On May 8, 2024, the California Attorney General’s Office released much needed and highly anticipated guidance on steps companies in California will need to take to ensure compliance with SB 478, California’s prohibition on “drip pricing” set to take effect on July 1, 2024.  These new guidelines are particularly helpful in detailing how companies in the hospitality and restaurant space can avoid running afoul of the new law.

As a reminder, SB 478, sometimes referred to as the “Honest Pricing Law or the “Hidden Fees Statute”, revises applicable Civil Code provisions, among others, to protect California consumers from hidden fees by prohibiting “drip pricing,” the act of initially advertising a price as less than the actual price a consumer will ultimately pay for a good or service.  The law, with limited exceptions, prohibits a business from advertising a good or service at a price that does not include all mandatory fees or charges that will ultimately be charged to the consumer (excluding taxes or fees imposed by the government).  SB 478 does not, however, regulate what fees a party may charge or how those fees are determined; the law is limited to regulating just the advertising of those fees.  The goal of the law is to promote fair competition between businesses by allowing consumers to make accurate price comparisons.

Prior to the further guidance issued this week, the text of SB 478 was not clear on how businesses would be expected to advertise several kinds of optional and variable fees.  Fortunately, the Attorney General’s new guidance offers clarification as to when these fees will need to be included in the initial pricing and when they can be noted elsewhere.  Some key takeaways from the FAQs:

• Optional Service Fees: Fees for optional services (like high-speed internet in a hotel room or valet service at a hotel) will not need to be included in the advertised price for the good or service as, by definition, these fees are not mandatory.  Similarly, a reasonable delivery or shipping fee does not need to be included in the listed price, as this fee is for the separate service of delivery or shipping.  However, a mandatory “handling” fee must be included in the advertised price.
• Fees Contingent On Later Consumer Conduct: Similarly, fees that are, by nature, contingent on the consumer’s conduct that cannot be determined at the time the rate is advertised, such as late check out fees or a fee for returning rental equipment after a deadline, also do not need to be included in the advertised price as they were not mandatory at the outset.
• Variable Service Fees: Conversely, variable service fees (such as mandatory gratuity or service fee) will need to be included in the initial price.  This is an important clarification, particularly for restaurants.  Once SB 478 takes effect, it will no longer be sufficient for a restaurant to simply note the percentage of the variable fee on the menu.  As these fees are mandatory from the outset, they will need to be built into the prices listed on the menu itself.  Interestingly, the FAQs explicitly note that the Attorney General does not anticipate immediately prioritizing enforcement of mandatory gratuity fees that are paid directly to workers, presumably as acknowledgment that most restaurants will need to revise websites and menus to be compliant with SB 478.  That being said, noncompliant restaurants still run the risk of facing private actions once SB 478 takes effect.
• Taxes and Government Fees: The advertised price does not need to include taxes or fees that the government imposes on the transaction, such as sales tax.

In short, in light of these guidelines, there are steps all businesses can and should take prior to SB 478’s July 1, 2024, effective date.  Hotels, for one, should review their websites to ensure that initial room pricing reflects all mandatory fees.  It is no longer sufficient to simply make sure those fees are disclosed prior to final payment; the initial price must be the full price that the consumer is required to pay, minus only government-imposed taxes and fees.

Restaurants, in turn, should review their menus and websites to ensure that all mandatory fees, including any mandatory gratuity, are included in the prices listed on the menu.  While the Attorney General has all but assured at least a brief reprieve from government enforcement where mandatory gratuities paid entirely to workers are concerned, restaurants should not delay in make necessary changes as there will be no such delay in enforcement through private lawsuits.