What Percentage Should Labor Cost Be in a Restaurant?
Working at a restaurant is a right of passage for many young Americans, and those who stay in the industry can have promising careers. From entry-level servers to five-star chefs, there are many opportunities for workers. But how much can you pay employees without jeopardizing your business?
Labor is often one of the highest expenses for a business. For a typical restaurant, labor costs will make up about 30% of revenue. That said, this figure can vary depending on the type of restaurant.
Here are some typical labor costs percentages according to BDO:
- Quick service: 31.6%
- Fast casual: 28.8%
- Casual: 34%
- Upscale casual: 31%
- Pizza: 30.1%
Let’s look more at finding your labor cost and calculating the labor cost percentage.
How to find your labor costs
Since restaurant profit margins can be quite low, you will want to track your financial picture carefully to reduce wasted spending. Since many expenses are fixed and unable to change, you want to optimize those that are in your control.
Labor costs include wages, but many other expenses fall under this term. To see your labor cost, you want to add up the following items:
- Salaried employee wages
- Hourly employee wages
- Overtime
- Incentives and bonuses
- Payroll taxes
- Health insurance
- Paid days off
To get your actual labor cost, you add these up over a designated period, such a weekly, monthly, or annually. That final figure is your labor cost.
Calculating your labor cost percentage
Once you have this number, you will need to divide it by a larger figure to see your labor cost percentage. Most often, this larger number is your revenue or your operating costs.
Labor cost divided by revenue
This is the most common way to measure labor cost percentage. Since your revenue will cover your labor costs, you need to make sure you have a healthy labor to revenue ratio. Funds need to be left over to cover other expenses like rent and marketing.
If you wanted to track your monthly labor costs, you would first add up all costs as outlined above. Next, you will want to add up all sales before deducting any expenses. This gives you your monthly revenue. Once you have both, you divide labor costs by revenue to see your percentage.
Formula: Labor cost ÷ total revenue = labor cost percentage
Example: $4000 ÷ $15,000 = .2667 or 26.67%
Labor costs divided by operating costs
As we stated earlier, some expenses are fixed and others can change. By viewing your labor costs as a percentage of overall costs, you can analyze your spending to see where to focus your cost-saving efforts.
First, find your total labor costs as outlined above. Next, add up all your expenses. Be sure to include rent, utilities, marketing, software subscriptions, food costs, uniforms, and all other expenses. Lastly, you will divide your labor by your total expenses.
Formula: Labor cost ÷ total operating costs = labor cost percentage
Example: $4000 ÷ $12,000 = .33 or 33%
You can use this formula for other variable costs too, such as electricity and restaurant equipment. That way, you can find a healthy percentage for each expense.
How to reduce your labor costs
If your labor costs are too high, you will want to reign them in before they cripple your restaurant. And even if your costs are at a healthy level, reducing them can help you boost advertising spend or invest in new equipment.
Group your workers
Your employees perform different tasks that match their job title, and as such, they earn different hourly wages. By breaking down employees into similar groups, you can see how much each group costs you.
For example, you will know on average what your kitchen staff cost per 8-hour shift vs. your hosts and servers.
Once it comes time to cut costs, you can see which groups cost you the most. While no one likes letting workers go, this process will help you determine which cuts will be most effective.
Cross-train
A normal restaurant likely has a few servers and a host out front and a small meal preparation team in the back of the house. A manager will oversee operations, handle customer service issues, and be the go-to person for all other issues.
On a busy night, this team may only cost 20% compared to your revenue. On a slow morning, however, a full shift like this may cost nearly 50% of your revenue.
By cross-training your team, you can reduce the number of employees on a shift without losing productivity. For example, assigning a hostess the manager’s duties on slow days will reduce your labor costs tremendously. Even paying this person a few dollars more per hour during these situations will cost less than scheduling a manager for an entire shift.
Likewise, you can train hosts to serve food. If a server doesn’t show up to work or needs to go home, your host can keep you operational. The manager can then take over the host’s duties, preventing you from needing to call in any more employees.
Incentivize performance and attendance
Callouts and no-shows can impact your operating costs. When an employee doesn’t show up, you need to call in another worker to take their place. Not only does this waste a manager’s time, but it also frustrates employees.
While you can fire employees for failing to show up, this doesn’t necessarily discourage the behavior. Rather, you want to incentivize workers to show up and reward positive behavior.
For example, you can give workers a $50 bonus for showing up to each shift on time within a set pay period.
Likewise, you can set qualifications to earn a raise. By setting attainable targets, you improve efficiency and reward employees for hard work.
Reduce turnover
Similar to the point above, employees like to feel valued. If your workers do not feel their work is commensurate with their pay, they will seek new jobs. Or if they feel uneasy or discouraged at work, they will look for another restaurant.
Interviewing and onboarding employees is expensive, especially if it involves background checks, uniforms, and government-mandated permits. Reducing your turnover will drastically cut operating costs.
Making your workers feel valued and part of a team can help lessen turnover. Rewarding and recognizing workers is one of the best ways to show your appreciation.
No matter how small an action might be, make sure you praise the worker when they act beyond their job description. Even if someone simply organized the supply closet or swept up floors without asking, make sure you recognize their effort.
Of course, these techniques won’t work if you do not pay market wages. After all, your employees are there to earn money at the end of the day.
Use the right technology
Just as you invest in marketing to boost sales, you should invest in the right tools to improve operational efficiency. One of the most important devices you need is the point of sale system. These devices are fundamental for processing payments and printing receipts, but they can do much more.
With a restaurant POS, you can:
- Track employee hours and run payroll
- Create reports to analyze costs
- Manage inventory to reduce shrinkage
- Build a digital menu and take online orders
- Integrate with over 100 apps
