01/15/2013 07:45 pm ET Updated Jan 16, 2013

Patxi's, San Francisco Pizza Chain, Hit For Violating City's Health Care Law (VIDEO)

Palo Alto-based pizza chain Patxi's has settled with the city of San Francisco for $320,000 due to the company's violations of the city's universal health care law.

The voluntary settlement came after an investigation by San Francisco City Attorney Dennis Herrera found, between 2009 and 2011, the company failed to use the majority of the four percent Healthy San Francisco surcharge it added onto customers' bills for its employees' health care.

Passed in 2006, San Francisco's Health Care Security Ordinance requires all firms operating in the city with over 20 employees to either provide health benefits, enroll in the city-operated Healthy SF insurance program or create a health reimbursement account that covers some medical expenses.

"Though Patxi's was wrong to not comply with the health care ordinance and to collect a surcharge from its customers for health benefits it wasn't providing to employees, the company deserves credit for working cooperatively with us to remedy the problem, to avoid litigation, and to make sure its workers are fully and fairly compensated," Herrera said in a statement. "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."

Herrera added that the City Attorney's office is planning on implementing a "more global" system for ensuring that San Francisco businesses follow the city's health care laws.

The company, which operates four restaurants in San Francisco, will be giving $205,000 of the total settlement amount to current and former employees who were eligible to receive health care funds during the time period of the investigation and increase the amount it spends on heath care by $100,000 over the course of the next year.

Patxi's CEO William Freeman has said that, as a result of the settlement, the restaurant chain will be spending 50 percent more on health care benefits in 2013 than the company collected in surcharges in all of the previous year.

Many San Francisco businesses, particularly restaurants, explicitly pass the cost of implementing the health care ordinance on to their customers by including a "Healthy SF Fee" onto their bills.

In a scathing report issued last year, a civil grand jury in San Francisco charged that a growing number of businesses in the city were enriching themselves by charging customers a health care fee but keeping the revenues instead of distributing them to employees.

"This blatant capture of funds is at the expense of employees who are not receiving funds earmarked for health care and customers who are paying the surcharge for what they believe was for employee health care," read the report, which advocated for the wholesale elimination of the reimbursement program.

Following the publication of the report, Supervisor David Campos introduced a bill that would have required that all money from the savings accounts go toward employee health care. That measure was ultimately vetoed by Mayor Ed Lee, under significant pressure from the city's business community, and a watered-down compromise version (authored by Board of Supervisors president David Chiu) was later approved.

Other businesses dinged for failing to adequately implement the reimbursement accounts include GMG Janitorial, which was fined $1.3 million for failing to operate the accounts and telling employees that no such accounts existed when they inquired about them, and Starbucks-owned bakery chain La Boulange.

"The city estimates that the cost [of the health care mandate] is about $40-50 million annually, and that cost is split up between a few thousand businesses. It's significant," Rob Black, executive director of the Golden Gate Restaurant Association, told the Huffington Post in an interview last year.

Black, whose organization mounted an unsuccessful legal challenge to the law that ended when the U.S. Supreme Court refused to take the case, insisted that, although he opposes the law, he feels it's essential for all businesses in the city to comply with it.

"Even if we disagree with parts of it, this is the law and everyone needs to be complying," he continued. "Otherwise it's putting some businesses at a competitive advantage. We work as hard as we can to make sure that our businesses are clear on the rules and follow them completely."

Update: In a statement sent to The Huffington Post after this article's initial publication, Patxi’s asserted that the company never spent money collected through the surcharges on anything other than healthcare for their employees. The unused balances sit in a liability account, waiting to be paid out to employees.