Some Twin Cities restaurants ditch service fees as diners push back

• It was testing the fee in part to see if the model could work at the group's other restaurants, which all rely on optional tips, co-owner Brent Frederick told Axios.

Why it matters: The prominent restaurant group is one of the first to publicly announce it would no longer use service fees, which grew in popularity during the pandemic and were cited as a way to ensure higher hourly pay for all staff.

• But the charges, which typically range from 15% to 22% of the bill, can confuse customers who are unsure what it goes toward and if it substitutes for a tip, or frustrate those who feel forced into a high gratuity, Axios' Kelly Tyko writes.

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Zoom in: Other local restaurants have quietly removed service fees and instituted health and wellness charges in their place, said Hospitality Minnesota CEO Angie Whitcomb, though she declined to share names.

• Those fees often range from 3% to 5% and are earmarked to fund employee benefits such as health insurance.

• Ann Ahmed's upscale Laotian eatery Khâluna removed its service charge in favor of a 5% wellness fee a year ago, an employee confirmed to Axios.

What he's saying: Jester Concepts won't consider service fees at any of its restaurants now because customers, notably from the suburbs, made it clear they didn't understand or like it, Frederick said.

• "Guests don't like having their control taken away, so we gave them back control. But ideally, they'd understand … it ensures equity across the playing field," he added.

Meanwhile: Broders' Restaurants recently pulled back on the fees they instituted three years ago in part due to customer feedback, co-owner Charlie Broder told the Minneapolis-St. Paul Business Journal.

State of play: Butcher & The Boar's back-of-house employees, which include chefs, food runners, and dishwashers, will continue to receive $20-$30 an hour — the same wage they had under the service charge.

• Server pay was lowered from $18 to Minneapolis minimum wage of $15.19 because they now receive tips, Frederick said.
• The restaurant is keeping its 5% health and wellness charge, he added.

Reality check: Many other spots, from high-end restaurants including Travail Kitchen and Amusements to counter-service eatery Union Hmong Kitchen, still have their service charges in place.

• "It works for our business, allows us to maintain terrific staff ... and I can count on one hand how many customers have complained," said The Market at Malcolm Yards co-owner Patricia Wall, who instituted an 18.5% hospitality surcharge to attract staff when the food hall opened in 2021.

What's next: Because service fees are still relatively new, it's too soon to tell where the industry is going, Whitcomb said — but don't expect a big difference in your final bill.

• "Whether you charge a service fee to offset costs, increase menu prices, or have tips, the consumer is still going to pay close to the same amount."

Equity in the kitchen

Some owners have argued that service fees allow them to close the wage gap between servers and kitchen staff, who often receive wildly different pay under a tipping structure.

How it works: In Minnesota, servers make at least the state minimum wage of $10.59/hour + tips, and even more in Minneapolis and St. Paul because of the cities' higher minimum wage.

• Frederick said servers at Butcher & The Boar can pull in more than $40/hour with tips.

Meanwhile: Back-of-house employees including chefs, prep cooks, and dishwashers receive hourly pay and no tips, and Minnesota has laws against requiring "tip outs" — when the employer makes servers share a portion of their tips with non-tipped employees.

Reality check: Unlike tips, which are the sole property of the employee, there's no legal guarantee that service fees are actually going toward wages.

• Alex Warren, who has worked as a chef for nearly a decade in Twin Cities restaurants with and without service fees, told Axios he's never seen a change in pay due to a fee.

What he's saying: "This shouldn't be a [servers] versus us argument, because one can't do the job without the other. Businesses should be building labor costs into prices so we can all receive a fair and stable wage, not putting that on the customer," Warren added.

Raising wages, raising prices

At least four local restaurants have decided to skip service fees and tipping altogether in favor of raising menu prices.

What's happening: Brasa, Terzo, Broders' Pasta Bar, and Kyatchi have moved to a no-tip, no-fee model in recent years, choosing instead to increase prices to account for the cost of labor.

Zoom in: After much of his staff left the industry when restaurants shut down at the start of the pandemic, Minneapolis sushi restaurant Kyatchi's co-owner Sam Peterson decided to change his business model to attract employees looking for more stability and benefits, he told Axios.

What he did: He raised menu prices by 19% in 2020, based on the average customer tip, and he increased starting wages to at least $20/hour for front and back-of-house employees.

• He also provides free shift meals, paid time off to all, and health insurance to those working more than 32 hours a week.

The intrigue: Because the starting wage is equal across the board, it's never been easier to hire kitchen staff, which used to be a "full-time job," he said.

Plus: Peterson said that in the three years since he hasn't received a single negative comment from customers about the model.

• "We say we're a no-tipping establishment, they sign their name and they walk out. I think it's less confusing than service fees."