How to Calculate and Improve Your Restaurant Labor Cost

Introduction

Across industries labor is often the largest business cost, sometimes nearly three-quarters of all costs, affecting, significantly, the bottom line (restaurants generally aim to keep labor costs at 20 to 30 percent of all income before expenses and taxes are deducted). Because restaurant labor costs and percentages are such critical metrics, they deserve extra tracking and reporting. Labor costs reflect salaried and hourly wages, paid sick and vacation days as well as other benefits (health insurance, tuition assistance, volunteer days, professional training, free meals, etc.), bonuses, overtime and payroll taxes.

Labor costs expressed as ratios allow easy adaptation as costs or revenue rises or falls, i.e., as sales increase, labor cost increases (though not necessarily in proportion). This labor cost increase could be due to staff working longer hours or management hiring more staff to accommodate the increased business. In this case, hiring additional staff may save money on overtime pay rules and can create a positive customer experience, possibly boosting the bottom line with return business and additional sales via online reviews or personal recommendations. By understating labor cost calculations, you can budget better and plan for upcoming hires.

In this article, we’ll explore common ratios used in calculating labor costs including:

• Direct labor cost as a percentage of total labor cost
• Labor cost as a percentage of revenue
• Labor cost per shift
• Labor cost as a percentage of operating expenses

Direct vs Indirect Costs as a Percentage of Total Labor Cost

When figuring out an employee's actual cost, it’s important to break out wages, salaries, bonuses and other monetary payments (direct costs) from indirect costs such as benefits, payroll taxes, worker compensation insurance premiums, etc. This ratio helps guide hiring considerations. To figure this calculation, simply add up all monthly employee costs, direct and indirect and divide the direct cost by the total cost.

Example:

Servers earn $10 an hour for a 40-hour week or $1,600 monthly. The restaurant provides health Insurance costing $200 monthly and covers its share of Social Security and Medicare taxes, or $122 per month. The restaurant also pays $20 per month for worker’s comp and offers one meal per shift valued at $12. In this scenario:

The total direct and indirect cost is $1,954 ($1,600 + $354) with direct costs representing about 82 percent of total labor costs: $1,600/$1,954 = 0.8188 x 100 = 81.88%. Consider utilizing this labor costing formula for all staff and stations: servers, bartenders, chefs, line cooks, managers, bus staff, etc.

Labor Cost as a Percentage of Revenue

This ratio describes labor cost as a percentage of total sales over a set period. This is a handy snapshot of your labor costs but should be done during slow and busy periods, breakfast, lunch and dinner shifts, weeknights vs weekends, etc. to better tweak your shifts for efficient staffing (and remember that understaffing will not save money when considering overtime and customer experience).

To calculate, use the model above: all labor costs, direct and indirect, for a set period, and then ascertain all sales for that period (before taxes and other deductions), then divide labor cost by sales.

Example Dinner Shifts for One Week

Total wages, benefits paid, payroll taxes etc.: $4,250

Total restaurant sales: $11,500

Total labor costs (dinner shift, one week) / Total sales (dinner shift, one week): $4,250 / $11,500 = 0.3695 X 100 = 36.95% Remember to calculate over various shifts, time periods, holiday seasons, weekends vs weekday, etc.

Labor Cost per Shift

To get a better understanding of expenses, calculate your labor costs per shift. This simple ratio is defined as Total Monthly Labor Cost / Number of Shifts Per Month. By cross-referencing various ratios, you can better identify and optimize staffing needs.

Example Average Cost Per Shift

Total wages, benefits paid, payroll taxes etc.: $17,000

Total restaurant sales: 84

$17,000 / 84 = $202.38 per shift.

As with other metrics, this number changes as you manipulate staffing, so recalculate regularly. For example, you calculate which shift has the highest labor costs against total sales for that shift and can either reduce or reshuffle staffing to bolster more profitable shifts while cutting costs on less productive shifts.

Labor Cost as a Percentage of Operating Expenses

This ratio allows you to compare your labor costs relative to your overall expenses. This is an important metric as upward movement is a red flag indicating increasing labor costs over your other expenses. It can be helpful to compare this ratio to your competitors: while average costs across an industry only offer a partial picture, they’re another way to assess your performance.

To calculate operating expenses, add your fixed costs (rent, taxes, mortgage, fees, etc.), variable costs (food and beverages or Cost of Goods Sold (COGS), marketing, etc.) and your semi-variable costs (both salaried and hourly employees fit under semi-variable as the former is fixed while the latter variable). By adding your COGS and total labor cost you ascertain a crucial metric: your prime cost. Your prime cost plus your fixed and other variable costs represent your operating expenses. Divide total monthly labor costs by total monthly operating expenses to gauge what percentage of your business goes to employees.

Example Labor Cost Percentage

Total monthly wages, salaries, benefits paid, payroll taxes etc.: $17,000

Total monthly operating expenses: $57,000

$17,000 / $57,000 = 0.2982 x 100 = 29.82% In this example, labor costs represent almost 30 percent of overall expenses.

What Is a Good Percentage of Labor Cost?

Since restaurants offer different levels of service, food, experiences, etc., it can be helpful to compare similar restaurant types to get a better understanding of average restaurant labor cost percentages. You can expect your labor costs to look like the following based on your restaurant’s category:

Fast food restaurants: 25%-30%: Certain fast-food restaurants can achieve labor costs as low as 25%, but that doesn’t mean that labor costs can’t (or shouldn’t) run higher.

Table service restaurants: 30%-40%: Where specific restaurants fall on this range depends on the menu and extensiveness of service.

Fine dining: Varies, but tends towards the higher end of the 30%-40%

If your numbers are running higher (or lower) consider actions to bring costs in line with industry standards.

Conclusion

Restaurant labor costs and percentages represent critical metrics: labor costs are always significant business expenses. Always keep your eye on these crucial ratios: Restaurateurs should carefully monitor labor cost ratios to ensure alignment with industry norms and individual financial goals. HigherMe has developed the best hiring solutions for the restaurant industry to help you in that next step.

If you’re ready to start hiring amazing employees, reach out to us at HigherMe! Email us at sales@higherme.com, or visit our product page for more information!