Herrera takes on restaurants that use bogus healthcare surcharges

In reality, some restaurants offer employees substandard health coverage and pocket surcharges customers pay.

City Attorney Dennis Herrera fired a warning shot across the bow of San Francisco restaurants that use a customer surcharge ostensibly to pay for employee health care – while in reality, many restaurateurs simply pocket the money and offer substandard health care options to employees – over the weekend when his office announced a settlement with Patxi's Chicago Pizza.

The tone of the press release announcing the $320,000 settlement was generally positive, with Patxi's claiming it was an innocent error and Herrera praising the owner's cooperation in an agreement that improves the health care coverage of Patxi's employees, compensates employees for the error, and ensures all surcharges tacked onto customers' bills go to employee health care. Yet Herrera also included a warning to other restaurants.

“But today's settlement should send a strong message that San Francisco is serious about making sure that restaurants keep their promises to their customers about health care surcharges. I look forward to announcing a larger, more global effort in the coming days to address this issue, to make sure health care surcharge money goes to the workers rather than being pocketed by business owners," Herrera said in the release, signaling an effort to resolve with civil enforcement something that the political system has failed to do.

This became a hugely contentious issue in 2011 when the Golden Gate Restaurant Association (GGRA) and San Francisco Chamber of Commerce aggressively opposed reform legislation by Sup. David Campos that would have required that all surcharges be spent on health care and prevented employers from raiding health savings accounts at the end of each year. Mayor Ed Lee vetoed that measure but signed a watered down version by Sup. David Chiu – moves that Herrera criticized while running for mayor.

GGRA (whose Executive Director Rob Black didn't return our call) aggressively fought the city's Health Care Security Ordinance requirement that employers provide minimal health coverage to their workers, taking it all the way to the US Supreme Court. After losing that battle, many restaurants began adding a 3-5 percent surcharge of customers' bills, even while offering employees what experts say is the worst form of health coverage, healthcare savings accounts, and often blocking their employees efforts to use them.

An investigative report in the Wall Street Journal showed how many San Francisco restaurants were essentially committing consumer fraud by pocketing the surcharges, elevating the issue, but the District Attorney's Office has consistently refused to treat this as a criminal matter, despite calls for action by the Civil Grand Jury. So Herrera's willingness to use civil sanctions, and his warning of more to come, was enthusiastically welcomed by Campos and other advocates.

“I'm very happy with what the City Attorney's Office is doing,” Campos said. “It's time for this kind of legal action.”

Campos had already pledged to reevaluate the issue later this year as data comes in about how the compromise regulations by Chiu and Lee are working, threatening to take it to the ballot if necessary and calling it an important issue for all San Franciscans.

“It's not just about protecting workers and consumers, but also protecting businesses that play by the rules and comply with the law,” said Campos, noting that many restaurants have admirably refused to use the surcharge, shortchange their employees, or support GGRA's litigation against the city. “It's about fairness.”