Should You Add a Service Fee?
With the rising costs of labor in the current market, there are a lot of restaurants that have or are talking about adding a service fee to their menus between 3% and 20% as a “cost of living” or “Hospitality” fee to enrich the lives of their staff. Some restaurants will remove the ability to tip and add a large fee equal to tipping.
Why are restaurants adding this fee?
The Great Resignation included restaurants for a couple of reasons. A LOT of Front of House employees were laid off or furloughed at the beginning of COVID. When teams were allowed back to work two huge factors led to people leaving the restaurant industry.
The first is that restaurant workers were frontline workers. Interacting with people all day long was risky and a lot of people took unpaid leave to address sickness due to COVID. If they didn’t get sick, they saw a lot of people who did. It was a risk that many people didn’t want to take, so they left.
The other reason for mass resignation from restaurants was that, being cooped up for months, customers were markedly less patient and less nice when they did visit restaurants. It was more peaceful to go work in a delivery company warehouse (and paid a little more in some cases) than a restaurant.
In order to woo new team members, restaurants needed to offer higher wages. When they offered higher wages to new team members, they often had to shore up wages for legacy team members to be fair. In order to afford the wage increases, many restaurants instituted service fees.
Should you add a service fee?
It depends.
You’ll want to consult someone familiar with local laws and regulations and an accountant. There may be rules about how to notify customers about those fees, how much you can take, and what you can do with that money. If you don’t know, it might be more expensive if you get fined.
If you do take a fee, do you plan on removing it at some point? If you expect that it will be a short-term solution, then make sure you commit to evaluating often with the expectation that you’ll be removing it. Make sure you’re thoughtful about the fee. If you have to reprint all of your menus to add information about the fee, make sure your percentage includes covering the menu reprint and/or signage to notify guests.
A better option is to increase menu prices:
You don’t need to display an explanation. Explaining why you’re adding a fee can be polarizing. It can damage the image or reputation of the restaurant if you take a fee. Increasing your menu prices is an expected change at restaurants. Some of your customers may be unhappy about it, but you need to run a business.
Honestly, few people really care. Customers assume that you’re taking care of your employees. Telling them that you’re adding a fee because you can’t take care of your team puts your good image at risk.
Your Front Of House staff (the people who would benefit from the fee) will be dealing with the brunt of customer unhappiness. Giving them a little bump of money, but making their job more difficult for it may go against the spirit of the fee. Sure, if you raise prices they’ll deal with unhappiness too. The main difference is the increased price can be explained with a vague “Our costs have increased, so we need to increase costs to keep our doors open” is easier to explain.
People expect that restaurants will increase prices. It happens all the time. No one is happy about increased prices, but it will likely be easier to understand.
So, can you add a fee?
Sure you can. Just make sure you do all your legal and accounting homework.
Should you add a fee?
It’s not recommended in most cases. Obviously, you know your business better than anyone else. At the end of the day, best practices are to just re-calculate your food costs and COGS and update your menu prices. Make sure you take reprinting your menus into consideration when you’re recalculating COGS.