Food Service Solutions

Labor Cost 101

Labor is often the largest expense for a restaurant, typically ranging between 25% to 35% of a restaurant’s total sales, depending on the type of establishment. Being able to effectively control labor cost is essential for profitability. In this blog post, we’ll break down what labor costs are, how they impact restaurant operations, and how to manage them effectively.

Labor costs in a restaurant encompass all expenses related to employees, including:

Wages – The hourly or salaried pay for all staff members, including chefs, servers, bartenders, dishwashers, and management.

Benefits – This can include health insurance, paid time off (PTO), and retirement benefits.

Payroll Taxes – Employers are required to pay various taxes related to employee wages, including Social Security, Medicare, and unemployment taxes.

Overtime – Some employees, particularly those in management or kitchen positions, may accrue overtime wages based on hours worked beyond standard shifts.

Labor costs are a critical factor in determining a restaurant’s overall profitability. If labor expenses are too high, it can erode profit margins. Conversely, if labor costs are too low, it can negatively impact service quality, employee morale, and customer experience.

Profit Margin – The most direct impact of high labor costs is on a restaurant’s profit margin. Even a small increase in wages or a reduction in efficiency can lead to significant losses if not properly managed.

Service Quality – Cutting back on staff to reduce labor costs can lead to slower service, longer wait times, and mistakes in orders. In an industry where customer satisfaction is paramount, poor service will quickly result in negative reviews and lost business.

Employee Turnover – High turnover can be a sign of poor labor management. When staff feels overworked or underpaid, they are more likely to leave. The cost of hiring and training new employees can quickly add up, further impacting your bottom line.

The Labor Cost Percentage

The key to managing labor costs is understanding how to calculate and track them. One common method is to calculate your labor cost percentage. This is the percentage of total sales that is spent on labor.

Labor Cost Percentage = (Total Labor Costs / Total Sales) x 100

For example, if your restaurant has $50,000 in total sales and $15,000 in labor costs, your labor cost percentage would be:

Labor Cost Percentage = ($15,000 / $50,000) x 100 = 30%

This means in basic terms, that $0.30 of ever dollar the restaurant brings in from sales will be used to pay labor costs.

This percentage gives you a quick snapshot of how much of your sales are going toward paying employees. While ideal labor cost percentages can vary based on the type of restaurant, a percentage between 25% and 30% is considered healthy for many full-service restaurants.

We at Food Service Solutions recommend that labor costs are separated between fixed and variable or salary and hourly employees. This is because if you employe a salaried manager, their cost will remain constant regardless if you make $1.00 or $1,000,000, but hourly labor can be managed based on how busy your establishment is.

Strategies to Manage Labor Costs Effectively

Managing labor costs requires a combination of strategies that balance staffing needs with maintaining quality service. Here are some tips for optimizing labor costs:

Track Sales Trends – Use historical sales data to predict busy periods and adjust staffing levels accordingly. For example, if a restaurant sees higher foot traffic on weekends, schedule more staff on those days.

 Use Part-Time and Flexible Scheduling – Instead of having a fixed full-time schedule, offer part-time positions and flexible hours. This allows you to adjust the number of staff based on demand, without paying for labor you don’t need.

Cross-training employees to perform multiple roles (e.g., servers trained to bartend, or cooks trained to handle dishwashing duties) can help you better manage labor resources. Cross-training ensures you have staff who can step in when needed, preventing overstaffing and minimizing downtime.

Use software to track labor costs in real-time. Tools like POS systems, labor scheduling software, and employee time-tracking apps can help streamline labor scheduling, prevent over-scheduling, and ensure accurate payroll.

 Overtime can be one of the most significant contributors to high labor costs. By carefully managing employee schedules and avoiding excessive overtime, you can keep labor expenses in check.

High turnover can be costly for a restaurant. Invest in training, offer competitive wages, and create a positive work culture to retain experienced staff. Reducing turnover will lower recruitment and training costs, which in turn helps manage labor costs more effectively.

Labor costs are a major component of a restaurant’s expenses, but they don’t have to be a source of stress. By understanding how to calculate, track, and manage these costs, restaurant owners can achieve a balance that supports profitability without sacrificing quality or employee satisfaction. Through strategic staffing, careful scheduling, and effective use of technology, you can reduce unnecessary labor expenses while ensuring your customers receive top-notch service.

If you would like to have a free labor cost evaluation to see how and where you could save some money or increase productivity, contact us at Food Service Solutions. On average, we lower labor costs for our clients by 8-10%. What could you do with an extra $0.08-$0.10 on every dollar you bring in?