How to Manage & Calculate Your Restaurant Labor Cost Percentage

How to Manage & Calculate Your Restaurant Labor Cost Percentage
AJ Beltis

By AJ Beltis

Before restaurants can record a profit, they need to take several expenses into account—inventory, food costs, kitchen equipment, building utilities, and of course, staffing the restaurant.

As the demand for a higher minimum wage continues to grow on a state and a federal level, restaurant owners and managers are understandably paying more attention to their restaurant's labor cost percentage. This is certainly true for the independent entrepreneur, but even large and resourceful restaurant franchises and groups are not immune to the threat—and in some cases, the reality—of rising labor costs.

However, restaurant owners and leaders can take clear, actionable steps towards understanding and managing their labor costs without taking a toll on employee productivity, customer satisfaction, or their bottom lines.

What is Restaurant Labor Cost & Labor Cost Percentage?

Labor Costs

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

  • Salaries and hourly wages: $130,000+
  • Overtime: $25,000+
  • Payroll + Payroll taxes: $20,000+
  • Health care: $25,000+
  • Vacation and sick days: $8,000+
  • Bonuses: $10,000+

Total labor cost = $218,000+

Labor cost includes more than just wages, so keep that in mind when calculating labor cost percentage for your restaurant. In isolation, this bottom number doesn't mean much. But, calculated as a percentage, it becomes far more useful...

Labor Costs Percentage

As a percentage of sales, restaurant labor cost percentage is the amount spent on all labor-related costs compared to your gross sales in a specific time period.

Some restaurant businesses choose to calculate labor cost as a percentage of operating costs rather than a percentage of sales. While there is no “correct” or “incorrect” way to approach this, the most important thing to remember is that you must be consistent in your calculations. If one franchise owner reports labor cost as a percentage of sales to corporate while another owner reports labor cost as a percentage of total costs, this can lead to a lot of frustration behind the scenes.

That said, on a corporate level, it makes sense to require all locations to report metrics as a percentage of the same metric—either costs or sales.

How to Calculate Labor Cost Percentage

The labor cost percentage helps you understand how much money you spend on labor to produce revenue. You can calculate it in two ways:

  1. Labor cost as a percentage of total sales: Total Labor Cost ÷ Total Sales
  2. Labor cost as a percentage of operating costs: Total Labor Cost ÷ Total Operating Costs

Labor cost percentage is determined by dividing all labor-related costs by your gross sales in a given time period, then multiplying that quotient by 100%.

To determine labor cost as a percentage of operating costs, simply replace gross sales with total costs in the equation.

Example of labor costs as a percentage of sales:

Jimmy's Pizzeria grosses $300,000 in sales each month. The amount spent on all labor related costs—including payroll taxes, benefits, etc.—totals $81,000.

The formula for calculating labor cost percentage is:

(Total Labor Costs) ÷ (Total Sales) x 100%

=($81,000) ÷ ($300,000) x 100%

=.27 x 100%

Restaurant Labor Cost Percentage = 27%

Example of labor costs as a percentage of operating:

Jimmy’s Pizzeria spends $243,000 on operating costs each month, including rent, food costs, advertising, and more. The amount spent on all labor related costs—including payroll taxes, benefits, etc.—totals $81,000.

The formula for calculating labor cost percentage is:

(Total Labor Costs) ÷ (Total Sales) x 100%

=($81,000) ÷ ($243,000) x 100%

=.33 x 100%

Restaurant Labor Cost Percentage = 33%

Restaurant Labor Costs Calculator Template

Calculate labor costs now with the free labor cost calculator.

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What is the Average Restaurant Labor Cost Percentage?

An average labor cost percentage for a restaurant spans between 29% and 33% and is dependent on multiple factors including, but not limited to:

Multi-location restaurateurs should note that the size, location, and performance of each store differs, which means it’s not uncommon for labor cost percentage to vary within a franchise or a group.

Quick service and fast casual restaurants typically have a labor cost percentage below 30%. This is because the business can usually get by with a dozen or fewer employees at their absolute busiest, and can serve multiple customers in a short period of time.

Sit-down and casual restaurants, however, tend to have a higher labor cost percentage, given the fact it takes you an hour to serve a guest rather than a few minutes. Specifically, fine dining restaurants can have some of the highest labor costs due to the specialized staff that is required. While higher ticket amounts can counter that model slightly, restaurateurs helming businesses with these concepts should prepare to budget more for wages and related labor costs.

Be careful about trying to hit an arbitrary number, though - Jim Taylor of BenchmarkSixty says hitting a certain labor cost percentage shouldn’t be your only consideration:

“We were doing this project with Cactus [Club Cafe], where we looked at every shift across 30 restaurants for two years. Part of the study that we did showed that the managers are under stress to hit these numbers. So they actually cut harder in so many scenarios…it actually hurts the business because they're cutting harder. And now they're running short-staffed. Now their team doesn't have a chance to get to the customer to even sell anything, meaning it hurts the average customer spend.”

Some experts suggest you’re better off aiming for a target prime cost. Prime cost is the cost of goods sold plus the labor cost. David Scott Peters of Restaurant Prosperity explains that if your sales are below $850,000 you should aim for 60% prime cost. If your sales are above $850,000 you should aim for 55% prime cost.

Ten Tips for Managing Labor Costs

Regardless of size, location, or concept of their business, here are some tips that all restaurateurs can try in their efforts to control and even lower labor cost percentage.

1. Avoid Overtime Pay Wherever Possible

We know: it's a lot easier said than done.

Still, the fact remains that overtime can quickly eat away at your labor budget when it's not closely monitored. Sure, situations arise when you need (or even want) a certain employee to work overtime, and some employees are eager to take these shifts to earn the extra pay.

Our challenge to you is to make yourself more aware of your overtime costs. Check your labor reports once a week or once a month specifically for overtime calculations to see how much you could be saving. Chances are, you'll be able to move something around to cut some of these costs in the future.

2. Schedule Based on Sales Forecasts

There's nothing quite like planning the perfect amount of staff for your shift. No one's talent is being wasted, and no one is too swamped for their own good.

One of the best ways to reach this state is to schedule based off of sales forecasts—determining how much business you'll do in a given shift based on similar shifts.

This task goes beyond your typical “Friday is our busiest night, so we're sure to staff up.” Instead, look more closely at how sales change on holidays or seasonal events (graduations, half-days at your local school, etc.). Look into what hour it gets busy on Fridays, and arrange your schedule to reflect that demand. This more granular approach might take an investment of time, but it will pay you back with a lower labor cost percentage.

3. Embrace the Split Shift

Some states and cities have regulations on split shifts that require you to compensate employees extra, but if you think it's worth it for your business, try incorporating more of them in your scheduling process.

You get to relieve employees for a few hours, and while they're running an errand or picking up their kids from school before the dinner shift, you're saving significant labor hours over the course of the year.

4. Enforce Clock-In Accuracy

Prevent rounding errors in your pay stubs by mandating employees clock in within certain time windows. Otherwise, you're allowing them to rack up extra pay for a shift they were never scheduled to work, and you might have to cover wages you hadn't planned on paying. To circumvent these situations, use an employee scheduling software with auto-punch functionality.

5. Expand Your Order-Taking Opportunities

When calculated as a percentage of sales, restaurant labor cost percentage can decrease when you sell more food.

Some restaurants can feel constricted by their traditional sit-down or take-out dining options. However, there are a few ways to increase revenue during each shift without increasing labor costs.

One of them is expanding into online ordering on your own website. When you offer online ordering in-house, you speak to the rising demand of diners looking to place orders on their phones and computers, thus potentially increasing sales. This route allows you to retain more profit when compared to a third-party software, but also makes it more difficult to find new customers, since you'll likely only get orders from those searching exclusively for your website.

Another option is to work with third-party order taking sites and apps. Partnering with these businesses exposes your brand to new faces, increases the output from your kitchen, and doesn't add a penny to your labor costs (since the delivery drivers work for the order-taking company).

In both of these scenarios, your sales go up, your labor costs stay the same, and mathematically, that means your labor cost percentage decreases each time you make a sale on one of these sites.

6. Analyze Your Labor Reports

Review your labor reports against certain times of the day and seasons to optimize your schedules and ensure you're never over or understaffed.

For example, a labor report could tell you that you're often over scheduled at 11am, just before lunch service and that your operations would benefit with less staff. This may seem like a small cost saving, but over time it adds up to thousands of dollars.

Another tip is to break down your labor reports by department. For example, separate labor costs by front of house and back of house to see if there is more room for improvement in a certain area.

Breaking down labor reports by position (servers, dishwashers, bartenders, bussers, line cooks, etc) can also help you better analyze your labor reports and labor costs.

Software dashboard displaying actual and projected sales

7. Review Your Seasonal Hiring Policy

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.

8. 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.

It's a cost you could avoid by focusing on retention. We conducted a survey of 3,700 restaurant employees, and here are the reasons why they quit their jobs.

Top reasons restaurant employees leave their jobs.

For employees under the age of 25, the top listed reasons why they've left jobs (or are planning to) are wages, scheduling, and school.

For those outside of school ages, the first two factors—wages and scheduling—remain constant. Manager recognition is the third reason.

But how exactly do you retain existing employees? We asked expert restaurant operators and professionals in our retention playbook and data study. Here is what they said:

Culture is Key

Restaurant culture is how you do the things in your restaurant and why you do them that way. Conduct a culture audit with the key leaders and employees in the business to evaluate what needs to be adjusted and improved upon.

Establish clear lines of communication

More than two-thirds of restaurant employees who participated in our recent study thought that more one-on-one meetings with management would increase job satisfaction. Open the lines of communication.

Track and manage employee workload

By helping employees become more productive and efficient in their positions, they can better manage their workload. This can in-turn help the restaurant have better margins and make employees happy with their contributions and workload.

Read more tips through the data study and guide for restaurant staff retention.

9. Cross Train Employees

Empower current staff members to take on responsibilities and duties in another area of the restaurant.

For example, an employee who is cross trained as a server and a host can fill in for a server who is on break, or for a host who is out sick. This can help with scheduling additional employees in those important areas on a busy night. Or easily find replacements for shift swaps.

David Scott Peters told us on The Pre-Shift Podcast:

“If I have two guys that could run two stations at a time and they're getting paid more than four rookies, I'm still going to be more efficient. Because I got two guys I'm paying more, but not as much as if I had four people on the line.”

Cross training can also help to improve employee morale, as it can give them a sense of ownership in the business and a sense of pride in their work.

10. Understand all Prime Costs

Prime costs will help you take a birds-eye view of the entire restaurant operation. To calculate prime costs, add all the cost of goods sold (COGS) with your total labor costs.

One way to regulate overall costs in a restaurant is to understand prime costs. High labor costs could be an underlying driver of high prime costs. However, that doesn't always mean that labor needs to be cut. There may be costs of goods that could be more efficiently used in the process to lower prime costs, without sacrificing shifts or hours for employees.

Prime cost calculation illustration and diagram

Or if a restaurant is seeing high labor costs drive prime costs to unsustainable levels, making more efficient use of staff and operations could help drive down labor costs and cost of goods. More efficient seating layouts could allow servers to get to more staff. Similarly, a streamlined kitchen operation can help chefs and line cooks work quicker and reduce food wastage.

David Scott Peters gave an example of this:

“What if we set up the line at the end of the night before your last cooks left, made sure it's a hundred percent parred up when they leave the building? Could I have four cooks walk in 15 minutes later because the line is completely ready to go? So if the daytime shifts could do the same thing for nighttime shifts, could you bring four cooks in 15 minutes later for the nighttime shift? That’s two hours a day, seven days a week, 14 hours.”

Learn more about how to calculate prime costs for your restaurant.

Five Bonus Tips for Managing Multi-Location Labor Cost Percentage

Larger restaurant groups have additional routes to a more manageable labor cost percentage. While the tips outlined above can be beneficial in all restaurants, these ones listed below are more applicable to franchises.

1. Brush Up on Fair Workweek Laws

If any of your restaurant locations are in a part of the country with fair workweek laws like New York City, San Francisco, or the state of Oregon, do your due diligence and refresh your memory. The laws laid out in these ordinances directly pertain to scheduling. Some mandatory tasks found in these ordinances can include:

  • Providing schedules 1-2 weeks in advance for employees.
  • Giving new hires a good faith estimate of what shifts and hours they will be expected to work regularly.
  • Offering a new shift opportunity to existing employees before hiring a new one to fill it.

Since a violation of any of these laws can result in a fine, the amount of money you spend on labor increases for each violation you're found guilty of. Reduce the number of violations and you'll be able to better control your labor cost percentage.

These laws apply only to restaurants in certain states and cities that are part of large groups and franchises, so catch up on which ones apply to you. You can learn more about how to stay compliant with labor laws using Labor Compliance Software and Tools.

2. Watch Out for Premium Pay

Building off the last point, certain restrictions outlined in fair workweek ordinances—such as requiring employees to work “clopens” or consent to last-minute shift changes—come with a premium pay fee to employees for their lost wages or restricted rest time.

These premiums range anywhere from $10 to $100, and even if your employees are consenting to these shift changes, those premiums can quickly rack up your labor cost percentage.

3. Develop Employee Retention/Incentive Programs

While high turnover is an unfortunate reality in restaurants, taking steps to reduce the turnover wherever possible can have a huge impact for your business.

For example, some estimates put the cost of recruiting and training a backfill for a lost employee at six to nine months' pay for the role. In other words, if you lose your restaurant manager who earns $40,000 a year, you're losing $20,000 - $30,000 in labor productivity.

In addition to hiring based on your restaurant's core values, use the resources of your restaurant group to develop programs and incentives for workers to stay longer. These could include:

  • Clear, documented paths for advancement in the company.
  • Tuition reimbursement for related courses and classes (an initiative recently expanded by Chipotle).
  • Competitive time off, vacation, benefits, and bonus programs.

Yes, these programs will cost your restaurant up front. However, if implemented correctly, they could enormously reduce your employee turnover costs.

Restaurant Turnover Costs breakdown pie chart by 7shifts

4. Equip Your Restaurant with an Employee Scheduling Software

Multi-location restaurant groups and franchises should be set up with a multi-unit scheduling and management software that can fit their needs and work across locations.

On a macro level, this universally-available data provides operations managers and business leaders with the raw data they need to understand how each location is impacting the company. On a micro level, managers spend 66% less time creating and managing schedules.

5. Compare Your Locations to the Company Average

One final task multi-location groups will have to take compared to their single-location counterparts is comparing labor cost percentages.

Compiling your group's collective labor cost percentage is a necessary first step. From there, you'll need to look at each of your locations to see if they're helping or hurting that average.

For those that are below average, dig into previous reports to see if this is a one-time rough patch or a pattern of underperformance. If it's the latter, work with the store owner and manager to get to the bottom of the problem and develop a plan to address whatever issues arise.

For those that are above average, take the time to understand what they're doing right in their locations. Perhaps they have strategies and tactics that you can share with workers in other locations to better the company as a whole.

All that said, you might want to consider which consistent factors cause some locations to perform better or worse than others in your analysis.

Wrapping Up: Small Changes Make a Big Impact

Adopting these processes and small changes can have a drastic impact on your labor cost percentage. With more visibility into your real numbers and more control over your costs, you'll be on your way to a healthier restaurant labor cost percentage, higher profit margins, and better staff morale.

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AJ Beltis
AJ Beltis

AJ Beltis is a freelance writer with almost a decade of experience in the restaurant industry. He currently works as a content manager at HubSpot, and previously as a blogger at Toast.