OK, But What Are The Service Charges On My Restaurant Bill?

One type of extra fee that’s becoming common in the hospitality world is a “service charge.”

It seems like the cost of going out to eat at a restaurant is always a hot topic for debate; between rising prices, gratuity requests popping up at counter-service spots and seemingly random surcharges, many diners now find themselves studying their restaurant bills more closely than ever.

One type of extra fee that’s becoming common in the hospitality world is a “service charge.” These line items usually involve a percentage of the final check, but you may be left wondering what these “service charges” cover, why they’re appearing on bills so much more frequently now, and whether you can opt out of them as a guest.

We’re here to answer all of these questions with the help of restaurateurs, restaurant consultants, small-business attorneys and accountants.

The recent popularity of service charges can be directly linked to COVID.

First, it’s important to remember that service charges are nothing new for restaurants. “ I’ve seen this for decades under names like ‘Staff Wellness Charge,’ ‘Administrative Fee,’ ‘Service Charge for Tipped Employees,’ and ‘Sustainability Charge,’” said hospitality consultant Jason Littrell .

But the big and recent rise in service charges happened for one clear reason: the COVID pandemic. “The restaurant world has been forced to make many changes since COVID and the rise of inflation,” explained Jonathan Kish , CEO of Queen Street Hospitality Group in Charleston, South Carolina. Kish pointed out that “inflation has been tough on everyone, particularly in restaurants. We work on tight margins that are less than most other businesses, and a 1% increase in cost can yield a 10% loss of profit or more. The ability to pass on a tangible cost to the consumer has saved many restaurants.”

Littrell agreed and emphasized that service charges aren’t instituted with a greed-based goal of gouging the restaurant’s clientele. “ The misconception that restaurants are profiteering from these charges overlooks the stark reality of high failure rates and modest owner incomes. By passing on costs responsibly, restaurants can sustain operations, retain talent and continue providing quality dining experiences amidst economic uncertainty,” he said.

Because these charges are intended to help support employees (more on that in a minute), it’s important for restaurants considering service charges to be as transparent as possible. Our experts suggested printing a clear statement about what the service charge covers right on the menus, broadcasting these policies on social media and sharing them with the local restaurant press, and ensuring that staff is fully informed about the policies and can explain them in detail to inquiring guests.

Service charges cover a wide range of operational costs and employee benefits.

So, what might a service charge be used to fund? The specifics can differ from restaurant to restaurant, and the allocation is ultimately up to each individual establishment. “ While a restaurant’s ‘service charge’ should be clearly understood, that isn’t always the case. It could be used to pay back-of-house wages, health benefits for the staff, delivery [fees], credit card fees, and so on,” said Rick Camac , executive director of industry relations at the Institute of Culinary Education.

Jonathan Feniak , general counsel at LLC Attorney (a small-business firm that represents a number of restaurants), added that “these service charges usually go towards worker incentives and equipment maintenance. By adding this fee, restaurants can pay their staff better and maintain or upgrade their equipment. This helps create a better dining experience and a happier, more motivated team.”

Service charges don’t necessarily replace gratuities.

Many diners assume that a service charge automatically replaces a gratuity and that they don’t need to tip in these situations. But it’s not always that simple.

From a tax-related perspective, Bob Patterson, founder and president of Patterson & Company Certified Public Accountants , told us that service charges and tips are handled completely differently. “Service charges are categorized differently by the IRS. When a service charge is used to increase employee’s [hourly] compensation” or to provide benefits for employees, “it’s not considered a tip. It must be reported as a non-tip wage,” Patterson said.

Don't automatically treat your service charge as a tip.

Unless the service charge is explicitly listed as an auto-gratuity, it’s likely not a replacement for a tip. “While service charges are designed to cover operational costs and ensure equitable pay for staff, tipping remains a personal gesture of appreciation for exceptional service. In major cities, where tipped workers’ incomes can vary widely, tipping can significantly augment their livelihoods,” Littrell explained.

If you’re at all uncertain about whether a tip is expected or whether a service charge covers gratuity, restaurant consultant Kate Edwards urges you to go ahead and ask your server or manager. “It’s OK to ask what the service charge is used for,” Edwards added. “You may discover that the service charge is used for something like paying benefits, which may not be directly offered to the service staff working that shift, [and that] would imply that a full tip would be greatly appreciated by your server.”

Some restaurants charge service fees instead of raising prices to stay competitive.

A common objection to service charges (and other added fees) is that restaurants should just raise their menu prices to compensate for higher expenses and employee benefits. While that idea makes sense in theory, restaurateurs hesitate to act on it based on what they know about customer instincts.

“There are a number of operators who have done just that: raised prices to include a higher hourly rate for their employees, and I applaud that,” Edwards said. “But the challenge is that the consumer is not taking that into account as they compare restaurants and compare menus. They’re comparing apples to apples, so when they see one pasta at a casual restaurant that is $18 and another similar pasta at a comparable restaurant listed at $22, they’re not assuming, ‘Oh, this means they’re paying their staff a living wage.’”

Camac concurs with that opinion because his industry experience shows him that “people ‘price shop’ by looking at your prices online. Restaurants are afraid if their pricing is a few dollars more, the diner will go elsewhere. I also understand the pressure on restaurants to charge more. They need to find a way to remain profitable and sustain the business.  If they can’t raise prices, they raise other fees.”

If you’re wondering whether a restaurant’s service charge is legit, check your local laws.

The way that service charges can be applied to restaurant checks isn’t totally up to the whim of the restaurateur; cities and states have laws that dictate the terms of added fees, and Edwards recommends that diners familiarize themselves with their area’s hospitality legislation: “Applying a service charge is not always legal in various municipalities. It’s essential to understand the laws where your restaurant is located to know what is possible and legal!”