On October 11, 2023, the Federal Trade Commission (“FTC”) released a Notice of Proposed Rulemaking to prohibit unfair or deceptive acts or practices relating to hidden or misleading fees that companies add to consumer purchases. The proposed rule follows the FTC's issuance of an Advanced Notice of Proposed Rulemaking, which sought comments regarding unfair and deceptive practices and fees. The FTC received more than 12,000 comments about how fees affect the public's personal spending or business. While the comments reflected the widespread practice of junk fees in various industries, the FTC specifically noted the restaurant industry in the preamble to the proposed rule.
The following is a summary of the Notice of Proposed Rulemaking concerning the hospitality industry.
Rise in use of fees.
The preamble to the proposed rule cited the National Restaurant Association’s 2023 State of the Industry Report for the statistic that 15% of restaurants are adding fees to bills. The FTC noted that fees in the restaurant industry take several forms, including:
the long-standing practice of full-service restaurants charging a mandatory service fee for large parties (e.g., 6 or more guests);
adding mandatory service fees for parties of any size that are equal to a percentage of the bill (e.g., 18%-22%) similar to percentages used to calculate gratuities;
charging fees to support higher wages or enhance workers’ benefits;
adding inflation-related charges; and
charging customers a fee for paying with credit cards instead of cash.
Disclosure of fees to customers.
Restaurants have discretion regarding how they disclose fees to customers. Some restaurants prominently say they have moved to mandatory service charges or instruct customers not to provide tips. Some restaurants have waitstaff explicitly informing consumers that their bills include a mandatory service charge, and thus, no tip is necessary. Others disclose fees on menus.
Deceptive practices in restaurants.
Commenters stated that restaurants routinely add fees to bills that were not previously disclosed. These fees go by various names (e.g., service fee, hospitality fee, kitchen fee, equity fee, economic impact fee, temporary inflation fee). The commenters expressed concern that these fees do not clearly or conspicuously identify their nature or purpose.
One such concern regarded whether service charges go entirely to the staff. While a restaurant’s management may not keep tips received by its employees for any purposes, no such prohibition exists for service fees imposed by a restaurant. Owners have complete discretion regarding the use of service charges, including whether the monies are passed on to waitstaff.
Reasons for the proposed rule.
While unfair or deceptive practices relating to fees are already unlawful under Section 5 of the FTC Act, which prohibits unfair or deceptive acts or practices, the proposed rule (if finalized) will allow the FTC to seek civil penalties against violators and more readily obtain monetary redress for the consumers who are harmed. The proposed rule will enable the FTC to more effectively police unfair or deceptive fee practices.
The proposed rule.
The proposed rule would prohibit as unfair or deceptive practices: hidden fees and misleading fees.
Regarding hidden fees, the proposed rule:
Targets bait-and-switch pricing and would prohibit businesses from offering, displaying, or advertising an amount that a consumer may pay without clearly and conspicuously disclosing the total price.
Requires businesses to include any mandatory costs for ancillary goods or services in their price disclosures. It also requires any offer, display, or advertisement that contains an amount a consumer may pay to display the total price more prominently than any other pricing information.
Regarding misleading fees, the proposed rule:
Prohibits businesses from misrepresenting the nature and purpose of any amount a consumer may pay, including misrepresentations about the refundability of such fees and the identity of any goods or service for which fees are charged.
Would require businesses to clearly and conspicuously disclose, before the consumer consents to pay, information about the nature and purposes of optional fees that are excluded from the total price. An amount a consumer may pay that is excluded from the total price includes optional fees, voluntary gratuities, and invitations to tip.
Effects of the proposed rule on the hospitality industry.
The proposed rule would require the prices of menu items to be inclusive of any mandatory fees. The preamble to the proposed rule outlined various scenarios of how the hospitality industry can apply the law.
Restaurants that have implemented mandatory service fees intended as substitutes for tipping could satisfy the proposed rule in one of two ways:
Maintain menu prices and eliminate mandatory service fees with the expectation that consumers will resume tipping as is customary.
Increase menu prices to incorporate mandatory service charges and operate on a no-tipping-expected model.
Restaurants that impose large party fees may print separate large party menus that include the large party fees in the menu prices.
Restaurants that impose non-service related fees (e.g., credit card usage fees) may eliminate these fees and adjust menu prices.
The FTC’s next steps.
The FTC is seeking public input on 37 questions. The questions are designed to assist the public and are not a limitation on the issues on which public comment may be submitted.
The period to submit comments will begin once the proposed rule is published in the Federal Register. It will remain open for 60 days afterward.
The Texas Hospitality and Non-profit Law Center only provides this material for informational purposes. The firm does not intend for this material to constitute legal advice. Nor does this create a client-attorney relationship between the firm and any recipient.