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FTC looks at regulating restaurant service fees, delivery charges

The regulatory agency is seeking another round of public comment on what rules should be adopted to combat "junk fees."
The overall goal will be greater transparency, the FTC said. | Photo by Lisa Jennings

The Federal Trade Commission indicated Wednesday that it intends to regulate restaurant service fees and delivery charges as part of a larger effort to protect consumers from the unexpected and often hidden surcharges known as "junk fees."

The agency announced it will seek additional public comment on how to protect consumers from being hit with charges that aren’t reflected in the stated prices of goods and services. A first round of comment-seeking apparently led the FTC to add restaurants to the list of businesses that routinely surprise customers with extra charges. Those earlier-identified culprits include hotels, airlines, ticket sellers and cable-TV services.

The FTC indicated that it will aim for more transparency rather than bans on surcharges. “Businesses would have to include all mandatory fees when telling consumers a price, making it easier for consumers to comparison shop for the lowest price,” it explained.

In Washington, D.C., and a few other areas that have already set guidelines for restaurant service charges, transparency has been the core requirement.

In the District, for instance, where use of service fees has soared since May, restaurants are required to post highly visible alerts on menus that a service fee of a specific amount will be added to all bills. The establishments also have to reveal how the money from the surcharges will be used, and are limited to using the proceeds solely for that purpose.

Failure to comply with the guidelines can result in a fine of $5,000 for a first offense and up to $10,000 for subsequent violations.

Misleading fees would be prohibited outright, the FTC said.

“For example, a meal delivery app that chooses to itemize a mandatory service charge as part of the Total Price cannot mislead consumers about the service for which the fee is charged,” it wrote. “If a portion of the service charge is used to compensate a delivery driver while another portion is used to compensate the Business for providing the online application, a description that combines both portions without specifying the recipient of each portion of the service charge would violate” the FTC’s prospective rules.

In comments submitted already to the FTC, consumer advocates complained that delivery customers are often surprised to be charged more than the posted prices for the food they ordered, a result of fees being tacked on by third-party services.

In addition, the FTC said, there’s no breakdown of how the proceeds will be used.

“The nature or purpose of these fees is not always clear or is misrepresented, for example, when fees identified as delivery fees do not go to delivery personnel,” it wrote in its formal request for additional comment.

Hidden delivery fees will be banned by state law in California starting next year. Many municipalities, including New York and San Francisco, have also instituted regulations governing delivery fees, including caps on the amount of the charges.

The FTC said it received 12,000 comments from stakeholders in its first round of soliciting public comment. Although many of the complaints about junk fees were focused on online commerce, a meaningful proportion addressed the surprise charges that are levied by brick-and-mortar businesses as well.

Unexpected fees are particularly common in the lodging business, the FTC noted. Guests often find a “resort fee” tacked onto their folios without warning, while short-term rentals like Airbnb locations often add a cleaning fee.

The regulator noted that surprise surcharges are also routinely used by concert-ticket services, apartment-placement agencies and even prisons, where inmates may not be apprised ahead of time of the fees they’re charged for certain goods and services.

The FTC proposed that its federal regulations would not supersede state rules on surcharges, leaving the door open for stricter state-level guardrails.

In a footnote, it acknowledged that exempting restaurants from a fee-disclosure final rule would save the industry money. Among the variables it will weigh, the FTC said, is whether it should focus on specific businesses rather than issuing rules that apply to all economic sectors.

Similarly, it aired the possibility of exempting some restaurants from a final rule on the basis of size or serving style.

“This proposed rule appears to be a scattershot plan that both attacks the restaurant business model and forces us to raise our prices," Sean Kennedy, EVP of public affairs for the National Restaurant Association, said in a statement provided to Restaurant Business. "Small business restaurant owners create the economic engines of their local economies, which is why it is disappointing that this proposed rule appears to be a one-size-fits-all rule for businesses big and small.

"We’re still closely reviewing what the FTC has included about restaurants and analyzing the ways in which their proposal changes will fundamentally change the way restaurants do business," he added.

The public will have 60 days to comment on the FTC’s proposal. The regulatory agency will then use that input in drafting a final set of regulations.

“The proposed rule would also have enforcement teeth, allowing the FTC to secure refunds for harmed consumers and seek monetary penalties against companies that do not comply with its provisions,” the agency said.

It estimated that junk fees cost American consumers “tens of billions of dollars per year,” and that regulations governing their use will spare the public about 50 million hours per year in having to build the actual price of certain goods and services.

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