Why the COVID-era 20% service fee at restaurants outlasted the pandemic

Tipflation. Tip fatigue. Guilt fatigue. Whatever it’s called, the escalating trend of additional tips, service fees and upcharges are creeping into everyday life, and Americans are at a tipping point of their own. A March survey by WalletHub found that nearly three quarters of Americans think tipping has gotten out of hand, and 78% of those surveyed think the same of automatic service charges. Many consumers are ticked off at tipping and service charges and would happily do away with them.

Not so fast, say many restaurant owners. They’re making a case for a flat-fee tip or service charge added to the bill. For many, it’s a way to recoup rising food costs, credit card processing fees, and increased labor costs. For others, adding an automatic gratuity or service charge is a way to pay staff more equitable wages or ramp up employee benefits like health insurance, paid sick leave, and 401(K). In an always-volatile industry, these restaurateurs argue that the service fee is a more transparent way to avoid menu hikes that would drive diners away.

The case for service fees

According to the National Restaurant Association, 15% of restaurants added surcharges or fees to guest checks. Exactly what these add-ons are for can be vague, however. A fee could cover anything from employee health insurance to owner operating costs, and state and federal laws sometimes clash over how they’re described and how they’re taxed. Many restaurant owners are working hard to prevent these fees being lumped in with the so-called “junk fees,” mandatory but not transparent fees often added at checkout, significantly raising the cost of the transaction. The Biden Administration promised a federal crackdown on junk fees in October 2023, and several states introduced their own laws. California restaurants received an eleventh-hour reprieve last month from inclusion in the state law banning junk fees, but many restaurateurs are feeling pressure to remove or at least more clearly define the origin and purpose of their add-on charges.

Sometimes service fees are used to work around state laws that don’t allow kitchen employees to participate in tip sharing. In some states, only employees that have direct customer contact for 90% of their time are eligible to participate in tip pooling. Originally designed to protect tipped employees—usually hosts, servers, and bartenders—from predatory owners who might claim tips for themselves, these laws had the practical effect of preventing back-of-house staff from sharing tips with the front of house.

Service fees at restaurants can range from a percentage or two up to 25%, charged by Michelin-starred restaurant Daisie’s in Chicago “to ensure our deserving staff members receive equitable pay and benefits,” according to a statement on the restaurant’s website. Customer reactions to service fees have been mixed, with some accepting add-on fees as a consequence of post-COVID inflation and others outraged at the higher costs.

Sandy Levine owns Freya, a restaurant in Detroit, which implements an automatic service charge of 22%. This fee goes directly to the restaurant’s staff as tips and to pay for health care. The decision to add the charge took him a long time, he says. “I’ve gone into week-long wormholes trying to figure out the best way to make sure that our staff is making a living wage without putting the business at risk,” says Levine. Increased food costs due to inflation and supply chain shortages are one factor. Another is the rising cost of wages: In Michigan, where Levine operates, a mandatory minimum wage increase for tipped employees was approved in August 2024 by the state’s Supreme Court, but labor costs in Michigan and across the U.S. have been steadily rising for nearly half a decade.

Levine is glad that restaurant employees are getting better wages, but it’s a juggling act as an owner: Tweak the menu prices too much and customer backlash will mean less revenue, which means less money for staff anyway. He briefly raised prices at one location by about 10 to 12%, but, he says, “we had figured out that our costs were about 48% higher” anyway.

The gratuity add-on at Levine’s restaurants is designed to address the traditional wage inequity between kitchen and dining room staff, which can be as much as $50 per hour or more at fine dining restaurants. The gratuity is split evenly between front and back of house employees and is clearly referenced as a gratuity on the restaurant’s website in advance of reservations, and on customer bills. Levine estimates that the fee is about equal to what his customers usually tip, and some add an additional tip as well. “For the back of the house, it adds maybe three or four bucks [more] an hour,” he says, “and for the front of the house, it usually only cost them a maximum of maybe 20 or 25 bucks” per shift, which he says the dining room and bar staff agreed to when the policy was implemented.

For many restaurant operators, service fees are a buffer during times of economic flux in an industry with notoriously low profit margins.

At Los Angeles’ Botanica, the 5% service fee is dedicated to operation costs, says owner Heather Sperling. She broke down her 2023 profit and loss statements: One percent of the restaurant’s revenue goes to employee benefits, 1% to workers’ compensation insurance, 4.9% to payroll taxes, and 3.11% to credit card processing fees. “When we say [the fee] offsets some of the very cumbersome operating costs, those are really what we’re talking about,” says Sperling. Unlike the 22% gratuity at Freya, Botanica’s fee is optional, although Sperling notes that only a handful of guests have opted out in the seven years since Botanica opened.

Those credit card processing fees are a sticking point for many restaurateurs. Several federal legislative efforts are in the works to ease the fees imposed by credit card companies, which range from 2 to 5%. Tyler Akin, owner of Bastia restaurant in Philadelphia, is also a board member of the Independent Restaurant Coalition (IRC). The IRC was founded in March 2020 by small restaurant owners across the country. Today, it lobbies for the Service Charge Tax Fairness Act, which caps restaurant service charges at 25% and requires greater transparency in fee disclosure, as well as guaranteeing that service charges are directly distributed to non-management employees. The group also advocates for the Credit Card Competition Act of 2023. Says Akin, “In the case of credit card fees, it’s like the death by a thousand cuts that nobody really notices until you step back in January and look at your books and you’re like, ‘wow, that 3% could have been really helpful elsewhere.’”

The case against service fees

Scott Marsh takes the opposite approach. He’s director of operations at a 40,000-square-foot restaurant and concert venue called The Jones Assembly, in Oklahoma City, which employs more than 600 employees. After holding a large staff meeting, he and his partners decided against a mandatory gratuity. For him and his staff, the numbers just weren’t different enough to justify tacking that dreaded sentence on at the end of the bill. In order to retain staff and remain competitive as an employer, he opted for paid medical and mental health benefits and paid time off for anyone working more than 30 hours per week. That investment, he says, “became a really important recruitment tool.” Better employee retention also helps rising operational costs from inflation and wage increases, because The Jones Assembly spends less time and money training new staff.

Matt Mergener is co-owner of two Detroit establishments: Two Birds, a neighborhood bar in West Village, and Easy Peasy downtown. For him, service fees are a definite no. “We should as business owners be able to build that into prices,” he says. “I feel like credit card fees and things like that have been around long enough where we just built that into” the pricing structure.He is considering implementing an automatic gratuity, but only at his downtown bar, which is higher volume and has more tourist visitors than regulars.

“We haven’t done an auto gratuity,” at Easy Peasy, he says, “but the tips downtown generally are lower. It’s something we’ve started to learn. So I can see why some places do it. We haven’t done it, but you know, it’s something we’re always reevaluating and talking to staff about.”

It’s a balancing act, says Sperling. “There is a sort of subtle art to your menu pricing, and it’s a complicated art where you really have to balance what you need to charge for your business to work on one hand, and what you can charge for the perception of your restaurant on the other hand.” A “Tuesday night” neighborhood restaurant like hers, she says, can get away with less upcharge than a “birthday dinner” night out.“Many operators over the years, myself included, have decided that even though, of course, this is all contributing to the check total for a diner, it feels a little bit more elegant and less off-putting to frame part of the cost of dining as a nominal service charge, rather than continuing to bump up our menu prices.”

There’s no denying that between rising labor and food costs, many restaurant operators are scrambling to hold onto dwindling profit margins. That balancing act—to fee or not to fee—might make up that difference, or drive loyal customers away.