Restaurant workers fear they could pay highest cost in junk-fee battle

In an industry known for its sky-high turnover rates, Noel Madayag is an outlier. He’s been a cook at Cassava since the business opened 12 years ago. He likes working at the upscale restaurant, which has made headlines for paying all staff at least $20 an hour and providing full health benefits including a 401k with a 5% employer match. 

But as of last week, Madayag is preparing for a job hunt. “I have been working on my resume,” he said. “I need something to supplement [my income].” 

Madayag is just one of many San Francisco restaurant industry workers bracing for the impact of SB 478, a California law aimed at eliminating drip pricing and junk fees. It’s set to go into effect on July 1 and would require restaurants to stop using mandatory surcharges, including the 20% service fee that allows Cassava to provide its staff with health insurance and retirement funds. 

Responding to a deafening roar from restaurateurs who fear the unintended consequences of the law’s passage, state legislators are hustling to pass a carveout for restaurants this week. The revised bill has already received assembly approval, but if it fails to emerge out of the state senate or get signed into law by Governor Newsom next week, most restaurant owners say they’ll be forced to raise menu prices. 

If that comes to pass, workers like Madayag fear that higher prices will deter diners and cause restaurants to reduce their hours. If that happens, Madayag says he’d have to pick up a second job to support his family. That’s if he can find one. 

“It’s not easy finding a second job, especially in this industry, given it’s slowing down,” he said.

SB 478 doesn’t just apply to restaurants; it also requires airlines, hotels and rental car companies to provide all-in pricing. But the change will be especially disruptive for San Francisco restaurants because of a 16-year-old city ordinance requiring most employers to set aside funds for workers’ health insurance. 

The majority of San Francisco restaurants accomplish this by implementing a healthcare surcharge, typically 5-8%. Diners, however, have consistently expressed frustration over their use. It’s not clear that the money really helps workers, critics say, pointing out that dozens of restaurants have been accused of misusing funds that were supposed to go to worker healthcare. 

Kelsey Bigelow, general manager at Mestiza in SoMa, said she benefits from the 5% surcharge the restaurant applies to diners’ bills. The money generated from the surcharge goes into one of Mesitza’s general ledger accounts and then gets dispersed monthly to workers, including herself. 

Right now, Mestiza covers about 75% of the $700 she pays monthly for health insurance. But Bigelow said the revenue generated by the restaurant’s health care surcharge doesn’t fully cover what Mestiza pays out every month to workers. If the restaurant drops the fee and raises menu prices instead, she worries that the gap could get even larger. Combined with the rising cost of ingredients and minimum wage increase also set to go into effect on July 1, Bigelow worries about her employer’s continued ability to provide livable wages and benefits for workers. 

“[The surcharge] is definitely a helping hand for the employer, but also for the employee,” Bigelow said. “I know some people think that it just lines the owner’s pockets. But I feel like, if it’s clearly stated, I have no problem helping any of the places that I patronize knowing that it actually does transfer over into the employees benefit.” 

SB 478 has also reignited the heated restaurant industry debate over tips, or rather, efforts to eradicate them. For the past decade or so, restaurants big and small—most famously, Danny Meyer’s New York-based Union Square Hospitality Group—have tried to eliminate tipping, which has been shown to exacerbate social inequities in the industry. But switching to a no-tipping model has proven difficult for even the most successful restaurateurs, leaving most restaurant workers’ wages at the discretion of diners. 

One major sticking point for workers: SB 478 would make it illegal for restaurants to put an automatic tip on bills for large parties, a practice common at restaurants of all sizes. Kelsey Atchinson, who’s been in the service industry for 15 years and is currently a server at Blue Whale restaurant in the Marina, wasn’t aware the law would impact so-called “automatic gratuities” for large groups. The news gave her pause, but she said she believes customers understand that a 20% tip is standard practice. “It could definitely affect things, but probably just a small percentage,” she said. 

In fact, she says getting rid of surcharges in favor of a traditional tipping model could result in better service. “I think the upside is that you’re going to have to provide better service if you want to get tipped for the work,” she said. “You’re not going to automatically get that tip. You’re going to get what you worked for.”  

Within the industry—and even within the same restaurant—there’s no broad agreement on how SB 478 will impact tips. Melissa Lang, who also works at Blue Whale restaurant in the Marina, came back to the hospitality industry several years ago after working in tech prior to the pandemic. Lang, who handles private event bookings for the restaurant, said eliminating automatic gratuities for large groups could lead to worse service if workers aren’t guaranteed fair compensation. “I can’t even imagine how bad service could be,” she said. “That’s a daunting thought.”

She said she’s watched many of her colleagues either leave San Francisco for more affordable markets or abandon the industry in favor of work with more consistent pay. With the additional uncertainty brought on by SB 478, she predicts even more people will choose to find other work. 

“It’s pretty tough to look at that and not say, I’m not stupid, I can work in tech—or do almost anything else other than work in the service industry.”

Fausto Galicia has worked in San Francisco restaurants for 30 years, starting as a dishwasher at the legendary Postrio and working his way up the ranks to lead sommelier at Pabu. The restaurant charges a 4% surcharge to meet city healthcare requirements but leaves tips entirely up to guests. 

Galicia worries confusion around restaurant pricing after July 1 could result in less money in his pocket. “I tried to read the articles, and it’s not really clear for me. So you can imagine for customers, it’s the same thing,” Galicia said. That confusion, he said, could only lead to one result: less money in his pocket. “Basically, I’d need to change to a different job.”