Title
Staff Report for a City of San Leandro City Council Resolution Confirming the Declaration of the Director of Emergency Services of the City of San Leandro Establishing a Temporary Limit of 15% on Fees Charged by Third Party Food Delivery Companies to Support Restaurants in San Leandro During the COVID-19 Pandemic
Staffreport
SUMMARY AND RECOMMENDATIONS
Staff recommends that the City of San Leandro City Council confirm a Declaration of the Director of Emergency Services of the City of San Leandro Establishing a Temporary Limit of 15% on Fees Charged by Third Party Food Delivery Companies to Support Restaurants in San Leandro During the COVID-19 Pandemic.
BACKGROUND
Since the initiation of the Alameda County Shelter-in-Place order on March 17, 2020, many San Leandro businesses, including restaurants, cafés, and other food and beverage businesses, have been closed, or limited to pick up service only, in order to protect employees and customers and limit the spread of the COVID-19 virus. The orders’ restrictions have devastated local businesses, particularly small service, food, and other direct customer serving businesses.
During this time, online ordering and delivery of food has become a critical lifeline to many restaurants and food businesses. In order to assist with the ordering and delivery process, many food businesses utilize third party food delivery companies, such as DoorDash, GrubHub, Postmates, and UberEats. These companies generally provide a means for businesses to market themselves, list their menu, receive orders online, and arrange for delivery or pickup, allowing the businesses to offset the direct staff costs associated with these tasks. These food delivery services are vital to our residents and businesses alike and the City wishes to encourage their expansion. Even after in-restaurant dining is allowed to resume, it is expected that many patrons will continue to rely on food delivery services due to individual comfort level and safety concerns.
There are several fees associated with using the food delivery services, some paid by
the restaurant, and others paid directly by the consumer. These fees vary by company and a number of different factors, including the service package that the business signed, whether the order is placed on the delivery company or individual business’ website, whether delivery or pick up is selected, the distance of delivery, and whether the restaurant is receiving additional promotion or services. Total fees paid by restaurants typically range from 20%-30%.
Fees that companies charge restaurants typically include:
- Service Fee - average 15%
o Sometimes called a marketing or commission fee, this is the fee that the delivery company charges for the service of the transaction. This is typically a percentage of the sale, which is utilized to cover the company’s direct costs, overhead, and profit. If a restaurant selects a package with additional marketing or data sharing, their fee will be higher.
- Delivery Fee - average 10%
o Both the restaurant and customer pay a delivery fee to go toward drivers’ wages; these vary based on delivery length and order size.
- Credit Card Fee - average 3%
o Fee to cover credit card company’s processing fee and delivery company’s fraud/loss protection
Fees that customers pay include taxes and delivery fees, as well as optional gratuity.
ANALYSIS
In response to the high service fees and resulting impact on local restaurants, cities in California and the United States have put limits on the fees that food delivery companies may charge in an effort to ease the burden on restaurants and other food businesses.
The City Attorney reviewed the matter and determined that the City, during the local emergency because of the novel coronavirus pandemic, may place a temporary limit on the fees charged by third-party food delivery companies. Under California Government Code Section 8634 and San Leandro Municipal Code Section 3-4-130(a), the City Manager, acting as Director of Emergency Services, is empowered upon the proclamation of a local emergency to make and issue rules and regulations on matters reasonably related to the protection of life and property affected by such emergency.
Clearly, San Leandro residents who are currently in the specific risk groups (persons 65 years of age or older, immunocompromised, or who have specific health risks such as respiratory disease, asthma, or heart conditions) will most likely in the future rely upon food delivery, not to mention those who care for such individuals, or do not want to contract the virus. Therefore, based on the City Manager’s broad authority during a local emergency, the precedence set by other jurisdictions, the baseless threats of litigation from the food delivery app industry, and San Leandro’s market size, the threat of legal challenge to such a policy is low. However, based on staff conversations with the food delivery app businesses, if such a fee extended into when public health orders removed prohibitions on indoor dining, legal risks would increase. There is an obvious balance of such risks against continuing harm to local businesses wrought by high fees.
City and San Leandro Chamber of Commerce staff have reached out to restaurant and other food businesses to gain feedback on their experience with food delivery companies and their fees. The businesses find that the delivery company fees are onerous and make it hard for them to make a profit. However, they also find that the delivery service is valuable and are generally not considering cancelling. Many find the delivery companies to be a necessary part of doing business and keeping their business alive during the shelter-in-place. Some also noted that they understand that part of what they are paying for is the marketing of their businesses and keeping customers ordering, with the hope that delivery customers will come to dining rooms once they are able to reopen. Others noted that they recoup the delivery fees by raising their prices.
City staff also reached out to several of the food delivery companies to learn more about how and why their fees are charged, the impact of a fee cap, and what they are doing to assist businesses during these difficult times. The companies shared that they are struggling with the fee limits that have been placed in other cities, with some alleging that they are not legal. They generally stated that the fees are high to cover their costs and overhead, and on driver pay, with one company citing that they are operating at a 40% loss under a 15% fee limit.
The food delivery companies noted that they offset reduced fees by passing more delivery costs on to the customer, providing less marketing to restaurants, stopping service to harder-to-reach delivery areas, reducing their own workforce, and reducing driver pay. They also noted that when they do pass more delivery costs to customers, they see fewer overall orders and/or smaller orders, which in turn reduces the take-home pay for drivers, with one company noting a 10% reduction in pay to drivers in San Francisco.
In response to the challenges that restaurants are facing, the delivery companies have provided various fee reductions and other forms of assistance. This includes no cost to sign up for service, no fees for pickup orders, assistance in creating restaurant pages, and providing daily payout of order proceeds (rather than weekly/monthly). Support activities for drivers include providing personal protective equipment, paid sick/quarantine leave, and in some cases, limited medical benefits. They are also doing various marketing programs and promotions to help increase restaurant orders, such as no delivery fees on Saturdays, reduced delivery fees for local restaurants and Black-owned restaurants, and helping restaurants to optimize their options to include what customers most want. Some are also providing means for customers to donate to restaurants or are creating funds to assist restaurants and drivers.
Several food delivery companies are also actively working with cities and Chambers of Commerce where they operate, such as San Jose and Oakland, to develop specific programs for restaurants in that community. The companies have expressed openness to continued conversations about how they can work to assist restaurants in San Leandro and City staff will continue these discussions in the coming weeks.
City staff have surveyed other communities in the area, and have found that while some cities have enacted a fee limit, others have considered it and decided not to impose a cap, and others have not had a formal discussion on the matter at this time.
- California jurisdictions that have imposed a limit include:
o San Francisco, Los Angeles, Marin County (unincorporated areas), Santa Cruz, Santa Monica, Glendale
- California jurisdictions that have considered a limit but have not implemented one include:
o San Jose, Sacramento, Oakland
(Note these lists are based on information staff have been able to gather and are not exhaustive)
The following are typical fee limit terms in the Bay Area:
1. Fee Limit - Typically ranges from 10-20% of the total order cost, with most at 15%. Note- the City may also be able to specify which types of fees are limited, such as service fees rather than delivery fees.
2. Applicability - For many cities, the fee limit only applies to small food establishments (with 5 or fewer locations).
3. Timeframe - The fee limits typically end when restaurants are permitted to offer dine-in service. Note - this may occur within a month in Alameda County.
4. Enforcement - Typically a civil matter, with restaurants providing written notice to the delivery company and a request for reduction in charges if their fees are not being appropriately limited.
EMERGENCY DECLARATION
At the meeting of July 6, 2020, the City Council provided comments and direction to the City Manager, acting as Director of Emergency Services, on the issuance of a declaration establishing rules and regulations to enact a temporary limit on fees charged by third party food delivery companies. Under emergency powers, the City Manager issued a declaration on July 8, 2020 establishing such temporary limit with the following terms:
1. It shall be unlawful for a Third-Party Food Delivery Service to charge a covered establishment a fee per online order for the use of its services that totals more than 15% of the purchase price of such online order.
2. For purposes of this order, the following definitions apply:
a. "Covered Establishment" means a restaurant that offers, in a single commercial transaction over the internet, whether directly or through a Third Party Food Delivery Company, the sale and same-day delivery of food to customers from one or more retail locations within the City of San Leandro. Covered Establishment will not include any restaurant that meets the definition of a Formula Restaurant, as set forth below.
b. "Online order" means an order placed by a customer through a platform provided by a Third Party food delivery company for delivery or pickup within the City.
c. "Purchase price" means the menu price of an online order. Such term therefore excludes taxes, gratuities and any other fees that may make up the total cost to the customer of an online order.
d. “Formula Restaurant” means a type of restaurant establishment that has eleven or more other locations in operation, or with local land use or permit entitlements already approved, located anywhere in the world. In addition to the eleven establishments either in operation or with local land use or permit entitlements approved for operation, the business maintains two or more of the following features: a standardized array of merchandise, a standardized facade, a standardized decor and color scheme, uniform apparel, standardized signage, a trademark or a servicemark.
e. "Third Party Food Delivery Company" means any website, mobile application or other internet service that offers or arranges for the sale of food and beverages prepared by, and the same-day delivery or same-day pickup of food and beverages from, no fewer than 20 separately owned and operated food service establishments.
3. The Director of Emergency Services, or designee, is authorized to implement the order and issue any necessary guidance or rules consistent with the order.
4. The order took effect on July 13, 2020 and will terminate at such time as the Health Officer of Alameda County amends or terminates the order prohibiting restaurants from offering dine-in service or that prohibition otherwise expires, so that dine-in service is then allowed, or the termination of the local state of emergency, whichever occurs first; or as otherwise terminated, modified or extended by the San Leandro City Council. For the purposes of the order, the restoration of outdoor-only dining does not constitute the restoration of dine-in service.
5. If a Third-Party Food Delivery Company charges a covered establishment fees that violates this order, the covered establishment shall provide written notice to the Third Party Food Delivery Company requesting a refund; the refund shall be paid within seven calendar days. If the Third Party Food Delivery Company does not provide the refund requested after seven days or the Third Party Food Delivery Company continues to charge fees in violation of this order after the initial notice, a covered establishment may enforce this order by means of a civil action seeking damages and injunctive relief. The prevailing party in any such action shall be entitled to an award of reasonable attorney fees.
Per the declaration, the temporary limit went into effect on July 13, 2020. It is now recommended that the City Council confirm the Director of Emergency Services’ declaration in conformance with emergency procedures.
City and Chamber of Commerce staff have provided information on the declaration to restaurants and food businesses in San Leandro via direct email and various public information sources. They have also provided information on the declaration to third party food delivery companies that operate in the area.
ATTACHMENT(S)
Attachment to Resolution
• Declaration
PREPARED BY: Katie Bowman, Economic Development Manager