How to Efficiently Manage Labor Costs for Your Restaurant

Restaurant labor costs are one of the highest costs of owning a restaurant. However, a full-service, white-tablecloth restaurant will likely have a much higher labor cost percentage than a quick-service restaurant since they need more staff to provide a higher level of service. So, how do you control restaurant labor costs?

Well, there’s no one-size-fits-all methodology for managing labor costs in a restaurant or hospitality business because each one is different. That means every restaurant will have a unique restaurant labor cost situation that will need to be managed differently. 

That said, there are a few essential tips and tricks for effective restaurant labor cost management. Read on to learn more. 

• Calculating restaurant prime costs
• Calculating restaurant labor cost percentage
• Looking at the bigger picture
• Grouping labor costs for better clarity
• Using technology to control restaurant labor cost
• Optimizing your schedule to save on costs
• Training to reduce restaurant labor cost
• What is a good restaurant labor cost percentage?

Understanding restaurant labor costs

Typical restaurant labor costs include salaries and hourly wages, overtime pay, benefits, payroll taxes and any paid time off. Two key metrics all restaurant operators need to calculate and keep track of are prime cost and labor cost percentage. 

Calculate your restaurant prime cost

In a restaurant, your prime cost is the sum of your labor costs plus your cost of goods sold, or COGS for short. Your COGS is the sum of all the direct costs that go into producing the items on your menu, from ingredients to take-out containers. 

A restaurant’s prime cost should ideally be 60% or less of total sales and represents the bulk of controllable expenses.

To calculate your prime cost, it’s the sum of your labor costs (hourly wages, salaried labor, overtime pay, payroll tax, benefits, vacation/sick pay) plus your COGS.

Calculate your restaurant labor cost percentage

For any business, it’s so important to understand how much you’re spending on labor, and how those costs relate to your sales. But this is especially true for restaurants—with their already tight margins—and especially true in today’s high inflation and rising costs environment.

There are a few ways to calculate labor cost percentage, but the most common is calculating your labor cost as a percentage of sales. To be able to do this, you need to do three things.

1. First, decide what time period you want to look at. Do you want to know what your labor costs are for the week? The month? Do you want to compare your labor costs from last year to this year? Did you recently invest in new technology and want to find out how it’s affected your labor costs? 

2. Get the sum of all of your labor costs within this set time period. If you’re using a restaurant POS like Lightspeed Restaurant, you can get shift data by time period in your labor reports. For labor costs related to benefits, vacation or sick pay, or salaried labor, consult your accountant (or view in your accounting software). 

3. Get the sum of your gross sales for the same period. In Lightspeed, you can get a sales summary by time period within your sales reports. Actually, there’s so much data in your sales reports, it would be faster to list what isn’t there. Find out more about Lightspeed sales reports here. 

Once you have these three pieces of information, the formula to calculate your labor cost percentage is: (Total Labor Costs for the Period / Total Sales for the Period) x 100.

For example, let’s say you check your sales report and your pub made $27,500 in sales last month. And everything considered, you spent $8,900 on labor. 

Your pub’s labor cost percentage for last month was 32%, which isn’t too bad, just slightly above the 30% industry benchmark.

Look at the bigger picture

Knowing your labor cost percentage is very important, but it’s only one piece of the puzzle. You need the full picture if you want to really identify potential issues and take the right action to reduce your labor costs without sacrificing quality.

For example, using the same example as above, you’ve discovered that your labor cost percentage for the previous month was 32%, but you know you’re usually around 28-30%. All this tells you is that your labor cost for the month was higher than expected, it doesn’t really tell you why. 

You might already know why based on context or recent changes in your business. But if you don’t, you’re going to need to do more digging into your numbers in order to see the bigger picture. 

For example, which category of labor (front of house, back of house, management) is contributing the most to your inflated labor numbers? Did you have more servers on the floor than you needed? Too many line cooks? Did a non-salaried manager or supervisor take on a time-consuming task such as inventory? (By the way, if you’re still doing inventory the old-fashioned way, you really should automate. This speakeasy in Toronto went from spending a full day on inventory to just 60 minutes.)

Which days of the week did you have the most significant variances? Which shifts/meal periods? Was there a stat holiday in that month somewhere (and you needed to pay staff time and a half), or a special event or day like Saint Patrick’s Day which necessitated more staff on hand to manage the rush? 

To truly identify where labor costs are creeping up, there’s no getting around gathering the necessary insights you need to make a complete and detailed picture. 

It’s important to remember that restaurant labor costs are just one part of a whole, and high labor cost percentages are sometimes the symptom of another issue. Rather than rushing to cut labor hours at all costs, your restaurant will benefit far more from taking the time to figure out what’s really going on and fixing the right problem.

Group your restaurant labor costs for greater clarity

Dividing staff into groups shows you which positions are costing you the most. Assign front-of-house staff such as servers, hosts and bartenders to one group. Kitchen staff such as cooks and dishwashers are another natural group, as are management staff. 

You can also divide your staff by whether they’re paid by hourly wage or salary. Once you have your staff all divvied up, you can compare how much each of those teams are costing you. 

Use technology to optimize restaurant labor cost

Your tech stack is the key to reducing your labor (and other) costs, enabling restaurants to streamline their operations, improve efficiency and automate repetitive tasks, thus reducing the number of labor hours you need to schedule for.

Your restaurant POS is at the heart of your tech stack, and we can’t emphasize enough the importance of an integrated platform. Using an integrated POS/restaurant management platform, you’ll be able to track employee performance and costs, identify areas that need improvement and make better decisions based on real-time data and insights. Besides that, you’ll be able to automate many of the tasks that keep your management team holed up in the office crunching numbers instead of developing an all-star team or building relationships that keep guests coming back. 

Other technologies that can help you reduce high labor costs are things like QR code ordering, which allows customers to order and pay for what they want on their mobile phone, freeing up your staff to focus on other things. 

A mobile point of sale (mPOS) can also help you get more flexibility in service and empower your staff to handle bigger sections. This is by cutting out unnecessary steps like running back and forth from table to POS station. Instant order sending from table to kitchen can also help improve pacing in your kitchen. Learn about Lightspeed’s handheld POS technology. 

Kitchen display systems (KDS), which replace traditional paper tickets, can also boost efficiency by streamlining communication between the front and back of house and helping improve workflows behind the line. By eliminating the need for manual order transcription, a KDS helps to both reduce errors and allow your kitchen to better handle busy periods.

Save on restaurant labor costs by optimizing your schedule

We can’t talk about reducing labor costs without talking about employee scheduling software. With employee scheduling software, restaurant owners and operators can effectively manage shifts, labor compliance and employee communication. They also get the top-level visibility they need to make better scheduling decisions. 

For example, 7shifts’s cloud-based software lets managers create optimized schedules based on forecasted demand, staff availability and labor regulations. By automating the scheduling process, restaurants can prevent overstaffing, which hurts their bottom line, and understaffing, which can hurt the quality of service. 

Using scheduling software that’s integrated with your POS, restaurants can consistently hit their labor goals and simplify the cost analysis and reporting process. In an integrated tech stack, all of your tools talk to one another, so you don’t have to reconcile multiple data sets from different locations to understand what’s going on.

Training and cross-training to reduce restaurant labor cost

First and foremost, a well-trained team will save you money on labor because they’re generally faster and more productive. They know your processes down to a T, and they could perform the steps of service in their sleep. 

But that doesn’t happen overnight—it takes time and commitment to ongoing training and skills development. (Of course, even the best and most experienced restaurant employees need tools and efficient processes to be able to reach their full potential.) 

Besides training on their primary jobs, we would encourage you to invest in cross-training between roles, which will not only keep your employees more engaged but also give you more schedule flexibility. 

That doesn’t necessarily mean training your line cooks to be sommeliers—unless they’re planning to make the leap to the front of house—but it makes a lot of sense to train your more experienced servers behind the bar, for example, or your prep cook to work behind the line. That way you can more easily cover last-minute absences when someone calls in sick, cover vacation periods, or simply make adjustments on the fly. (For example, if your dining room is dead but your bar is getting slammed, a server with bartender training could be moved from the floor to the service bar to help handle the rush.)

Another reason to invest in training and skills development for your restaurant employees is because it helps improve engagement and retention. According to research from the Center for Hospitality Research at Cornell, the cost of employee turnover is around $5,864 per front-line employee. 

And restaurant employees want training and skills development. If you provide your best talent with a path to professional growth, they’re less likely to leave you for another business that does.

What is a good restaurant labor cost percentage?

A good restaurant labor cost percentage depends on the type of restaurant and its business model. Most restaurants aim for between 20%-30% of gross sales, but it’s normal for this goal to vary (sometimes significantly) by industry segment.

Here’s a ballpark estimate of a good labor cost percentage by restaurant type:

• Fast-food/QSR restaurants: 25%. If you think about it, it makes sense. Food moves faster, profit margins are higher, and the labor is relatively unspecialized, which costs less to deploy. Of course, just because some fast-food restaurants can achieve labor costs as low as 25 percent, that doesn’t necessarily mean that labor costs can’t (or shouldn’t) run higher. 
• Full service restaurants: 25%-35%. Where specific restaurants fall on this range depends on the menu and methods of service. A more casual restaurant that offers table service, for example, will probably have lower labor costs compared to a more upscale restaurant with a higher standard of service and more operational complexity.
• Fine dining: varies, but tends towards the higher end of 30%-40%, depending on in-house food production and service standards. A fine dining restaurant that makes most of its menu components in-house will have a much higher labor cost, for example, than a world-class steakhouse selling simple-to-prepare foods like steak and baked potato.

If you want to better track and control labor costs in your restaurant, the importance of choosing the right technology cannot be overstated. Need help building your perfect tech stack? Chat to one of our point of sale experts.

FAQs

What is the typical labor cost for a restaurant?

The average labor cost for a restaurant can range from 20% to 35% of total revenue, but this really depends on the restaurant’s size, location, level of service, menu complexity and more. 

How do you calculate labor cost in a restaurant?

To calculate labor cost in a restaurant, add up the wages and benefits paid to all employees over a specific time period. Then divide this total by the total revenue generated during the same period and multiply by 100 to get the labor cost percentage.

What is an example of a standard labor rate?

Standard hourly labor rates vary widely (even wildly) depending on factors like job role, experience and geographic location. In the United States, for example, the average hourly wage for tipped restaurant employees can range anywhere from $2.13(!) in some states to $15 an hour in others. Wages for specialized roles like chefs or managers will obviously be higher, given that these require more specific skills and experience.