Two calls to investigate SF restaurant surcharges as consumer fraud

Are you being scammed by the SF restaurants that tack on an "employee health care" surcharge?

The surcharges that many San Francisco restaurants charge their customers – ostensibly to help cover their employee health care obligations, although in practice it has often just padded their profits – should be investigated by the District Attorney's Office as consumer fraud, according to Sup. David Campos and San Francisco's Civil Grand Jury, which recently issued a scathing report scrutinizing the practice.

Campos raised the issue during Tuesday's Board of Supervisors meeting, calling for a criminal investigation and City Hall hearing. He even questioned whether businesses that have been so hostile to city's Health Care Security Ordinance – the landmark 2008 measure that created the Health San Francisco universal care program and required businesses to help pay for their employees' health coverage – should benefit from the tax cuts it would receive under a business tax reform ballot measure the board also considered that day.

“In the restaurant industry, we have an issue that remains unresolved,” Campos said during the business tax debate, after earlier in the meeting calling for the DA “to begin an investigation for fraud against the people of San Francisco by businesses that use this surcharge.”

DA's Office spokesperson Stephanie Ong Stillman confirmed that the office is looking at the issue: “The Grand Jury report was just released and we are in the process of evaluating the results.”

Mayor Ed Lee last year vetoed legislation by Campos that would have banned the practice and prevented businesses from simply pocketing money from Employer Health Reimbursement Accounts they create to comply with the mandate (federal law bars the city from dictating how businesses cover employee health care) at the end of each year. Lee later signed a watered down version sponsored by Board President David Chiu requiring employers to keep the money in the fund for two years, to let their employees know about the fund on a quarterly basis, and to dedicate surcharge revenue to employee health care.

Rob Black, executive director of Golden Gate Restaurant Association – which unsuccessfully sued the city over the employer mandate and appealed the case all the way to the US Supreme Court – criticized Campos and the Grand Jury, saying they were relying on data from last year and that the situation has improved since Chiu's legislation went into effect (Chiu told us data collection from his legislation will allow the city to better assess what's happening).

“Supervisor Campos know this information is based on data that was prior to the new ordinance,” Black told us, acknowledging that many restaurants profited from the surcharges “but that was before the law was changed.” Campos responded by saying the grand jury concluded that the Chiu legislation didn't go far enough the prevent the abuses, which are tough to detect because they are based on self reporting by the businesses.

The Grand Jury looked at 38 restaurants, of which 25 used the surcharges and 22 use the reimbursement accounts rather than either health insurance or Healthy San Francisco, which health care experts uniformly say are better options for employees. It analyzed data submitted to the city by these 22 restaurants with a total of 1,562 employees, finding that of the more than $2 million earmarked for the health reimbursement funds, just $123,612 was paid to employees and $1.9 million was kept by the employers.

Black said the quarterly noticing requirement in the Chiu legislation is already helping with the low reimbursement rate: “My hope is, and my belief is, we're going to see significant...improvements in utilization rates in people taking advantage of their benefits, and that's great.”

The grand jury also looked specifically at the health care surcharges collected by 18 restaurants with almost $64 million in gross revenue. Despite collecting almost $2.2 million in the surcharges it placed on customers bills, they reimbursed their employees for $1.16 million medical expenses and kept the more than $1 million that remained as profits.

Black criticized the grand jury for selectively picking the restaurants in its study and for targetting private sector businesses rather than the public agencies it traditionally investigates. “They're outside of what the government charter calls for,” he said.

But Mark Busse, the chair of the Grand Jury Health Committee that led the study, told the Guardian that while it's unusual to look at the private sector, there was a legitimate public policy interest here and its work was approved and overseen by Presiding Judge Katherine Feinstein (who happens to be the daughter of US Sen. Dianne Feinstein, San Francisco's former mayor).

He also denies hand-picking the restaurants, saying he asked jurors to simply keep the receipts from all restaurants they frequented. While that may not be representative of all restaurants, he said it was a large enough sample to draw some conclusions and that he was more surprised than anyone at their findings.

“I thought our results would be totally different. I didn't think they would be that abusive, I really didn't. I thought we would find we have some outstanding restaurants and entrepreneurs,” Busse said, adding that he was alarmed by their actual findings. “It turned our stomachs. It makes us sick. It is not a level playing field. There are legitimate businesses that accept the spirit of the law and are taking care of their employees, but a lot of them aren't.”

Given that these employees handle the food of city residents, he said that they should get the health care to which they're entitled. As Busse told us, “The intention of the jury was to make sure the workers are getting health care and the customers aren't getting deceived.”

7/27 Update: We heard back from the Mayor's Office, whose Chief Deputy Communications Director Francis Tsang wrote: “Mayor Lee is a strong supporter of the Healthcare Security Ordinance. The Civil Grand Jury surveyed only 38 restaurants and its report restates facts we already know - some businesses add a surcharge and in the past, it was not well regulated.  Working with Supervisors, Mayor Lee strengthened practices effective January 2, 2012 to ensure employees could make better use of the program.  We will know the results in 2013, when we collect and report on 2012 data informed by the new regulations.”