Dining at a tipping point: What service fees, extra charges mean for diners and restaurants

“It turned out to be the most expensive restaurant bill I’ve ever had at nearly $300,” Martin said.

Many diners in the Richmond area have been seeing similar charges on their restaurant bills.

A service fee is automatically added to the restaurant bill, pre-tax, by the restaurant. The service fee is typically 18% to 20%, locally. The service fee is often pooled and distributed evenly among the staff, from dishwashers to bartenders.

But there is confusion with these fees. Patrons are often told they can tip on top of the service fee for exceptional service. Also, restaurant owners have the flexibility to use service fees however they like, which means the server does not always get the full 20%.

“For the most part, (the addition of service fees at restaurants) is to defray the massive increase in their labor and food costs,” said Eric Terry, president of the Virginia Restaurant, Lodging & Travel Association. “The reality is that their costs have grown dramatically in the last two to three years.”

Regardless, the experience left a bad taste in Martin’s mouth, as it does for many restaurant patrons.

Martin said he does not plan to return to The Boathouse or to any other restaurant with an automatic service charge.

Other fees are also starting to pop up on restaurant bills, such as credit card fees of 3% for patrons using credit cards, or take-out fees of $1 to $2 to pay for paper bags, containers and utensils.

“Going out to eat is starting to feel like booking an Airbnb. You order two $10 sandwiches and the bill turns out to be $40,” said Austin Stokes of Richmond. “Getting slapped with all types of fees at the end of a meal definitely dampers the experience.”

Many diners are left wondering: What are these fees? Why are they being added? Where do they go? And should I tip on top of a service charge?

Service fees started gaining traction locally after the pandemic, when restaurants were struggling with the impact of COVID-19, being shuttered for months and facing myriad challenges when they reopened.

Staffing shortages, the increase in the minimum wage, inflation, supply chain issues and an industry shift toward providing employment benefits and a living wage are just a few of the many challenges restaurants are confronting.

The LX Group, which manages Kabana Rooftop, Switch and Nama, has instituted an 18% service charge at its restaurants.

“We have moved to this system to ensure more competitive wages to our staff as well as give us longevity with staff since turnover has been a huge challenge since COVID. This model has allowed us to provide a more consistent and higher hourly wage to staff,” said Kunal Shah, a managing partner at the LX Group. According to Shah, the full 18% is allocated to the staff.

Likewise, Kevin Healy, owner of The Boathouse as well as Casa del Barco and Island Shrimp Co., said the HOUSEpitality restaurant group added the 20% service fee “as a way to guarantee a wage to our service staff. It’s a step in the right direction to professionalize the industry.”

According to the Virginia Department of Labor and Industry, Virginia’s minimum wage for tipped employees is $2.13 per hour, and it applies to workers who typically receive more than $30 per month in tips.

Employers must pay the difference if that wage and tips do not meet Virginia’s minimum wage of $12 per hour, which went into effect on Jan. 1. Consequently, labor costs for restaurants have gone up between 30% and 40%, Terry said.

The median hourly wage for Richmond-area servers (a figure that should include tips) is $13.76, which adds up to $28,620 per year (if a server works 40 hours a week for all 52 weeks).

At The Boathouse, with the service fee now in place, servers typically make around $20 per hour or higher, which is significantly higher than the average wage.

“We wanted to come up with a reasonable and fair compensation. We distribute it in a way so that (our staff) can have a professional income. They can buy a car, rent an apartment or take a vacation. They can plan and not be dependent on the whim of guests,” Healy said.

Most restaurants that include a service fee notify guests in small print on the menu, on websites or verbally through the server.

“People have been complaining about ‘paying servers a living wage,’ and then balk when menu prices go up. A way to fix that is to charge a service charge, usually 18 to 20%,” said Marla Gallaher, a local server. But, she said, that 20% is not usually passed straight on to the server the way a tip would be. “It is collected by the restaurant and used to provide the higher hourly wages.”

“The public doesn’t always understand why tipping is so crucial. If a server is not tipped appropriately,” they cannot pay their bills, she said.

Not every restaurant is implementing these fees.

“If the service staff knows their product, times the delivery and assists in a five-star manner, they will probably receive more than 20% in the long run,” said Ann Butler, owner of 21 Spoons restaurant in Midlothian, which was recently named the “Best Locally Owned Restaurant in Virginia” by Southern Living magazine.

There were nearly 8,000 people employed as restaurant servers in the Richmond metropolitan area as of May 2022, according to the Bureau of Labor Statistics.

Many servers earn more than the median server wage, depending on where they work and the tips they get. “The restaurant where I work does not charge a service fee, and I make well over minimum wage,” Gallaher said.

21 Spoons has, however, started collecting a credit card for reservations and charging a $10 per person fee for no-shows without a 12-hour notification.

“With only 14 tables, this has become a necessity for us. We just wanted to make sure everyone was getting an opportunity to solidly reserve a dinner table,” Butler said, considering the interest in 21 Spoons since the Southern Living article.

Grisette, a small restaurant in Church Hill, also collects a credit card for reservations and charges a $25 fee for no-shows if the reservation is not canceled by noon on the day of the reservation.

For years, dentists’ and doctors’ offices have charged cancellation fees. Now, restaurants are adopting the practice, seeing it as another way to recoup lost income.

“Restaurants operate on razor-thin margins,” the VRLTA’s Terry said. The average restaurant profit margin usually falls between 3% and 5%. “Their margins are so slim, they can’t absorb the increases they’ve had.”

No matter how much service fees may be needed and necessary, by and large, consumers hate them.

“Very simply, I will discontinue going to Richmond restaurants,” said Linda Shelton, a self-described “foodie” in the Fan. “We choose to use a tipping protocol to reward good service and not to pay the ‘staff’ per say. That is the responsibility of the owner.”

Others believe the increase in costs should be added to the menu items.

“I urge restaurants to please account for labor costs in the menu pricing rather than forcing it onto the consumer. Any restaurant we get blindsided by, we’ll not be in a rush to eat at again,” said Jonathan Nedin of Chesterfield County. “As a consumer, I’d highly prefer to see the prices increased to meet the rising cost of business, and ideally the wages of the employees increased as well. I’d rather know what the true price is so I can make informed selections.”

However, menu prices have already increased nearly 8% in the past 12 months, according to a survey from the National Restaurant Association. Many restaurants say they continually adjust menu prices to reflect rising food costs.

Even with inflation starting to taper off, the Producer Price Index for all foods remained 28% in April, above its pre-pandemic level.

With these rising costs, diners are starting to take notice, with fewer people going out to eat.

Between March 2022 and March 2023, 38% of restaurant operators saw their customer traffic decline, according to the National Restaurant Association.

Add to that the many restaurants that did not survive the challenges of the pandemic.

“We believe 20% of restaurants have closed in Virginia during the pandemic,” the VRLTA’s Terry said.

Last year, over 15 restaurants closed in the Richmond area, with several such as Perch and Lady N’Awlins Cajun Café citing challenges caused by the pandemic as the reason.

“Richmond’s a great city with a rich restaurant scene. We’ve all got to adapt to the conditions we are now in,” said Dan Coakley, a former Richmond server. “For restaurants, that might mean adding a service charge. For diners, that might mean reserving eating out for special occasions and going to the grocery store more often.”