- Labor cost and labor cost percentage are critical metrics for restaurants to monitor.
- Control and minimize labor costs by using efficient equipment, streamlining operations, and monitoring overtime hours.
- Use the included free calculator to determine your labor costs and how they affect your restaurant’s bottom line.
Labor is easily one of a restaurant’s largest costs, and can compete with food costs for being the biggest expenses restaurants face. And just as any successful restaurateur will monitor the cost of the food that goes into each item on the menu, it’s equally important to monitor labor costs.
Labor cost and labor cost percentage are metrics for a restaurant operator to not just monitor, but control and adjust on a regular basis.
We’ve created a free template to help you calculate restaurant labor cost, but first it helps to understand what these key metrics are and how to manage them.
What Is Restaurant Labor Cost?
Labor cost is the total dollar amount spent on the staff on your restaurant’s payroll. Some business owners make the mistake of only including the wages of hourly workers into their labor costs. Restaurant 365 defines these direct wages as “unburdened labor.” On the other hand, “fully burdened labor” refers to additional expenses paid out, like salaried employee wages, employee benefits like healthcare, and additional costs like payroll taxes and Social Security.
To calculate labor costs, you need both. Add up all expenses related to wages, benefits, and other fully burdened labor line items. We’ve created a free calculator below to help you with this process.
However, the total cost alone doesn’t paint the full picture. For labor costs to mean anything, it needs to be compared to your overall sales.
How to Calculate Your Labor Cost Percentage
Labor cost percentage is the relationship between your labor cost and your total revenue over the same timespan. To calculate your labor cost percentage, divide your labor cost by your total sales for the same period. You can plug your total sales into our free calculator to get your labor cost percentage.
Every restaurant is different, so there isn’t an exact benchmark for labor cost percentage. Chron recommends that labor costs come in below 30% of total revenue, but this could be lower for fast casual and quick service concepts and higher for fine dining.
Monitoring labor cost percentage in addition to labor cost alone helps identify how labor affects your restaurant’s bottom line.
Let’s use an example to illustrate how:
Say your restaurant has four cooks and four servers on shift at any given time. Each gets paid $10 per hour and works 8 hours per day. Your restaurant is open five days a week and averages $12,000 in weekly sales. For simplicity’s sake, factor out burdened labor costs such as bonuses, benefits, and payroll taxes.
- Your total labor cost for each day is (4 + 4) x 10 x 8, or $640
- Your total labor cost for the week is $640 x 5 = $3,200
- Your labor cost percentage is $3,200 ÷ $12,000 = 27%
Now let’s say that in the scenario above, your front of house has been understaffed, and you consistently have a 20-minute wait while tables remain empty in the dining room. You hire another server, allowing you to serve more covers. This boosts your weekly sales to $15,000.
- Your total labor cost for each day is (4 + 5) x 10 x 8, or $720
- Your total labor cost for the week is $720 x 5 = $3,600
- Your labor cost percentage is $3,600 ÷ $15,000 = 24%
You may hesitate to add a new server since it will mean an increase in labor cost. However, the numbers show that this new addition results in a lower labor cost percentage, directly improving the restaurant’s profit margins.
Conversely, let’s say that a new place opens up across the street and now you’re only doing $10,000 in weekly sales. You have the same 4 cooks and 5 servers:
- Your total labor cost for each day and week is the same: $720 and $3,600
- Your total labor cost for the week is $720 x 5 = $3,600
- Your labor cost percentage is higher: $3,600 ÷ $10,000 = 36%
This is not just a shift from 24% to 36%, but rather a 50% increase in your labor cost percentage. Going (and staying) above the recommended 30% labor cost percentage typically signals that you’re now over-staffed and might need to cut back on hours or possibly head count.
How to Calculate Prime Cost
Another restaurant industry metric to track is prime cost, or the cost of labor and food combined. Since food and labor are the two largest costs for any given food item (fixed costs such as rent and utilities aren’t factored in), adding the two together gives restaurateurs a good sense of their net profit per item across their menu mix.
To calculate prime cost percentage, divide your prime cost for a given time period by your total sales for the same period. While there’s no magic number for prime cost percentage, Chron recommends 60% as a baseline to work from.
Food prices, shipping costs, taxes, and other factors beyond your control are constantly changing. But just as you’d change your menu mix to respond to food costs, you have multiple options to control your labor cost as well.
How to Control Labor Cost
While it’s extremely important to treat your staff well and pay them fairly, controlling labor costs is equally important to maintain profitability and ensure that everyone has a job in the first place. Here’s a few ways to keep your labor cost percentage in check.
Invest in efficient, reliable equipment
A top-of-the-line dishwashing machine may take away the need for an extra dishwasher. A commercial food processor could cut down on prep time, eliminating the need to bring on a new prep cook. An efficient POS system could let servers spend more time delivering orders and less time at the register, requiring one less person on shift.
Great equipment comes with a higher price tag, but could save you significant operating costs in the long run.
Improving standard procedures for both front and back of house operations not only saves time on unnecessary tasks, but also saves the money you’d be paying out for people to carry out those tasks.
Changing up your line to turn out food faster can increase sales (either by maximizing turnover or enhancing take-out and delivery) and decrease your labor cost percentage. If you’re doing $10,000 in sales for the week and your labor costs $3,000, you’re at 30%. Improve efficiency in your line to cut production time by 10%, and you have potential to do $11,000 in sales for the week, reducing labor cost to 27%.
Monitor overtime hours
It’s one thing to have hourly employees work overtime on occasion, but if you’re consistently paying out overtime, it may be time to hire additional staff. Keep a close eye on consistent overtime “offenders” who work a greater number of hours than scheduled without a specific request from management.
Let’s say one of your staff members, who makes $10 an hour, clocks an hour of overtime every week. At time-and-a-half, that’s an extra $15/week that’s eating into your bottom line. At 50 weeks a year, that’s a loss of $750. If overtime becomes consistent among multiple employees, you could be out thousands of dollars.
Additionally, make it a company policy to pay employees based on when they’re supposed to start each shift rather than when they clock in. This will help mitigate overtime offenders and control costs while refining company culture.
Training a host or a busser to be a server when needed will save you anytime you’re short-staffed. If a host can double as a server for a shift rather than a current server working a double shift, you won’t have to pay overtime. Equipping your staff with the skills to take on multiple roles will not only help you in a pinch, but also elevate company culture by empowering your staff with training and opportunities for promotion.
During the onboarding process, allow trainees to shadow not just the staff members whose roles they’re looking to assume, but also staff in roles that the trainee could take on in a pinch. Have written documentation of standard operating procedures for all staff roles in your restaurant, and make sure that related positions are familiar with the processes required by their peers.
Upping Your Labor With Pared
Being short-staffed leads to unnecessary overtime expenses, increasing your labor costs and negatively affecting your bottom line. When you use Pared’s app, you’ll be able to fill your front and back of house needs in as little as two hours. Whether you need event servers, bartenders, barbacks, or support staff, Pared has your back. We’ve already done the legwork of vetting and checking references so you can book with confidence. Sign up with Pared to control your restaurant’s labor cost today.
Free Restaurant Labor Cost Template
Ready to get started? This spreadsheet template will help you calculate your labor costs so you can have a clear picture of where your restaurant stands. Find instructions for use below.
How to use this template:
1. Click here to open the template.
2. Click “File,” then “Make a copy.” You must be signed in to a Google account.
3. Add your company’s information in the orange cells. Do not edit white cells.
4. Fill out annual benefit costs and assumptions.
5. Complete a line for each hourly worker in the “Hourly Staff” section and each salaried employee in the “Salaried Employees” section. Include any vacation/sick time paid out.