Updated: Apr 13, 2022
Every restaurant owner knows that one of the biggest costs of running a restaurant is labor cost. Pay, benefits, payroll taxes, and more all add up quickly to impact your bottom line. So, calculating the total labor cost and then comparing it to the income you make is important as you plan to run a thriving restaurant business. But this metric is something many restaurant owners don’t know how to calculate well.
Whether you are just starting your restaurant or are a seasoned restaurant owner, this metric will remain an important one to calculate regularly as you evaluate your operations. Here’s a guide that will help you calculate your restaurant labor cost percentage as you look at your operating costs to determine your profitability as a restaurant business.
What Is Restaurant Labor Cost?
Labor costs are the costs associated with paying your team members for their work and providing them benefits to help with their personal needs. Most people are well aware of the need to calculate wages and salaries in this metric but may not be aware of the other costs associated with labor.
The restaurant industry has more than just the hourly or salaried cost of labor to consider when calculating staffing costs. Some factors you must add to this metric include:
Hourly employee wages: This metric varies because hours worked may change from week to week and based on how busy your restaurant is.
Salaried employee wages: This metric stays the same as long as there are no raises, and it often applies to management staff.
Employee bonuses: If you pay a bonus or performance incentives to your team members, this needs to be part of your labor costs.
Employee overtime: If you pay overtime because employees clock more than 40 hours a week, add this in.
Payroll taxes: Payroll taxes include Social Security and Medicare taxes paid to the federal government for each employee's paycheck.
Health insurance costs: If you provide health insurance, the premium is part of your labor costs.
Sick and vacation days: These paid days are not part of the wages but do become part of the labor costs.
Additional insurance, like life or dental: Not all small businesses or restaurateurs provide this benefit, but if you do, it is a labor cost.
Workers' compensation insurance: The premium for this insurance is considered a labor cost.
Education and training: If you have costs for training your team members, add this into your total labor costs.
Paid meals at your restaurant: Many quick service and dine-in restaurants offer free or discounted meals for workers during the period of time they are on the clock, so add this to the labor costs.
Payroll cost: If you pay a payroll company to process paychecks or direct deposits and deduct payroll taxes and other benefits, the cost to process paychecks is part of your labor cost.
Scheduling software: If you use scheduling software or a time card program that is separate from your POS system, you should add this to your labor costs.
Any cost associated with hiring, managing, and paying your staff and also improving retention of staff is part of your restaurant labor cost. Take some time to carefully calculate this before working on your labor cost percentage because you need accurate data to fully understand the impact your employees have on your profitability.
How to Calculate Labor Cost Percentage [Formula + Example]
Operating a successful restaurant requires understanding the impact of your labor costs on your overall profit. In the restaurant industry, the goal is to have your labor costs be no more than 30 to 35% of your overall revenue. Lower than this is good, too, but the 30 to 35% range is a great goal because it gives you plenty of room for other costs of doing business and some profit on top of that. Restaurant management teams need to know how to calculate labor cost percentages in order to stay within this range.
While you can use a labor cost calculator to determine this percent, knowing how to do it on your own is a better choice. A labor cost formula will help you easily determine this cost. A basic formula would be:
Total labor costs/total profitability x 100 = labor cost percentage
So if you run a quick-service restaurant that has two cooks, one drive-through worker, and one counter worker on the clock at all times and those workers all make $12 as an hourly rate for the 10 hours your restaurant is open each day, you would calculate the percent as follows:
4 x $12 x 10 = $480 for your daily costs
Then, multiply this by 7 for your weekly costs, giving you $3,360 a week.
Finally, add in the other costs you have previously calculated for factors like benefits, salary management, and other labor costs. For this example, let's say this equals $1,000 a week. Your total labor costs are $4,360 a week. For this week, you had gross sales of $14,750.
Now you are ready to use the labor cost formula:
$4,360/$14,750 x 100 = 30%
Based on these figures, your labor cost for this scenario is within the recommended range, and you controlled those costs well.
If your cost percentages are outside of this recommended range, regardless of whether you run a fast-casual restaurant or a fine dining establishment, evaluate your operations to see where you can improve and lower your operating costs with reduced labor costs.
Best Practices for Managing Labor Costs
If you find that your labor costs are too high, you are in good company. Rising minimum wage across the country combined with a labor shortage that means many workers are forced to work overtime puts many restaurants in a bind as they look to manage their labor costs. Some ideas you can use to lower labor costs as well as total operating costs include these:
1) Upgrade Your Restaurant's Equipment
The best dishwashers, grills, food processors, POS systems, and self-ordering kiosks can help you make your restaurant more efficient. Efficiency can help you cut back on the number of employees you need to have in the building at any one time. Having fewer employees will lessen the number of hours of payroll costs you clock each day.
For example, an integrated POS and self-ordering kiosk system allow your customers to enter their own orders, which then get sent directly to the kitchen staff, skipping the order taking at the counter and eliminating the need for a paid employee taking those orders.
The kiosk also takes the payments and helps calculate data about your customers, and that can give you the insight you need for marketing and other concerns, all without paying people for these tasks. Not only that, but you can often increase your output by putting your people to work in the kitchen rather than at the counter, and that can increase your profits and therefore lower your labor cost percentage.
INFI is one tool that works well for the restaurant industry and restaurants looking to lower employee labor costs. The self-ordering kiosks limit the number of employees you need to man a counter or take orders in a sit-down environment, so you can have fewer people on hand each day. Check out the self-ordering total solution to see how it might optimize your restaurant's operations.
2) Optimize Your Current Operations
After upgrading your equipment, make changes to the way you operate your restaurant. For example, you might create a more efficient cooking process, so your cooks can make more food in less time. This helps you increase your output and serve more customers each hour, which increases your profit margins and total revenue.
Similarly, a better order delivery process, perhaps one that eliminates the need to have employees hand-deliver the orders, can lower your operating costs.
Take the time to evaluate your current operations. Do you see people standing around with little to do? Put them to work, or send them home. Optimizing the way you operate now will lower all of your costs, including labor costs, so you can see better overall profits.
3) Regulate Your Staff's Overtime Hours
If calculating your labor costs shows that you are regularly paying overtime hours, this is a place where you can easily limit your expenses. Sometimes it will be absolutely necessary to pay time and a half when someone works overtime. However, this eats up your profit margins quickly and may not always be necessary.
If you notice this concern, consider regulating overtime hours more closely. You can do this in a few ways. One option is to spread out the hours among your existing employees, enforcing strict rules about how often overtime is allowed. Another option is to hire more staff. However, if the labor shortage is affecting your restaurant as many are reporting, this might not be easy to do.
Check out more advice from us about how to handle the ongoing labor shortage here: 9 Ways To Conquer the Restaurant Labor Shortage
Keep Your Labor Cost Percentage Low with INFI
If you are looking for creative ways to optimize your labor costs and improve your overall operations to increase your profits as a restaurant owner, INFI should be part of the conversation. INFI's self-ordering kiosk systems are a cost-effective way to increase output, improve customer satisfaction, and make your restaurant more profitable with fewer people on the clock. Reach out to INFI today to schedule a demonstration of our system, and see the difference it can make for you.