How to Calculate Your Restaurant Labor Cost Percentage
Knowing your restaurant’s labor cost percentage is critical to operating and maintaining a financially healthy business.
That labor (i.e. your employees) represents the heart and soul of your restaurant. But those employees don’t work for free. In fact, labor and food are the most expensive operating costs for the foodservice industry.
When you understand how much you’re spending on staffing, and how those costs relate to your sales, you’ll be better prepared to navigate whatever challenges come your way. Even if accounting isn’t your favorite subject, keeping tabs on labor cost percentage can steer you towards the right business decisions.
In this guide to restaurant labor cost percentage you’ll learn:
What labor cost percentage means to a restaurant
What percentage should labor cost be in a restaurant
How to calculate your restaurant’s labor cost percentage
How to lower your labor cost percentage
What Is Restaurant Labor Cost Percentage?
Restaurant labor cost percentage indicates how much money a restaurant spends paying its staff compared to how much sales it generates over a given period of time.
Knowing your labor cost percentage is important because it can inform different business decisions and it serves as a barometer for profitability.
More specifically, labor cost percentage can help you understand if your business is spending a “normal” amount on staff payroll compared to other restaurants. With this knowledge, you might discover that you’re spending too much on labor and need to reduce your costs. Or, you might find out that you have the flexibility to hire or rehire more help, which could help your business increase total sales.
Labor cost percentage is also helpful for cash flow management. Knowing this figure can help you determine whether or not you need to adjust your food prices. After calculating your labor cost percentage, you may realize you need to raise food prices to support your labor costs.
What Percentage Should Labor Cost Be in a Restaurant?
You should aim to keep your restaurant’s labor cost percentage below 30%. That means that for every $10 your restaurant generates, no more than $3 should be spent on wages, employee benefits, and payroll taxes.
You don’t want your labor cost percentage to be too high OR too low. If it’s too high, your business may not be financially sustainable. And if it’s too low, you could be short staffed and not able to keep up with demand.
Average Labor Cost Percentage for Restaurants
So you already know that 30% is the ideal labor cost percentage for restaurants. But what’s the industry’s average labor cost percentage?
Across all venue types, the average labor cost percentage is 31.6%.
Here’s a look at how each type of restaurant stacks up.
Average Labor Cost Percentage for Restaurants by Venue Type
Now you’re probably wondering, why does labor cost percentage vary so much among different venue types?
Typically, quick service restaurants have a lower labor cost percentage because they have fewer staff members than full service restaurants. They don’t need servers, because of the limited service style, or specialized cooks in the kitchen because fast food recipes are created for quick, easy execution.
On the other hand, fine dining restaurants have higher labor cost percentages than their casual counterparts because they need experienced (read: higher paid) servers to ensure a memorable dining experience for every guest, and skilled cooks to man specialized stations.
How to Calculate Your Restaurant’s Labor Cost Percentage
To calculate your restaurant’s labor cost percentage, you’ll need three key pieces of information:
1. A Set Time Period
Labor cost percentage is calculated over a set period of time, so choose one time period you want to know about, like a specific month, quarter, or year. Just remember to review your labor cost percentage on a regular basis to make sure it’s where you need it to be for your business to be financially healthy.
2. Total Labor Costs for Your Employees
Find this figure by adding up total labor costs over your chosen period of time. Labor costs include obvious elements like wages and salaries. They also include often overlooked employee-related expenses like overtime pay, benefits, payroll taxes, and paid time off costs. Consult your accounting software or payroll provider for help finding these figures.
3. Total sales
Generate a sales report through your point of sale (POS) system to find out your gross sales over the set period of time in question.
Once you have those figures, you’re ready to plug them into the labor cost percentage formula.
Labor Cost Percentage Formula
(Total Labor Costs for the Period / Total Sales for the Period) x 100 = Restaurant Labor Cost Percentage
Let’s test out this formula with an example.
Labor Costs as a Percentage of Total Sales
Sam of Sam’s Smoothie Shop wants to know her labor cost percentage for the year that just ended, 2020.
First, she adds up her labor costs for 2020. She looks at her accounting and payroll records and discovers that her total labor costs includes $100k in salaries and wages, $20k in overtime pay, $20k in paid time off, $40k in payroll taxes, and $20k in employee benefits, for a total of $200k in labor costs for 2020.
Then, Sam generates a sales report for 2020 from her POS and sees that her smoothie shop generated $715k in total revenue that year.
Now that she knows these key figures, Sam can plug them into the equation.
First, she divides her labor costs by her total sales and gets 0.28 as a result
$200,000 / $715,000 = 0.28
Then she multiplies that figure by 100 to convert the decimal into a percentage.
0.28 x 100 = 28%
Sam discovers that her smoothie shop’s labor cost percentage is 28%, which is below the 30% industry benchmark.
How to Lower Employee Labor Costs & Operating Costs
If your labor cost percentage is higher than the industry benchmark or benchmark for your venue type, you may want to consider implementing a combination of these strategies for reducing labor costs and keeping your business financially healthy.
1. Schedule Employees for Split Shifts
Splitting shifts is when you divide an employee’s shift into two shorter shifts with an unpaid break in between. This technique can reduce your labor cost percentage by ensuring you’re spending on restaurant payroll when you need it most.
Try to split shifts strategically by scheduling staff for your busiest service times, and keeping them off the schedule when you expect demand to come to a lull. If they’re not obvious, check your POS reports to find the most in-demand times of day at your restaurant.
For example, if lunch and dinner are your restaurant’s busiest services, schedule some of your servers to open the restaurant and work the lunch shift, then take unpaid time off in between when the lunch rush ends and when the dinner rush begins. These individuals would be first cut for lunch (to ensure they have enough downtime between shifts to make it valuable for them) and first cut for dinner (to ensure they don’t spill into overtime).
Remember to adhere to local fair labor laws if you decide to split shifts. In most places, you won’t be able to spontaneously tell an employee to leave in the middle of the day. Instead, you’ll need to schedule the “split” in the shift in advance in order for it to legally count as a split shift.
2. Plan the Schedule Using Staff Scheduling Software
If you’re used to creating a shift schedule based on a gut feeling rather than data, you could be paying more than you need to.
An easy way to reduce your labor cost percentage is simply by using scheduling software – especially one that integrates with your POS. For instance, 7shifts staff scheduling software integrates with TouchBistro POS and can review your sales data to accurately forecast labor needs. For example, it could predict that you’ll need to double up on staff the week after Thanksgiving. It might also predict when you need fewer staff on the schedule.
A scheduling tool can help you make sure you’re never understaffed, but it can also prevent you from spending on labor when you don’t need to be.
3. Keep Overtime Hours & Wages to a Minimum
Keep overtime in mind when creating your schedule, and before asking staff to stick around to help with extra tasks. Remember, overtime wages are very costly. When you’re paying staff for time and a half, your payroll costs can skyrocket quickly.
Staff scheduling software can also help you monitor overtime hours and wages, and alert you when an extra shift could push a team member into this pricey rate – something that can help to keep your labor cost percentage on track.
4. Increase Employee Retention
What’s one of the biggest unexpected labor costs? Staff turnover. Barely three in 10 employees will stay with a restaurant for more than a year.
Employee turnover is problematic because it’s very costly to hire and retrain new staff – on top of all your other operating costs. In fact, it can cost almost $6,000 to replace just one employee in the hospitality industry.
Keep staff happy to reduce turnover and your labor cost percentage. Whenever possible, offer benefits and generous paid time off, and keep employees engaged with team building activities and perks. Even paying above minimum wage can be a cost-effective way to keep hiring and training costs in check.
Another way to keep turnover to a minimum is to implement user-friendly technology that doesn’t frustrate or intimidate new staff. For instance, when Café Crêpe switched from a legacy POS to TouchBistro’s user-friendly iPad POS system, staff turnover dropped dramatically in just the first 30 days.
“We generally have high turnover in this industry, which costs about $1,800 to $2,000 worth of resources for every new staff member of minimum wage. So if you’re saving staff members from quitting in the first 30 days because they can’t deal with the interface, then you’ve paid your return on investment.”
Lewis Hart, Café Crêpe, Vancouver and Hong Kong
5. Boost Efficiency with Technology
There are lots of tasks that restaurant technology can assist with to lower labor costs and boost sales, ultimately resulting in a lower labor cost percentage. Find efficiencies in your restaurant by implementing technology where appropriate.
If you run a quick service restaurant, consider installing self-ordering kiosks. Kiosks can process orders and payments, which frees up your front-of-house (FOH) staff to focus on hospitality.
Similarly, contactless ordering and payments solutions can help servers at full service restaurants (FSRs) spend more time creating a memorable dining experience for guests.
Finally, a POS with tableside ordering capabilities is another great option for FSRs. When FOH staff can input orders and process payments right at the table, they can spend more time with guests AND turn tables more quickly. For instance, Illinois restaurant Crosstown Pub & Grill was able to turn an additional 176 tables – about $2,000 – each night after adopting tableside ordering and payments technology.
Technology like self-ordering kiosks, contactless dining, and tableside ordering lets you serve more customers with fewer employees during each shift, helping you lower your labor cost percentage overall.
6. Train and Cross-Train Team Members
The more efficiently your team works, the more they can do in less time. Boosting your training and cross-training efforts are effective strategies for maximizing your labor spend per employee and lowering your labor cost percentage.
First, ensure your onboarding training sessions are thorough, and conduct refresher training sessions on a regular basis. Use employee performance reviews to evaluate supplementary training needs.
Then, cross-train staff by teaching employees how to perform their colleagues’ roles and serve multiple functions. With cross-training, colleagues can jump in for each other when a team member calls in sick. Or if someone has downtime, they can use that time to help another staff member out with their tasks. For example, a server who is cross-trained as a busser can clean tables, bring food out, and restock dishes and place settings when they aren’t serving customers. Alternatively, you could allow a manager to double as food delivery driver when dine-in service is slow.
Keep your payroll on the right track by training and cross-training staff to reduce your labor cost percentage.
The restaurant industry is an unpredictable one. However, when you know your labor cost percentage, you’ll be able to navigate tough times more successfully.
If your labor cost percentage is high, there are a number of things you can do to lower it, like using staff scheduling software and implementing helpful restaurant technology.
If decreasing your labor cost percentage is proving difficult, rest assured that you can also improve efficiency by reducing other operating costs, like food costs and rent.
Dana is the former Content Marketing Manager at TouchBistro, sharing tips for and stories of restaurateurs turning their passion into success. She loves homemade hot sauce, deep fried pickles and finding excuses to consume real maple syrup.