What’s a service fee? The story behind the new charge on your restaurant bill

Paying the check at a restaurant
(Via Flickr Commons)

Inflation is pushing the boundaries of price and pricing for everyone, businesses and consumers. Now, new “service fees” can add a few percent onto a bill. Restaurant owners say that helps pay employees and can fund health insurance, but for some, it’s a move they don’t want to make. We look into the tangle of the new charge appearing on some of your receipts.

Have something to say? Lookout welcomes letters to the editor, within our policies, from readers. Guidelines here.


As the friendly barista at Cat & Cloud Coffee inside the bustling Abbott Square Market in downtown Santa Cruz hands me my chai, I notice a new line item on my receipt — a 3% surcharge labeled “health contribution.” The fee, which comes out to 14 cents on my $4.75 bill, now helps cover health insurance for Cat & Cloud’s full-time employees.

Such service fees have become a national trend that’s becoming more common at Santa Cruz County coffee shops, bars and restaurants. While it’s difficult to say how many dining establishments have added a service fee to their bill, the number is growing locally.

The added cost comes with a healthy serving of confusion: What is a “service fee”? Further, why are restaurants suddenly charging them? And how does it affect the tip?

While the “service” that these fees support varies, local business owners most commonly apply them to offset labor costs and add employee benefits. The fee — usually 3 to 5% of the total before tax — supplements employee wages or, like at Cat & Cloud, provides health insurance, they say, while preserving their already razor-thin margins. The fees aren’t regulated and, as long as the business states what it’s for on the bill, it’s perfectly legal.

One thing about service fees is clear: A service fee is not a tip. While it could benefit the server, it isn’t intended to decrease the gratuity.

At East Side Eatery in Santa Cruz’s Pleasure Point neighborhood, guests pay an additional 3.75% service fee on their orders of pizza, burgers and street tacos. Owner Derek Rupp decided to add the fee in 2019 in order to increase wages for his kitchen staff as the rising minimum wage made it increasingly expensive to pay employees. He believes he was one of the first restaurant owners in the county to add one, several years ahead of the current trend.

While his front-of-house employees are able to increase their hourly wage through tips, his “living wage” service fee goes directly to his back-of-house staff in the kitchen, he said. When it’s busy, especially in the spring and summer months, the additional income provided by the fee increases his kitchen staff’s wages, some of which are already as high as $25 per hour, by as much as $6 an hour, although it’s typically $2 to $4 an hour.

“It’s great as opposed to just raising prices in order to raise wages. That only works as long as you’re really busy, and you’re selling a lot. But if you’re not busy and you’re not selling the food, your labor is still the same,” Rupp explained. “This way, when it’s busy and we’re making the money, their wages go up and fluctuate with the business cycle.”

The service fee is now a permanent fixture at his restaurant and, so far, he hasn’t seen his servers’ tips be negatively affected. A customer might occasionally get frustrated, he says, but it doesn’t happen very often. “I think especially with COVID and inflation, people just understand that everything is getting expensive,” Rupp said.

When asked how he feels about service fees, Elias Stanom’s feelings are clear: “I don’t like it.” The co-owner of the new Achilles Restaurant in Santa Cruz, a fast-casual restaurant that specializes in gyros, schawarma and heart-shaped falafel, has seen service fees increase in popularity throughout the Bay Area along with other additional fees for packaging, employee benefits and even COVID fees to provide equipment like masks and hand sanitizer. Stanom says he thinks restaurant owners should simply raise prices if they need to rather than tack on a laundry list of fees.

Like other area restaurant owners, Stanom has watched the price of products and supplies rise higher and higher. He agrees that it’s not realistic for a restaurant to change its prices every day, but believes the fees are getting out of hand.

“If the customer pays full price, and then a tip, I’m not sure an additional service needs to go to the employee. It doesn’t make sense to me,” said Stanom. “They pay for the item, plus a service fee, plus a packaging fee, plus gratuity ... is that right?”

In his experience, it’s rare for a customer to not leave a tip and, he said, Santa Cruz customers are particularly generous. While Achilles’ online ordering platform does charge a credit card processing fee, he says he won’t be adding any additional fees to his Santa Cruz or Santa Clara locations anytime soon.

For more than a year, Sean Venus has considered adding a service fee at his Westside distillery Venus Spirits, the adjoining Santa Cruz restaurant Venus Spirits Cocktails & Kitchen and Venus Spirits Cocktails & Kitchen Beachside, its new sister restaurant in Aptos, but has yet to pull the trigger.

On one hand, a service fee would help cover the cost of health benefits for his 20 to 30 full-time staff members, which he is required to provide based on the size of his business.

Venus believes a 3% service fee would cover his health care costs — plus it’s direct and quantifiable, unlike menu prices that have multiple inputs and are harder to measure. “If we see health care go up, we can adjust that without reprinting all of our menus and making those changes,” he said.

The biggest hurdle is how his customers would perceive it. “We don’t want people to take it off the gratuity,” Venus said. “That would mean stealing money from our employees, and we don’t want that to happen.”

Raising prices isn’t necessarily the clear option people think it is, either. “People say, ‘Why not raise your prices?’ But there’s so much that goes into it,” said Venus. He has raised prices at various times in reaction to increasing food costs, but every time he does he risks losing business by looking more expensive than a competitor.

Either way, with labor expenses consistently rising, Venus admits that whether he raises prices or adds a service fee, the cost is passed on to the consumer: “It’s six one way, a half-dozen the other.”