Managing labor costs is essential for the financial health of a restaurant. Excessive expenses relative to revenue can diminish profit margins, while inadequate staffing levels may undermine the quality of customer service. Calculating the restaurant labor cost percentage accurately is crucial for effective cost management and decision-making. This article provides insights into understanding, calculating, and optimizing labor cost percentages for restaurants.

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Understanding Restaurant Labor Cost Percentage

Effective labor cost management is critical for a restaurant's profitability, ensuring financial stability and a competitive advantage through optimized staffing. Strategic scheduling and responsiveness to sales trends boost employee satisfaction and operational efficiency, pivotal for maintaining thin margins in the hospitality industry.

Your restaurant's labor cost takes into account every dollar amount spent on labor throughout your business. This goes beyond just employee wages and encompasses all employee-related expenses like uniforms, payroll processing fees, and workers' compensation insurance.

Factors involved in calculating labor costs include:

• Salaried and hourly employee wages
• Training costs
• Overtime pay
• Bonuses
• Payroll taxes
• Health insurance
• Vacation & sick days

If you identify any other labor-related costs, you should include them in your labor cost percentage calculation.

Is Labor a Fixed or Variable Cost?

There are two main types of operating costs with which restaurants run: fixed costs and variable costs.

Fixed costs include rent, insurance, license fees, and loan payments. These costs typically remain constant on a monthly and annual basis.

Variable costs on the other hand regularly fluctuate since they're directly impacted by business revenue, usage, and activity. Some of these costs include cost of goods sold (COGS) and utility bills.

While certain labor costs, like salaries for full-time employees, remain constant, most restaurant labor expenses are variable, fluctuating due to factors such as scheduling adjustments for busy or slow periods, minimum wage changes, and operational efficiency.

What Percentage Should Labor Cost Be in a Restaurant?

A good labor cost percentage for a restaurant typically ranges anywhere from 20% to 30% of its total revenue. Generally, restaurateurs aim for a labor percentage below 30%, but this goal will change depending on the type of business you run.

This range varies depending on other various factors including:

• Size of staff
• Staff efficiency
• Type of restaurant
• Restaurant location
• Menu complexity
• Business model

Fast-food or quick-service restaurants usually have lower labor cost percentages due to efficient operations with fewer, cross-trained staff. On the other hand, fine dining establishments will experience higher labor costs due to a higher staff-to-guest ratio and extensive training requirements.

Keep in mind, that it's common for franchise locations to vary in labor cost percentages since their individual sizes, costs, sales, and performances will factor into each calculation.

Labor cost percentages are best used as benchmarks rather than hard targets for assessing business performance. While aiming for a lower percentage is desirable and suggests profitability, an excessively low figure might signal bigger problems, such as understaffing and compromised customer service.

The key is not just to set a target labor cost percentage but to do so with a comprehensive understanding of your business's broader context, which will pave the way for enhanced profitability while delivering quality service.

How to Calculate Restaurant Labor Percentage

To calculate your restaurant's labor percentage, you'll need to know the following data points:

1. A Specific Time Frame: Select a time period for calculating your labor cost percentage, such as a specific year, quarter, or month.
2. Total Labor Costs: Add up all wages, taxes, benefits, and other employee-related expenses for this time span.
3. Total Sales: Calculate the total revenue from food and beverage sales over the same period. You can easily view your total sales for a specific timeframe in MarketMan's COGs and Gross Profits reporting tool.

We'll be calculating labor cost percentages using two methods: labor as a percentage of sales and labor as a percentage of total operating costs.

Restaurant Labor Costs as a Percentage of Sales

Restaurant Labor Percentage = (Total Restaurant Labor Costs for the Period / Total Restaurant Revenue for the Period) x 100

Let's use this formula with an example.

Lucas, Franchisor of Urban Morning, wants to know the labor cost percentage of one of the locations for the month of February. 

He finds that this particular location in February spent $8,500 in salaries and hourly wages, $3,000 in payroll taxes, $1,200 in paid time off, and $820 in employee training. He adds these up and discovers that the total labor cost was $13,520 for the month.

Lucas accesses the location’s sales report in MarketMan’s COGS and Gross Profits reporting tool, runs the report for the month of February, and sees that this location brought in $42,000 in sales.

Using the formula, he first divides the total labor cost by the total sales generated. $13,520 / 52,000 = 0.26

He then multiplies 0.26 by 100 to get the final labor cost percentage.

0.26 x 100 = 26%

Lucas finds that one of his locations’ labor cost percentage in February was 26%. 

Labor Costs as a Percentage of Total Operating Costs

You can also calculate labor cost percentages using total operating costs. Restaurant operating costs include all operational expenses like rent, utilities, equipment, marketing, food & drink, supplies, and more.

The formula is as follows:

Labor as a Percentage of Operating Costs = (Total Restaurant Labor Costs for the Period / Total Restaurant Operating Costs) x 100

Whether you choose to calculate labor costs as a percentage of operating costs or as a percentage of sales, it's key to stay consistent in your choice. Franchises should report their percentages using the same formula across all locations to avoid confusion and maintain uniformity.

Strategies to Reduce Labor Costs in a Restaurant

Reducing labor costs is not just about cutting hours or wages; it's about optimizing your workforce for peak efficiency. Here are some actionable strategies:

Cross-Train Employees

Enhance skills and efficiency with comprehensive training programs. A well-trained staff is quicker, makes fewer mistakes, and can handle a greater variety of tasks. Cross-train your staff so they can take over other tasks when last-minute absences arise.

Optimize Staffing

Analyze your workload and ensure you're not over or understaffed. Use scheduling tools to align staff levels with customer demand. Regular reviews can reveal opportunities to reallocate or reduce hours without impacting service.

Reward Performance

Acknowledge and incentivize high-performing employees to keep them motivated. Boosting morale creates a positive work environment, minimizes employee churn, and reduces the amount of money spent to train new hires.

Embrace Automation

Invest in and integrate labor-saving technology to handle repetitive, manual tasks throughout your business to boost employee efficiency and cut down on manual labor and costs.

MarketMan, a cloud-based restaurant inventory management platform, helps restaurateurs around the world reduce labor costs by streamlining BOH processes and minimizing manual work with advanced automation. Eliminate labor-intensive paperwork, gain access to real-time data and predictive analytics, and improve profitability today. Request a demo of MarketMan to see it in action.