City Council Approves Cap on Fees That Delivery Services Can Charge Restaurants

Hoping to throw an economic lifeline to Pasadena restaurants struggling during the COVID-19 crisis, the City Council on Monday approved a temporary cap of 20 percent on total fees and commissions that online and app-based delivery services can charge eateries, including a 15 percent limit on the delivery-fee portion of an order.

The council’s move – similar to ones undertaken by cities across the region and nation — also protects delivery workers from having tips garnished as companies might look to comply; and mandates transparent breakdowns on bills, detailing what fees, commissions and other costs go into the total price of a delivery.

Delivery services such as GrubHub, Postmates, DoorDash and UberEats are increasingly vital to the survival of restaurants, with dine-in services again restricted as the coronavirus surges once more. But those services come at an often-burdensome cost for restaurateurs.

Currently, such third-party fees can reach the 30 percent range, cutting into already thin profit margins.

Monday’s unanimous decision by the council was, in the words of Council Member Andy Wilson, “mission critical” for restaurants that rely on deliveries to stay afloat.

“All of us are concerned about the longevity of our restaurant network and community,’’ Wilson said.

Council Member Victor Gordo, chairman of the council’s Economic Development and Technology Committee, which considered the matter before it came before the full council, said: “The goal of the committee is to bring relief to restaurants and other businesses that rely on delivery of service.’’

“Particularly in this time, we thought it was important to take the steps necessary to avoid price-gouging, to put in place at least temporarily during the crisis a fair ordinance that also brings about transparency.’’

Gordo later added, “I think it’s the right thing to do.”

The 20 percent cap figure actually represents a tweak from the 15 percent total cap that was originally recommended to the council in a staff report prepared by City Manager Steve Mermell. According to Michelle Garrett, project manager for the city’s Department of Economic Development, the late change came about to mirror the cap the L.A. County Board of Supervisors is expected to discuss on Tuesday – making enforcement easier.

“It was to avoid a patchwork of regulations,” Garrett told Pasadena Now.

Technically, the council’s move is a supplement to Pasadena’s pandemic-induced “Declaration of Local Emergency,” and gave Mermell the authority to impose the cap. It would expire 90 days after dine-in service is allowed to resume without restriction.

Because of the late change in city staff’s recommendation to the council regarding the percentage of the cap, specific language of the Pasadena move was yet to be formalized. But the county order that it is intended to replicate says, among other points:

* “It shall be unlawful for a food delivery platform to charge a restaurant any combination of fees, commissions or costs that totals more than 20 percent of the purchase price of each online order. Fees, commissions, or costs includes a delivery fee.’’

* “It shall be unlawful for a food delivery platform to charge a restaurant a delivery fee that totals more than 15 percent of the purchase price of each online order.”

*  And, “It shall be unlawful for a food delivery platform to reduce the compensation, including any tip or gratuity, paid to any worker as a result of (the new cap rules).’’

Formalizing those rules is on the L.A. County Board of Supervisors’ agenda for Tuesday.

The cities of Los Angeles, Glendale and Santa Monica have already approved 15 percent caps on fees charged to restaurants by third-party delivery services. So has San Francisco, Santa Cruz, New York City and Seattle, among other places.

Cambridge, Mass., and Portland, Ore., have capped fees at 10 percent, while the state of New Jersey has enacted a 20 percent cap.

Pasadena’s new cap will come as welcome news to city restaurant owners.

An anonymous email survey of city restaurateurs conducted by the city recently drew 66 respondents, 92 percent of whom supported a temporary cap, according to Mermell’s report.

The survey also found, among other points, that local commission fees paid by restaurants ranged between 16 and 31 percent, with a majority of the respondents paying between 25 and 30 percent; and that 89 percent of local respondents use a third-party delivery service, most of them Postmates, GrubHub and DoorDash.

“After a (third-party delivery service) takes their commission, and our overhead is paid, we do not make enough of a profit,’’ one Pasadena restaurateur wrote in the city survey.

“A cap is necessary for us to continue utilizing a third-party delivery service, and given current operating conditions, it is imperative that we are able to offer delivery as an option.’’

Said another respondent: “Please enact a permanent cap on commissions as delivery service fees are significantly impacting our revenues on take-out orders. In some cases, we lose money on delivery orders; however we cannot raise our menu prices to adjust because then our prices would be too high. We do not have the infrastructure or ability to provide our own delivery.’’

The cap is one more effort by the city to help ailing local restaurants. Recently, the city also enacted various street closures – significantly, along stretches of Colorado Boulevard – to facilitate outdoor dining, with inside dining now restricted.