OAG Testimony on Bill 25-280, Workers and Restaurants Are Priorities Act of 2023

Statement of Adam Teitelbaum, Director, Office of Consumer Protection, Office of the Attorney General for the District of Columbia

Before the Committee on Business and Economic Development

Public Hearing on Bill 25-280, Workers and Restaurants Are Priorities Act of 2023

June 8, 2023

Good afternoon, Chairman McDuffie, Councilmembers, staff, and residents of the District. My name is Adam Teitelbaum, and I am the Director of the Office of Consumer Protection in the Public Advocacy Division at the Office of the Attorney General for the District of Columbia (OAG). Thank you for the opportunity to provide comments on behalf of OAG on Bill 25-0280—the Workers and Restaurants Are Priorities Act of 2023 (Bill).

In offering these comments, we are mindful that restaurants, like so many businesses in our country, struggled significantly during the pandemic. The past few years have seen unprecedented turmoil as restaurants nationwide were forced to navigate reduced revenues, staff departures, and ever-changing dining restrictions. Some, including here in the District, were forced to close permanently. And now, while restaurants are recovering from the pandemic, they continue to face operational challenges, including labor shortages, rising supply chain costs, and adverse impacts from the post-pandemic prevalence of tele-working. OAG supports efforts to ensure a vibrant restaurant industry in the District. These efforts, however, must not come at the expense of consumer confusion or harm to workers. We therefore urge the Committee to reject Sections 3 and 4 of the Bill because, if passed, they would undermine key protections afforded to consumers and service workers under existing District laws.

The Consumer Protection Procedures Act

To fully consider the impacts of the Bill, it must be viewed in the context of the District’s Consumer Protection Procedures Act (CPPA)—one of the strongest consumer protection laws in the country. Enacted in 1976 by the Council, and updated and strengthened by the Council over the years, the CPPA protects consumers by prohibiting businesses from engaging in deceptive or misleading conduct. Among other things, the CPPA requires businesses to timely and adequately disclose information that consumers would consider important when deciding whether to purchase goods or services.

In recent months, OAG has received scores of complaints and expressions of concern from District consumers who believed, often mistakenly, that restaurants that impose service fees distribute those fees directly to service workers, on top of their base wages. In other words, many DC consumers believe that service charges compensate servers and effectively function as tips. As a result, many of those consumers are reducing what they would otherwise pay in tips to service workers or choosing not to tip at all. To address this confusion, OAG issued guidance about restaurants’ disclosure obligations under the CPPA. Our guidance was essentially two-fold:

  •  First, before consumers order their meals or drinks, restaurants must prominently disclose the existence and amount of any fees, including service fees, that they intend to charge so that consumers are not surprised by additional charges when their bills arrive at the end of their meals.
     
  • Second, restaurants must be transparent about the purposes of the fees they charge—for instance, by disclosing whether “service fees” function as tips which are paid fully and directly to workers on top of their wages, as many diners assume, or whether they are used to cover operating costs, such as base wages.

These disclosures are required under the CPPA so that consumers can make informed choices about where they choose to eat and drink, how much they order, and whether or how much to tip at the end of a meal. OAG mailed this guidance to over 2,400 restaurants in the District in March 2023. The purpose of OAG’s mailer was to educate restaurants about their legal obligations and to address consumers’ concerns about surprising and confusing service charges. OAG received positive feedback from District restaurants who welcomed our guidance on restaurant fees as a measure that would level the playing field between restaurants that are already disclosing their service fees and those that are confusing customers with ambiguous or hidden fees.

Protecting Consumers and Service Industry Workers

Given the critical role that the CPPA plays in protecting District consumers from deceptive and unfair trade practices, OAG is concerned that several provisions of the Bill—especially when read in concert with one another—will increase consumer confusion, allow consumer harm, and reduce worker wages.

First, the Bill changes when and how a service fee must be disclosed. Under current law, restaurant service fees are treated the same as fees in every other industry: consumers must be adequately informed about fees at the beginning of a transaction. The proposed Bill would create a special carve-out to the CPPA for restaurant service fees by allowing them to be disclosed verbally, by reasonably visible signage, or on a restaurant’s website. These minimal disclosure standards would allow a restaurant to bury its disclosure about a service fee in fine print on a menu or place it on an obscure page of its website where consumers are unlikely to see it—the result being that diners may not become aware of mandatory service charges until after they have consumed their meals and receive their bill. For this reason, we urge the Council to reject Section 3 of the Bill. Restaurants should be held to the same standard as all other merchants in the District, and should be legally required to inform consumers about service charges in an effective manner and at the outset of a purchasing transaction.

Second, the Bill relieves restaurants of the obligation under the CPPA to disclose to consumers how they will use the proceeds of service charges. Under current law, merchants must provide consumers with all information that might influence their purchasing decisions. We know that consumers’ decisions about whether and how much to tip are influenced by how they believe service fees are being used by restaurants. We also know that many consumers believe that restaurants handle service charges like tips, leading reasonable consumers to tip less—or not at all. This is exactly the type of confusion that the CPPA was designed to address. This Bill, as proposed, would remove that requirement for restaurants under the CPPA, exacerbating consumer confusion by defining a “service charge” differently than what many consumers understand the term to mean. The Bill defines a “service charge” as a mandatory charge that is “used to pay base wages of the employees of the vendor.” This means that the fee does not need to be given to workers in addition to their base wages, like a tip would, and that the fee can even be used to pay the salaries of managers. So, not only does the Bill eliminate the CPPA’s requirement that restaurants inform their diners about what service charges are used for, it affirmatively allows them to use these fees in a way many reasonable consumers would not expect.

Third, OAG’s concerns are further compounded by Section 4 of the Bill, which would exempt service charges of up to 22% from being taxed as sales revenue—creating a strong incentive for every District restaurant to begin charging 22% service fees, including for those which do not currently charge service fees. Coupling a tax exemption with service fees which we know are already causing consumer confusion will only lead to more confusion. Moreover, the White House and others have recently called for an end to the practice of “drip pricing,” where a merchant initially presents a low price for goods or services and then incrementally increases the final cost with additional charges and fees. [1] As the Biden Administration explained, and as the academic literature confirms, these fees are irritating to many consumers, weaken market competition by making it more difficult for consumers to compare prices, and cause real harm where consumers end up incurring greater costs than they had initially budgeted or expected. [2] In other words, even if service charges are adequately disclosed and explained, the Council should carefully consider the consequences of legislating tax relief that will encourage the proliferation of service fees. To be clear, OAG does not take issue with a policy decision to legislate tax relief that benefits restaurants, but we urge the Council to consider the incentives created by tying the tax exemption to the imposition of service fees.

[1] https://www.whitehouse.gov/briefing-room/blog/2022/10/26/the-presidents-initiative-on-junk-fees-and-related-pricing-practices/.

[2] https://www.sciencedirect.com/science/article/abs/pii/S0167268120301189.

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Restaurants play an essential role in the business, tourist, and social life of our city. They are major local employers and key contributors to the District’s economy. Like the Council, OAG supports the growth and success of the District’s restaurant industry, which is why we issued guidance that would assist their recovery from the pandemic years and help them navigate the phasing out of the tipped minimum wage. We also believe it is critical that all restaurants compete on a level playing field, where the rules are known and uniformly followed. To alleviate any lingering confusion among restaurant owners, as well as continuing confusion among consumers, we are planning to supplement the guidance we previously issued by preparing specific examples that illustrate how restaurants can disclose and charge service fees in a manner that complies with the District’s consumer protection laws. To the extent the Council wishes to subsidize restaurants, we urge the Council to do so in a direct manner, not through legislation that is likely to provide such subsidies at the expense of consumers or hard-working service employees.

Thank you once again for the opportunity to speak about OAG’s concerns regarding Sections 3 and 4 of B25-0280. I welcome any questions that the Committee may have.