3/4/2019 Restaurant Labor Cost: What It Is And 8 Ways To Control It

Operations | 7 min read

Restaurant Labor Cost: What It Is And 8 Ways

To Control It

By Nick Darlington , 28 February 2019

Of the five major restaurant costs—equipment, utilities, food, and a POS system— restaurant labor cost is one of
the most important. Labor cost is not only one of your largest restaurant costs, but it's also part of your prime
cost —a key performance indicator that helps determine your profitability

But as essential as labor costs are, controlling them can be a huge challenge. Labor cost is ever-changing, usually
upwards, due to minimum wage increases. Indeed, Ontario restaurant owner, Steven Mastoras, estimates that by
2019 “costs related to labor, payroll taxes and employer contributions will increase by roughly $60,000.” That’s a
staggering statistic that paints a pretty grim picture.

Thankfully, it’s not all doom and gloom. This post will help you control restaurant labor cost by showing you:

Exactly what labor cost entails (hint: it’s not just salaries and wages)
How to calculate labor cost percentage (and why you should track it)
8 ways to control labor cost to remain profitable (some strategies you can implement today for quick wins)

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Ready? Let’s jump in.

What is Restaurant Labor Cost?

Labor cost includes all labor-related categories:

Employees wages and salaries

Bonuses
Payroll taxes
Health care
Vacation and sick days
Overtime

How Do You Calculate Restaurant Labor Cost?

Calculating your total labor costs, then, involves adding the total cost for each of the above cost groups. For
example:

Salaries and wages: $130,000+

Overtime: $25,000+
Payroll: $20,000+
Health care: $25,000+
Vacation and sick days: $8,000+
Bonuses: $10,000+
Total labor cost = 218,000

In isolation, this bottom number doesn’t mean much. But, calculated as a percentage, it becomes far more
useful.

How Do You Calculate Labor Cost Percentage?

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The labor cost percentage helps you determine how efficient staff are at producing profits. You can calculate it
in numerous ways:

Labor cost as a percentage of total sales: Total Labor Cost/Total Sales

Labor cost as a percentage of operating costs: Total Labor Cost/Total Operating Costs

Below are the steps (with examples) to calculate labor cost as a percentage of total sales. To calculate labor cost
as a percentage of operating costs, simply substitute sales with operating costs. Your operating costs will include
all your monthly running costs like utilities, rent, and food.

*When making these calculations, ensure you use sales and cost data for the same period.

Labor Cost as a Percentage of Total Sales in 4 Simple Steps

Step 1: Collect your total revenue data

Collect your total revenue data from income statements or POS sales reports. For this example, let’s assume
your sales were $800,000 for the year.

Step 2: Calculate your total labor costs

Calculate your total labor costs by adding all applicable cost categories like wages, salaries, bonuses, and
overtime. For this example, we’ll assume your total labor costs for the year were $240,000.

Step 3: Divide labor cost by revenue

In our example, this gives us 0.3 ($240,000/$800,000).

Step 4: Multiply the number you get by 100

Finally, multiply the number in Step 3 by 100 to get your percentage. In this case, of 30%

Pro Tip: Track the labor cost percentage overtime to identify upward and downward trends. A continuous
upward movement suggests you need to implement cost controls (discussed later).

What Percentage Should Labor Cost Be In A Restaurant?

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You’re likely wondering whether a labor cost percentage of 30% is any good. Well, most restaurants will target a
percentage of 20 to 30% of sales, though percentages do differ by industry:

Quick service: 29.4%

Fast casual: 28.9%
Casual: 33.2%
Upscale casual: 30.4%
Pizza: 31.3%

The above statistics are average restaurant labor cost percentages for Q4 of 2017.

Comparing your labor percentage to other restaurants in your industry helps you assess your performance
compared to the industry as a whole. But remember these are only a guideline.

8 Ways to Control Cost Using Effective Restaurant Labor

Allocation

Now that you understand what labor cost is, how to calculate labor cost percentage, and what percentage is
suitable, let’s look at eight ways to properly allocate and control your restaurant labor.  

You’ll notice there’s no mention of “raising your menu prices” or “reducing wages”—and with good reason. While
these methods may benefit you in the short term, they can cause more harm in the long run with a potential
negative impact on profits, staff morale, and customer service.

1. Use the Right POS System

Not all POS systems are created equal. Find a system that, at a minimum, offers the following basic features:

Inventory management
CRM
Staff management and communication
Basic marketing features
Sales reports
Labor reports
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Employee scheduling (some POS systems integrate with scheduling software to simplify the scheduling
process, which can reduce your labor cost by 4%).

Then, ensure you actually use the features to gain the benefits. Two notable features you should focus on to
control labor costs are labor reports and employee scheduling.

2. Analyze Your Labor Reports

Review your labor reports against certain times of the day and even seasons to optimize your schedules and
ensure you’re never over or understaffed. For example, a labor report could tell you’re often overscheduled at 11
am in the morning just before lunch service and that you would benefit with less staff. This may seem like a small
cost saving, but over time it adds up to thousands of dollars.

3. Invest in the Right Employee Scheduling Tool

If you’re like some restaurant owners, you:

Create and manage schedules in Excel

Spend time creating and moving between schedules
Struggle to track and manage any schedule changes
Make mistakes when comparing actual vs. scheduled labor
Risk the quality of your customer service by over or understaffing (let’s not forget the impact
overscheduling has on labor costs)

Luckily, the right scheduling tool solves all these problems by helping you:

Create schedules in no time—30 min or less

Reduce manager input when sourcing staff for shifts thanks to crowd-sourcing features
Schedule the right amount of employees per shift
Track and reduce labor costs by analyzing labor reports

7shifts is one such tool. Expect to save anywhere from 1 to 3% on your labor costs when using it. For a more
precise savings estimate, use this labor cost savings calculator.

4. Review Your Seasonal Hiring Policy

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It’s not uncommon for restaurant owners to hire seasonal staff during peak periods like summertime. But, you
may not actually need such a large seasonal workforce.

Review your hiring policy, analyze historical labor reports to spot opportunities to trim seasonal staff, and ask
regular employees to take on more shifts. Removing one or two positions can translate into massive savings down
the road.

5. Reduce Operating Hours

Review how busy your restaurant is on certain days and during specific times of the week. If there are quieter
times, with revenues barely covering costs, you may choose to reduce your operating hours. The benefit of this
approach is that you can concentrate wholeheartedly on your peak periods.

6. Properly Train Staff

Train your staff, so they feel empowered to do their job correctly and become more efficient. Greater efficiency
ensures you can schedule a leaner workforce without jeopardizing service. Training should include:

Educating employees on how to use your POS properly

Properly communicating customer service standards to everyone
Letting new hires shadow top performing staff so they can learn from the best
Giving all employees access to your employee handbook. This document provides employees with
everything they need to know about your restaurant, including HR policies, your restaurant's mission
statement, and crucial systems and processes. Besides acting as the main point of reference for
employees, it helps prevent mistakes that can cost you money.

Don’t forget to conduct refresher training with all staff as bad habits can, and do, creep in. Also, ensure you have
regular staff meetings and hold performance reviews to identify areas for improvement.

Recommended Reading: How to Write a Powerful Restaurant Mission Statement

7. Boost Staff Retention

Turnover rates are notoriously high in the restaurant industry. These high turnover rates cost you money in the
form of higher labor costs. Every time an employee leaves, you have to invest time, money and resources into
finding and training a new employee. You could avoid this cost by focusing on retention:

It’s a cost you could avoid by focusing on retention. But how exactly do you retain existing employees? Here are
three ways:

1. Rewards: Provide monthly rewards like “employee of the month” or daily rewards for those who make the
most sales.
2. Recognition: It’s not always about a financial reward. Sometimes employees just want to feel valued. A
simple “thank you,” and even public recognition can boost their confidence and morale.
3. Promotion opportunities: Reward top-performing employees with a promotion to create a culture of
growth that encourages other employees to work harder because they see a future with your restaurant.
To help identify these top performers, review sale reports from your POS and monitor those who regularly
do more than their job description.

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8. Analyze and Improve *All* Processes

Audit your current processes such as time clocking, inventory management, and employee scheduling to identify
optimization opportunities that will improve efficiency. For example, instead of using manual clocking out
methods, use a solution that automates and digitizes the entire process while giving you business intelligence.  

The Bottom Line

Labor is a significant restaurant cost that can be difficult to manage. Not only do you have to run a restaurant
and keep tabs on other costs, but you have to contend with minimum wage increases.

The good news is you can overcome this challenge and regain control by understanding these costs, knowing how
to calculate them, tracking your labor cost percentage and, most importantly, implementing the correct
strategies such as investing in the right employee scheduling tool.

Are you ready to wrestle your labor costs to the floor?

Labor–along with food, utilities, kitchen equipment, and the pos system–is one of the biggest costs
restauranteur's must deal with to thrive and achieve success. You can start reining your restaurant costs in today
with the help of the Ultimate Guide to Restaurant Costs.

Restaurant Scheduling Software

for managers that want to stay in control
The easiest way to spend 80% less time scheduling your restaurant staff.

Try 7shifts for free.

Nick Darlington
Nick Darlington (www.nickdarlington.com) is a B2B writer who conceives, writes and produces
engaging website copy, blog posts and lead magnets for technology companies.

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3/4/2019 Restaurant Labor Cost: What It Is And 8 Ways To Control It

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