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)
Ready? Let’s jump in.
What is Restaurant Labor Cost?
Labor cost includes all labor-related categories:
- Employees wages and salaries
- Payroll taxes
- Health care
- Vacation and sick days
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?
The labor cost percentage helps you understand how much money you spend on labor to produce revenue. You can calculate it in several 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.
Recommended: Restaurant Utility Costs: 8 Ways To Save Energy, Money, and the Planet
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 our example, that works out to 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?
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 can help you assess your performance in relation to the industry as a whole. But remember these are only a guidelines.
8 Ways to Control Cost Using Effective Restaurant Labor Allocation
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
- Customer relationship management (CRM)
- Staff management and communication
- Basic marketing features
- Sales reports
- Labor reports
- 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 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 overscheduled 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.
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 schedule changes
- Make mistakes when comparing actual vs. scheduled labor
- Risk customer service quality 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 using 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
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:
- Rewards: Provide monthly rewards like “employee of the month” or daily rewards for those who make the most sales.
- 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.
- 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.
8. Analyze and Improve Processes
Audit your current processes including 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 collecting valuable business intelligence.
You’ll notice there’s no mention in the above tips 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 and have a potential negative impact on profits, staff morale, and customer service.
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 your labor 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.