it was needed to cover the rising cost of health insurance.

“It certainly does communicate that to people who come into our stores,” Bartmann says.

Aside from rising insurance costs for her roughly 400 employees, Bartmann faces other financial challenges: Minnesota is one of only seven states without a tip credit, and in 2017 it became the first Midwest city to pass a $15 per hour minimum wage ordinance.

She says she wanted to transparently communicate the financial challenge to customers, but she didn’t believe there was enough price elasticity to cover rising costs by simply increasing menu prices—at least not in Minneapolis.

“Consumers of casual restaurants don’t want to pay $15 for a burger,” she says. “Thirteen dollars is like their top end in the Twin Cities.”

Bartmann says she’s received little pushback from customers and that the 3 percent surcharge hasn’t affected tips. But she still isn’t sure that restaurant surcharges—a concept that originated in pricey coastal markets—are ready to go mainstream across the heartland.

Her 10 concepts, ranging from the casual Tiny Diner to the French brasserie Barbette, are known for sourcing ingredients from organic farms and for using sustainable practices.

“I think you definitely need to know who your customers are and align your practices,” she says. “I do live in what some people would term a liberal enclave, a bubble, and a majority of my customers appreciate our communicating that we subsidize our employee healthcare.”

Stephen Zolezzi, president of the Food & Beverage Association of San Diego, says operators in California’s second-largest city are cautiously implementing surcharges. They see it as another way—in addition to raising menu prices—to combat rising rents and spiking healthcare costs.

The surcharges allow restaurants to separate menu prices from operating expenses with customers, Zolezzi says. Oftentimes, rising costs are associated with healthcare or wage mandates out of operators’ control.

“Customers then realize this is what it’s going to cost,” he says. “These programs can be beneficial, but they cost money. The business has to be able to pass those costs onto the customer in a realistic way.”

He believes surcharges make most sense in the states without a tip credit, as well as in cities with the highest operational costs.

“It really is very geographic,” Zolezzi says. “I don’t see administrative surcharges being something that’s going to be done universally. In bigger markets—New York, Chicago, San Francisco, Los Angeles, San Diego, Seattle—the more expensive markets, we’ve got to have alternatives.”

But in arguably the nation’s most expensive restaurant market, operators are prohibited from implementing surcharges. New York City banned those fees decades ago after some restaurants applied a charge to certain high-priced items, says Andrew Rigie, executive director of the NYC Hospitality Alliance.

“We shouldn’t be handicapped by a more than 40-year-old local rule that was adopted for a completely different purpose,” he says.

The 2,000-member alliance recently penned a letter to New York City Mayor Bill de Blasio asking for the right to assess surcharges of 3 to 5 percent “to generate the revenue to simply survive.” The letter was signed by more than 200 full-service operators.

Surcharges have mostly been implemented in the most progressive—and expensive—markets across the country, and operators in New York want the same option, Rigie says. Like other elements of the restaurant business, Rigie says, customers will ultimately determine the success of surcharges by voting with their feet.

“The market will decide,” he says. “If a restaurant thought they could just raise their menu prices again, they would. But clearly, they don’t think they can, and that’s why they want this option.”

Feature, Finance, Menu Innovations