How to reduce labor costs in a restaurant

Next to skyrocketing food costs, labor is the biggest expense for restaurants each year. And as minimum wage creeps higher and higher, it has us wondering: how to reduce labor costs in a restaurant. Let’s learn how to calculate and how to reduce labor cost in a restaurant, the factors that may be contributing to increased labor costs—like time theft and unnecessary overtime—and the tools you can use to keep them in check.

What are labor costs?

Labor costs, or cost of labor, is the total amount of money an employer pays to cover employee wages, sick days, and benefits, plus related payroll taxes and benefits. New restaurateurs may be surprised to learn that labor costs aren’t just the hourly wages you pay employees. Here are a few other things that will factor into your labor cost calculation:

• Payroll taxes
• Overtime
• Bonuses
• Sick days
• Vacation days
• Insurance
• Benefits
• Uniforms
• Meals
• Supplies
• Training
• Public transportation stipends

Understanding labor costs helps you figure out what to charge for your products and services, and how many employees you can afford. If you don’t know how much each employee costs your business, it’s impossible to calculate your hiring needs, you can’t properly price goods and services, and you run the risk of doing damage to your bottom line.

Learn how to calculate labor cost in a restaurant

Fortunately, there are formulas to help you accurately determine your labor costs. A labor cost formula gives you an exact dollar figure for what every hour of labor costs your business. With a dollar figure in mind, it’s easier to determine how much staff you can bring on and how to maximize your profits. The labor cost formula can also help you pinpoint where you may be overspending, helping you reduce labor costs as well. There are two ways to calculate labor in a restaurant. The first: as a percentage of sales. The second: as a percentage of total operating costs.

Labor costs as a percentage of sales

Calculating labor cost percentage based on sales is the most common formula used in the restaurant industry. Let’s break it down:

• First, calculate your restaurant’s labor cost. This is all the money that your business had to pay to its employees throughout the year. Be sure to think beyond wages and include things like bonuses, sick days, vacation days, stipends, and any other paid employee benefits. If you’re not sure how to get this number, there are a few helpful online calculators.
• Second, calculate your restaurant’s revenue. This is the total amount of money that your business takes in before any taxes or other deductions have been made. You can easily find this number in the dashboard of your POS system.
• Divide the total labor cost by its annual revenue. For example, if your restaurant paid employees $200,000 last year and did $800,000 in sales, you’d divide $200,000 by $800,000. This would give you 0.25
• Finally, take the number you get when you divide labor costs by revenue and multiply it by 100. For example, multiply 0.25 by 100. In this case you get 25.

Labor cost as a percentage of total operating costs

To calculate your restaurant’s labor costs as a percentage of total operating costs, the steps are slightly different.

• Start again by calculating your restaurant’s annual labor cost, or all the money you paid your employees.
• Next, you’ll have to calculate your total operating costs, or the cost of doing business. Operating costs include rent, food, drink, furniture, marketing, web hosting fees, monthly payments for online reservation sites, POS fees, water and electricity bills—anything you pay to run your restaurant every day.
• Divide labor cost by total operating costs For example, if your labor costs are $16,000 per month and your total operating cost is $65,000 per month, divide $16,000 by $65,000. In this example, you get 0.25.
• Finally, take the number you get when you divide labor costs by operating costs and multiply it by 100. According to the example, you get 25%.
• 25% is your restaurant’s labor cost percentage, or 25% of the total cost of doing business every month.

What is labor cost percentage?

Labor cost percentage of a business is the total amount of money it pays employees relative to its gross sales. It’s the total amount of sales your business brings in before deductions. Labor cost percentage gives you a sense of whether your business is succeeding financially. Otherwise, you may need to lower your labor costs to stay profitable. It essentially tells you how much you can pay employees without putting your business in jeopardy. This is why it’s important to know the ideal labor cost percentage for a restaurant.

What is a good labor cost percentage for a restaurant?

Most experts agree that a good labor cost percentage for a restaurant is between 28% and 33%. This isn’t a hard and fast rule, but the higher the labor cost percentage, the harder it is to turn a profit. This percentage also varies depending on the type of restaurant and the level of service it provides. To give you a sense, here are some average labor cost percentages for different types of restaurants:

• Quick service: 31.6%
• Fast casual: 28.8%
• Casual: 34%
• Upscale casual: 31%
• Pizza: 30.1%

Keep in mind that your labor cost percentage can vary from day to day. For example, if your restaurant is fully booked every night and you have four servers, two food runners, and a front-of-house person on staff each night, your cost of labor may be 20%. On a slow night with the same number of employees, your costs may jump to 40%. To keep your labor costs steady, you should have a handle on your daily spending so you can adjust as needed.

What causes unnecessary labor costs?

Labor costs are one of the biggest expenses in the restaurant industry, so it’s important to keep them under control. You should start by understanding where you might be making costly mistakes. Let’s look at the factors that can contribute to unnecessary labor costs in your restaurant.

Poor scheduling

If you’re not on top of your sales and high and low periods, it’s hard to predict demand and schedule the optimal number of staff each day. This can lead to overstaffing, which means inflated labor costs—just like our example above where overstaffing on a slow night drove labor costs up to 40%. You may also find yourself with not enough staff to meet your customer needs, which could cost you repeat customers or your even reputation.

Unnecessary overtime

Poor planning can also lead to employees working more hours than they should, which means overtime pay. If you’re still scheduling everyone last minute or you’re not using any kind of scheduling software, it’s easy to make this mistake. And overtime mistakes can be expensive—overtime is 1.5 times employee’s hourly rate in most states.

Time theft

Time theft is when employees bill you for time that they didn’t work. This can happen when they have a friend clock in for them, when they start early and finish late, take extra-long breaks, or do personal things when they’re on the clock. A recent study found that approximately 20% of every dollar earned by U.S. companies is lost to time theft, costing U.S. employers more than $400 billion per year.

High admin costs

Having a human take care of HR, payroll, and scheduling tasks by hand is expensive and time consuming. Are you still handwriting reports, using paper time cards, or creating your schedule in a spreadsheet program? You’re likely spending way more money on admin than you need to be. If you have an automated program that’s capturing the data on all that paper, there’s no need to be doing anything by hand.

How to reduce labor costs in a restaurant

With a little help, it’s easier than you think to reduce your labor costs. These tips and tools can help you lower your labor costs and keep them that way.

Hire the right people

The cost to hire a new employee is so much more than their salary. You’re paying for recruiting, interview time, background checks, and training. It can take a business six months just to break even on a new hire. That being said, it pays to hire the right people the first time. Homebase can help you craft effective job postings quickly and easily, and post them to multiple job sites, so you can attract the best candidates for your open positions. You can also manage all your potential hires in one place, which leaves you more time to hold great interviews, get to know your applicants, and feel good about who you’re taking on.

Use a time clock app

With paper timesheets or old-school punch clocks, it’s easy for employees to engage in buddy punching or time theft. And those extra minutes can really add to your labor costs. Eliminate the problem with a digital time clock app. Digital time clocks are web-based alternatives to mechanical punch clocks. Employees can clock in and out of their shifts from a computer browser or a mobile device—anywhere with internet access. Time clock apps, like Homebase, help prevent time theft by providing each employee with a unique PIN, which means they can’t clock in for their coworkers. And because with GPS-enabled software, employees can only sign in and out from a pre-determined location, curbing early clock ins and late clock outs. Time clock apps can also help you catch unwanted overtime with reminders when your employees are approaching overtime hours, late clock-in alerts to make sure your workers are on time, and auto clock-out when they forget to sign out for the day.

Automate your admin

Payroll, scheduling, and other HR responsibilities can take days if you’re still doing it by hand. And time is money, right? You can turn days into hours with automated HR software like homebase. We make it easier to handle every aspect of managing a team from hiring and onboarding, to scheduling, payroll, team communication, and more. And with an automated system, you’re less likely to make pricey mistakes. Integrate Homebase scheduling and time tracking with your POS, so you can monitor labor costs and sales, too. An all-in-one automated solution like Homebase is the most cost effective way to tackle admin and keep your labor costs on track.

Cross train your employees

On a typical day, a restaurant employs a few servers, a host, a prep and cooking team, and a manager to oversee operations. On a busy night, it’s all hands on deck. But if things are slower, the same number of staff may not have much to do. That’s a lot of money to have servers standing around. And if someone calls in sick, the last-minute replacement may end up costing you overtime.  By cross-training your team, you can reduce the number of employees on any given shift without compromising productivity. For example, you could train a host on the manager’s duties or how to serve food, and make sure your servers are also trained at the bar. Paying slightly more depending on what role an employee is doing is less expensive than paying for a second staff member. And if someone doesn’t show, it’s easier for other employees to step in.  Homebase can help you automate your onboarding process, so you have more time to train new employees on all aspects of your restaurant. Need help designing a training program? We also have HR experts on call.

Make shift swapping simple

All managers know their employees have lives and that events, commitments, or illness can conflict with their work schedule. Depending on your staffing needs and resources, changes to the schedule can create chaos. Shift swapping takes some of the scheduling burden off managers and makes sure that all your shifts are covered. This can save you calling in an expensive last-minute replacement, or going understaffed and compromising your customer experience. Homebase makes shift swapping a breeze. Our team communication tool allows team members to send a message to one of their colleagues, a group, or the entire team to see who’s available to swap shifts. Your team doesn’t need to exchange personal contact information, or worry about emails going unseen. And because everything’s online, the shift swapping process happens in real time. When an employee sends a swap request, everyone involved can see what’s happening on the app. It’s easy for employees to change their schedules when conflicts, emergencies, or last-minute events come up.

Go for predictive scheduling

“On-call” scheduling has been a must for many restaurants to accommodate surges, seasonality, or unexpected events that may impact the business. However, new laws are making it costly for employers to change shifts at the last minute. For example, in San Francisco, if you change an employee's schedule with less than a week’s notice, you owe one to 4 hours of pay. Scheduling software like Homebase makes it easy to create your schedules in advance. Use templates or auto-scheduling based on your team’s latest availability, sales forecasts, and labor targets. Once you find a schedule that works, simply copy and paste to build it out for the coming weeks. Alert your employees as soon as the schedule changes so there’s plenty of time to adjust if needed. Homebase scheduling also integrates with most POS systems, so you can use sales data to create a more accurate schedule for everyone. Controlling labor costs without just-in-time scheduling? Sounds like a win-win. Is your company struggling with soaring labor costs? Homebase can help. With a suite of HR tools from time clocks to automated scheduling, it’s easy to avoid unnecessary labor costs at your restaurant. Get started for free.

Reducing restaurant labor costs FAQs

What are common labor costs in a restaurant?

Common labor costs include more than just employee wages—it’s the total amount of money you pay to employees each month. Common labor costs in a restaurant include:

• Payroll taxes
• Overtime
• Bonuses
• Sick days
• Vacation days
• Insurance
• Benefits
• Meals
• Supplies
• Training
• Public transportation stipends
• Uniforms
• Any other employee perks or benefits

What can make your labor costs higher than they need to be?

There are a few different things that can make your labor costs higher than they need to be. If you’re using paper to track employee time, it’s easy for your employees to buddy punch or engage in time theft. Clocking in early, leaving late, or taking extra long breaks may only be a few minutes here and there, but it can really add up over time. Unnecessary overtime can also make your labor costs higher than they need to be. If you don’t have a sense of who’s approaching overtime, regular staffing or last-minute replacements could wind up costing you time and a half. Poor scheduling can lead to expensive overstaffing or understaffing, which can have a negative impact on your customer experience. You may lose out on repeat customers or worse, your reputation. Finally, spending too much time on admin will drive up your labor costs. Tackling hiring, scheduling, and payroll by hand takes hours, and it’s pricey if you’re paying someone to do it by hand. You’re also more likely to make costly mistakes when everything’s on paper.

How do you reduce labor costs in a restaurant?

You can reduce labor costs in a restaurant by investing in hiring so you get the right people the first time. You can also keep labor costs on track by automating your time tracking, scheduling, and payroll. An app like Homebase time clock, stops time theft in its tracks. Employees have a unique pin so they can’t punch in and out for their coworkers and GPS enabled software means they can’t clock in our out if they’re not in a designated area. Homebase scheduling makes it simple for employees to give their availability, trade shifts, and more, so it’s easy to create schedules with plenty of notice. You can also integrate with your POS and use sales data to create more accurate schedules and get staffing levels just right. When you automate payroll and other HR responsibilities, you save time, money, and make fewer expensive mistakes.