Restaurants are now twice as likely to charge a ‘service fee’ – but where does the money go?

(NEXSTAR) – Does your restaurant receipt have a few more line items on it lately? Restaurants are increasingly adding service charges to bills, according to point-of-sale company Square.

Square collected data from restaurants that use its service to ring up customers and found that 3.7% of food and drink transactions had service charges tagged onto them in the last quarter.

While it’s still a small portion of restaurants, the practice is quickly gaining popularity. It’s already about twice as popular as it was in 2022. Three years ago, only about 1% of restaurants were adding service or labor charges to bills, according to Square’s data.

Service charges are an add-on fee that is usually not the same as gratuity or a tip for service. Instead, it's a percentage or fixed amount that helps restaurants cover their operating costs. It may also be called a “living wage” charge or “kitchen fee" when it's used to better pay back-of-house staff like cooks and dishwashers. Other times it’s a fee the restaurant says it uses to cover employees’ health care.

Occasionally, a service fee is a mandatory minimum gratuity that gets split by all restaurant employees.

While diners may find the extra charge frustrating, restaurant owners say the small fee can help them stay afloat in a tough economy.

“Margins are slimmer than ever for restaurants, and sellers have needed to find ways to offset higher costs,” said Ming-Tai Huh, head of restaurants at Square, in the quarterly report. “We know restaurants use service fees for many reasons like managing unpredictable shifts in their operations or overhead, maintenance, and administrative costs, among others.

Service charges are often disclosed somewhere on the menu, but many diners look over the fine print, only to feel caught off guard when the check comes.

"As a restaurant owner, it’s important to be clear and transparent about these fees so customers can understand dining costs and what fees are being allocated for," said Huh.

Why not include the fee in the menu prices? Diners don't tend to like that either.

“Restaurants have been increasing menu prices to offset skyrocketing operational costs, but they can only do that so often and by so much before guests complain," Denise Mickelsen, communication director at the Colorado Restaurant Association and Foundation, told Nexstar .

While consumers have started to spend more at small businesses and retail this summer, restaurants are not seeing the same trend. Restaurant sales slipped 1.6% in July 2024 (when compared to July 2023), despite seeing modest growth in foot traffic, up 0.7%.

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Consumers dining out have also seen a significant decrease in average check size, down 2.4% compared to July 2023, although it was not clear if the decrease came from lower prices or diners ordering less.

The Associated Press contributed to this report.

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