Patxi's Chicago Pizza agreed to the settlement after an investigation by the San Francisco city attorney's office and the Office of Labor Standards Enforcement, City Attorney Dennis Herrera said Sunday.
The investigation found that from 2009 to 2011, the chain added a 4 percent "Healthy San Francisco" surcharge to customers' bills at its San Francisco locations. But the bulk of the money didn't go toward Healthy San Francisco, the city's universal health care program, Herrera said.
The program was created in 2006 to provide health care for residents who lack private insurance but are not eligible for Medicare or Medi-Cal. Businesses with at least 20 workers that do not provide health care must give part of each employee's wages to the city as a fee to help pay for the $200 million program.
As part of the settlement, Patxi's will distribute about $205,000 among 115 current and former employees, Herrera said. The chain also will increase its health care spending by about $100,000 for 2013 and will pay $15,000 in penalties to the city.
"When we discovered that our health care plan did not comply with the San Francisco law and that we were collecting more in surcharges than we were paying for employee health care, we knew we needed to take immediate steps to make things right," Patxi's chief executive officer, William Freeman, said in a statement.
"Every dollar we collected from the surcharge has or will be spent on our employees' health benefits," Freeman said.
The settlement comes after an Associated Press report in September found that restaurants and other businesses in San Francisco collected almost $14 million in extra fees in 2011 from their patrons, but that roughly 40 percent of that money hadn't been spent on their workers' health care.
The surcharges, which range from 3 to 5 percent and often appear in fine print on receipts, are one result of San Francisco's health care program, which includes some of the most far-reaching such requirements mandated by any U.S. city.
The law applies to more than 4,000 businesses with as few as 20 part-time workers, from nail salons to international banks with local branches, requiring them to set aside for workers an extra $1 to $3 an hour for health care.
The city's mandate is unrelated to the federal health care law that takes effect in 2014 and applies only to companies with 50 or more employees.