The OP... Ollie Eh knows the law -he was more concerned with his handling of the matter. The restaurant is either clearly and openly in violation of law or trying to put one over on the customer, in either case not good, we all agree on this.
The guest is going to know up front by reading the menu and can simply get up and leave, no harm done, but once food is ordered a decision needs to be made regarding leaving a tip or not and how much and how the waitstaff may respond. If one is not comfortable with this it can be a issue to decide at the outset.