How to calculate and optimize your restaurant labor cost

Having barely recovered from the chaos of 2020, restaurants are now facing even more economic challenges. One survey found that 58% of small restaurant owners were spending roughly 50% more now on labor than before the pandemic.*And the same study found that by late 2022, half the restaurants in the US had stopped hiring more staff as a result of rising labor costs and fears over the state of the economy.But your restaurant can’t function without great staff – so there’s never been a more urgent need to optimize your restaurant labor costs.That’s why in this article, we:

• Explain the difference between labor cost and labor cost percentage and why it matters
• Share the average labor cost for different types of restaurants, so you can see how you compare
• Show how to calculate your labor costs, including a percentage of sales, operating costs, and hours worked
• Outline our top four tips on how to cut restaurant labor costs without damaging productivity

We also explain how small business management software saves you time and money by making calculating, monitoring, and lowering restaurant labor costs much easier.

{{banner-cta}}

What is restaurant labor cost?

Restaurant labor cost is how much it costs to pay all of your employees. This is one of your major operating costs as a restaurant owner or operator (just like, for example, food and drink), and it includes wages, salaries, overtime, benefits, payroll taxes, and PTO costs.Restaurant labor cost is a crucial metric to understand and track because keeping it at a reasonable level is key to ensuring your business is financially viable and profitable.

What is labor cost percentage?

Labor cost percentage is your restaurant labor cost as a percentage of your overall costs. For example, for every $100 you spend, if $30 of that is spent on labor costs, your labor cost percentage is 30%. This makes it easier to tell if your labor costs are at a profitable level because you can compare your percentage to the industry average. There are several ways of calculating labor cost percentage, including as a percentage of sales, total operating costs, or hours worked (see more below).

What is the average labor cost for different types of restaurants?

If you’re trying to reduce your labor costs, it makes sense to get an idea of a national benchmark so you can tell how you compare. Knowing the national average labor cost may help you to figure out:

• Whether your expenditure is “normal” and you’re doing well
• If you have scope to hire more people to avoid becoming short-staffed
• If you need to scale up efficiencies to improve your business’s financial health

Typically, restaurant labor cost percentage should be below 30% of your total expenditure. It can also vary depending on the type of restaurant. For example:

• Fine dining 30-35%
• Casual dining 25-30%
• Fast food 25-30%
• Bars inside restaurants 30%
• Standalone bars 18-24%

Labor as a percentage of sales formula

To calculate your labor cost as a percentage of sales formula, you need to know:

• The time period - Choose a specific period of time to calculate, like a week, month, or quarter.  
• The total labor costs - Add up your labor costs over your chosen time period. This includes salaries, wages, overtime, PTO, payroll taxes, and benefits.
• The total sales - The figure for your total sales over the chosen time period. You can likely find this in your Point of Sale (POS) software and generate a report.

The calculation is your total labor costs divided by total sales, multiplied by 100 to find the percentage.(Total labor costs ÷ Total sales) x 100 = labor cost as a percentage of salesFor example, if you have annual labor costs of $100,000, and total sales of $425,000, the calculation would be:($100,000 ÷ $425,000) x 100 = 23.5This means your labor cost as a percentage of sales is 23.5%.

Labor as a percentage of total operating costs formula

To calculate your labor cost as a percentage of total operating costs, you need to know:

• The time period - Choose a specific period of time to calculate, like a week, month, or quarter.  
• The total labor costs - Add up your labor costs over your chosen time period. This includes salaries, wages, overtime, PTO, payroll taxes, and benefits.
• The total operating costs - The figure for your total operating costs over the chosen time period. This includes all expenses, including sales, food and drink, marketing, and rent.

The calculation is your total labor costs divided by total operating costs, multiplied by 100 to find the percentage.(Total labor costs ÷ total costs) x 100 = labor cost as a percentage of operating costsFor example, if you have annual labor costs of $100,000, and total operating costs of $225,000, the calculation would be:($100,000 ÷ $225,000) x 100 = 44.4This means your labor cost as a percentage of total operating costs is 44.4%.

Labor cost per hour worked

This is a way to calculate your labor costs per hour worked in your restaurant across all areas (averaged out across all staff, for example, kitchen staff, front of house, and bartenders.) You can also do the calculation for each section of your staff and compare them, so you can see how much one group is paid compared to the rest.Calculate your hourly cost for each staffing category using their hourly wage.(Total weekly hours x hourly wage) ÷ 52 weeks per year = cost per hour For example, if you have 10 staff who work 40 hours per week, and their wages together work out, on average, at $15 per hour:

• 10 staff x 40 hours each = 400 weekly hours  
• 400 weekly hours x $15 average wage per hour = $6,000 per week
• $6,000 per week ÷ 52 weeks per year = $115.38

This means that your average labor cost across all of your staff works out at $115.38 per hour.You could repeat the same calculation but use a different average wage for each type of staff member. For example, the chefs’ average wage versus the front-of-house staff, and see what each group is costing you per week, per year, and per hour on average.

How can I lower the labor costs of a restaurant?

Now you’ve calculated your costs, you may find your labor expenses are low (so you can hire more people for extra productivity) or that they’re about right.However, if you’re reading this, you’re probably looking for ways to get more control of your labor costs without limiting your profit or results. Here’s how.

1. Use dedicated scheduling software like Homebase

{{banner-cta}}

2. Integrate split shifts into your schedule

Split shifts are shifts worked in two parts, with a break of at least two hours in between. Split shifts are a particularly useful way to reduce labor costs for restaurants because you can cover more hours of service with fewer staff members and fewer hours to pay.For example, you may have busier periods when you need more team members and slow periods when you need fewer. So you could schedule one person for 9 am to 2 pm and from 6 pm to 11 pm. This means their workday technically covers the 14 hours from 9 am to 11 pm, but they’re only working and costing 10 hours. Research also shows that the more hours worked consecutively, the more productivity declines.However, split shifts aren’t always popular with employees, so it’s important to use them with care and ensure they’re scheduled in accordance with local regulations. For example, you can’t just spontaneously decide them; they need to be scheduled in advance. Different US states also have different laws around split shifts and hours; for example, in New York, if a team member works for more than 10 hours per day, you need to pay an extra hour at minimum wage.Homebase can help you with this, as its HR and compliance features help you track overtime, keep you up to date on state labor laws, and notify you of any changes.

3. Train employees for a variety of positions

Ensuring your employees are trained in a variety of positions (cross-departmental training) helps to cut labor costs because you can schedule different people for different jobs depending on demand. You can move staff members around depending on where and when you need them, whether you’re dealing with a busy period or a lull.For example, if your sales forecasting predicts it’s going to be a quiet day, you could save on labor costs by having some team members on shift who can jump between positions as needed (like a bartender who can also serve or take food orders), rather than having one team member per role for the entire day. This is also useful if one of your employees has to go home sick or leave unexpectedly for a family emergency, as one of their co-workers can jump in to cover their role without costing you more on labor.

4. Boost retention efforts

A major, but sometimes overlooked, way to reduce and manage restaurant labor costs is to keep the staff you do have as long as possible. It’s much more expensive to recruit, hire, onboard, and train new employees than it is to retain existing staff and keep them well-trained and happy. In fact, one study found that replacing an hourly employee being paid $8 per hour can cost a company up to $3,500 overall, including hiring, onboarding, training, and productivity time lost.Enter staff management platforms like Homebase, which can help with retention. Transparency, advanced planning, and solid communication will help staff feel their work and time are respected, so they’ll be more engaged and productive and will stay on your team for longer. Homebase’s suite of tools helps with retention by offering a free employee app that lets your team see the schedule in advance, communicate with their coworkers, view their earned wages, request time off, and give their teammates kudos.

Calculating labor costs: Automate and optimize for success

{{banner-cta}}