Herrera steps up his crackdown on surcharge fraud by restaurants

City Attorney Dennis Herrera.

City Attorney Dennis Herrera has stepped up his efforts to ensure San Francisco restaurants aren't committing consumer fraud with their healthcare surcharges – by pocketing money collected from diners ostensibly to cover their city obligation to provide health coverage to employees – offering an amnesty period for following city law.

At a City Hall press conference on Friday – flanked by Sups. David Campos and David Chiu, Assembly member Tom Ammiano, and local restaurant employees – Herrera announced an investigation and enforcement effort targeting dozens of local business who have reported spending less on employee health care than they collect from customers for that purpose. They will receive letters this week urging voluntarily compliance during an amnesty period, after which they could be hit with lawsuits and civil penalties.

"The enforcement program we're launching today isn't simply to protect employees and consumers from surcharge fraud – it's also to protect the vast majority of competing restaurants that follow the law and provide health care benefits to their workers," said Herrera. "We San Franciscans take great pride in a vibrant local restaurant scene that enriches our neighborhoods, employs thousands of our residents, and serves millions of tourists each year. And it's unfortunate that the illegal business practices of a relative handful of bad actors require the creation of this enforcement initiative.”

The City Attorney's Office is refusing to release the list of restaurants that will receive the letters, calling it an ongoing investigation that exempts the list from public disclosure. But the office did furnish reporters who asked with a spreadsheet from the city's Office of Labor Standards Enforcement, which ensures compliance with the landmark Health Care Security Ordinance that Ammiano authored as a supervisor, going into effect in 2008 and creating the Healthy San Francisco program.

That list includes many well-known restaurants. Topping the list is Mina Group LLC (which includes restaurants Michael Mina, RN74, Bourbon Steak, and Clock Bar) collecting $539,806 and spending $211,809, Wayfare Tavern collecting $303,207 and spending $68,018, Layers LLC (owners of Paxti's Pizza, which Herrera's reached a settlement with two weeks ago), Squat & Gobble collecting $160, 498 and spending nothing on employee health care. Others on the list include Cheesecake Factory, Max's Opera Cafe, Asia SF, Burgermeister, Folsom Pie, Cafe Bellini, and One Market Restaurant.

Golden Gate Restaurant Association Executive Director Rob Black lashed out at Herrera's office for releasing that list and media outlets for publishing it, claiming that he's talked to many of those restaurateurs and that they had filled out the forms wrong or that they simply hadn't yet spent the surcharges collected even though the funds may be set aside for employee health care.

“They aren't committing fraud, which is the accusation by the city attorney, just because of errors in filling out a form,” Black said, urging the public to reserve judgment until the investigation is complete.

But it's hard to feel too bad for GGRA or the member restaurants that aggressively contested and then sued the city over the health care law, appealing it all the way to the Supreme Court, then turned around when they lost and used deceptive (and sometime fraudulent) surcharges to single out those costs for customers.

According to a press release put out by Herrera's office:

“The City Attorney's target letter outlined conditions worst-offender restaurants must take steps to meet by a deadline of April 10, 2013 to come into legal compliance, and avoid civil litigation by Herrera's office for pocketing customer surcharge money intended to fund employee health care benefits.  
* Worst-offenders must provide an accounting to City Attorney investigators for all health care surcharges collected during the period from 2009 to 2011, along with health care expenditures pursuant to the Health Care Security Ordinance, or HCSO, for that time period.
* Worst-offenders must distribute 50 percent of unallocated health care surcharge funds  to employees who worked for the company during the time surcharges were imposed on customers, covering the years 2009 to 2011, in accordance with City Attorney instructions.
* Worst-offenders must remit amounts unredeemed by their eligible employees to the San Francisco City Attorney's Office for the purpose of funding future enforcement of the HCSO and other consumer protection laws.
* Worst-offenders must attest that they will refrain from committing further consumer fraud and remain in full compliance in good faith with the HCSO going forward, in accordance with City Attorney instructions.”

In his press conference, Herrera emphasized the “relative handful” of restaurants targeted by his office, just a few dozen in a city with thousands of restaurants. But he also said that his office is aware of restaurants that use the surcharge without even reporting to the OLSE as required, so both the amnesty program and his investigation goes beyond just the restaurants who get letters.

“I'm tremendously gratified by this very statesmanlike and generous gesture by the City Attorney's Office, Mr. Herrera in particular,” Ammiano said. “I feel somewhat parental toward this program, the Health San Francisco program. It was a hard fight to get it and it's been successful, so any attempts to sully it, minimize it, or water it down get my dander up.”