California Service Charge Laws: The Truth About Fees, Surcharges, and Automatic Gratuity

In California, you’ve probably noticed service charges or automatic gratuities added to restaurant bills, hotel stays, delivery apps, and other services. But are these fees legal? Do businesses have to tell you about them ahead of time? And what happens to that money—does it go to the staff, or the business? Here’s a clear, straightforward look at California service charge laws, and what you need to know as a customer or business owner.

What Is a Service Charge?

A service charge is any extra fee that a business adds to your bill beyond the advertised price. It’s not a voluntary tip. In California, you might see it called an “automatic gratuity,” “healthcare surcharge,” “living wage fee,” “service fee,” or “convenience fee.” It’s common in restaurants (especially for large groups), hotels, delivery platforms, and event venues.

Example: Restaurant adds 18% service charge to parties of 6 or more.
Example: Hotel bill shows a nightly “resort fee.”
Example: Food delivery app tacks on a “service fee” at checkout.

Are Service Charges Legal in California?

Yes, service charges are legal in California, but with strict rules about honesty and transparency:

Disclosure: California’s consumer protection laws require that all mandatory fees—including service charges—be clearly disclosed to customers before purchase (see California Civil Code § 1770 and Business & Professions Code § 12024.2).
No deceptive labeling: It’s illegal to mislead customers about the nature of a fee. For example, calling a service charge a “tip” when it’s not voluntary could be considered deceptive and is forbidden by law.
“Junk fee” crackdown: Starting July 1, 2024, California’s new law (SB 478) makes it illegal to advertise a price that doesn’t include all mandatory fees except government-imposed ones (like sales tax). In other words, no more hidden service charges or surprise fees at checkout—the full price must be shown up front.
Credit card surcharges: Businesses can charge extra for credit card payments, but this must be disclosed before payment. Surcharges for debit cards are generally not allowed.

Service Charges vs. Tips: Know the Difference

California treats service charges and tips (gratuities) very differently, especially when it comes to employee pay:

Service charges (including automatic gratuity) are mandatory and legally belong to the business, not the employee. The business can use the money however it wants—including to pay staff, cover benefits, or keep for itself—unless it makes a specific promise to share it.
Tips are voluntary payments left by customers. In California, tips must go to employees and cannot be kept by the employer, according to California Labor Code § 351.
Employers must make it clear on receipts, menus, or signage whether a charge is a service charge or a tip. Confusing the two can lead to lawsuits or state investigations.

Common Service Charges in California

Restaurant service charges: Frequently added for large parties, banquets, or catered events. Some restaurants now add a flat “living wage” or “healthcare” fee to every bill—always check the menu or ask your server.
Hotel resort/facility fees: Added daily for amenities like Wi-Fi, pool use, or gym access. These must be disclosed during booking.
Credit card surcharges: Legal for credit cards if disclosed before you pay, but generally not allowed for debit cards.
Delivery or convenience fees: Common on food delivery platforms, ticketing sites, and utility payments.

Can a Customer Refuse to Pay a Service Charge?

If the charge was clearly disclosed on the menu, booking site, or before purchase, you must pay it—it’s part of the total price. If you’re surprised by a fee that wasn’t disclosed, you can dispute it, refuse to pay, or file a complaint with the California Attorney General’s Consumer Protection Section or your local District Attorney.

Are Service Charges Taxed in California?

Most mandatory service charges are subject to state and local sales tax, just like the main item or service you bought. Voluntary tips are not taxed as part of the sale.

Employer Rules: Service Charges and Employee Pay

If a business collects a mandatory service charge, the money goes to the business—not automatically to employees. If the employer promises to distribute part or all of the charge to staff, it must keep that promise. Otherwise, service charges can be used to help meet payroll costs, pay for benefits, or cover operating expenses. Employees should check pay stubs and ask questions if unsure.

How to Spot and Avoid Hidden Fees

Read menus, booking confirmations, or receipts closely—look for mention of “service charge,” “administrative fee,” or other extra costs.
Ask staff before ordering or booking: “Are there any mandatory service charges or fees on top of the price listed?”
If you’re surprised by a fee, ask to speak with a manager or dispute the charge. You can also report hidden fees to state agencies.

Helpful Resources

Final Thoughts: California Service Charges—Legal, but Must Be Clear and Honest

California’s service charge laws are all about transparency. Businesses can add these charges—but only if they clearly disclose them up front and don’t mislead customers. For consumers, always read the fine print, and don’t be afraid to speak up if you feel a fee was hidden or unfair. For businesses, clear labeling and open communication are your best protection against unhappy guests and lawsuits.