How to Efficiently Manage Labor Costs for Your Restaurant

Restaurant labor costs are typically the highest costs of owning a restaurant. Restaurateurs commonly aim to keep labor costs between 20% and 30% of gross revenue. However, a full-service, white-tablecloth restaurant will likely have a higher labor cost percentage than a quick-service restaurant since they employ more staff to provide a higher level of service.

How do you control restaurant labor costs?

Well, there’s no sure-fire way to go about managing labor costs in a restaurant because every bar, restaurant, and coffee shop is different. This means that each place will have a unique restaurant labor cost situation that will need to be managed differently.

As a first step, you can start by keeping track of staffing via your restaurant POS system, but after that point, it’s all going to depend on the unique needs of your restaurant. 

That said, here are a few essential tips and tricks for calculating and managing restaurant labor costs.

• Group your restaurant labor costs for greater clarity
• Understand your prime cost with a restaurant labour cost formula
• Move beyond asking, “what percentage of sales should labor be in a restaurant?”
• Save on restaurant labor costs with training and thoughtful scheduling
• Average labor cost by restaurant type

Group your restaurant labor costs for greater clarity

Dividing staff into groups shows you which positions cost the most. Assign front-of-house staff such as servers, hosts, and bartenders to one group. Kitchen staff such as cooks and dishwashers are another natural group, as are management staff. You can also divide your staff by whether they’re paid by hourly wage or salary.

Restaurants should aim to keep labor costs between 20-30% of gross revenue.

Once you have your staff all divvied up, you can compare how much each team costs you. You can also see if you can tinker with the combination of staff you schedule during each shift to bring your restaurant’s labor costs down. If bartenders are significantly more expensive than servers, try replacing a bartender with two servers. If the job still gets done and the night goes off without a hitch, you’ve found a way to reduce your labor costs already.

Understand your prime cost with a restaurant labor cost formula

While calculating something called prime cost might sound daunting, it’s easier than you might think, and it will tell you a ton about your restaurant’s labor costs.

Your prime cost is the sum of your labor costs plus your cost of goods sold, or COGS for short. COGS = the cost to create each food and beverage item on your menu.

A restaurant’s prime cost should ideally be 60% or less of total sales and represents the bulk of controllable expenses.

To calculate your prime cost, simply list all hourly wages, salaried labor, payroll tax, and benefits, and add the sum of your labor costs.

Congrats! You’ve just mastered the central way that most calculate restaurant labor costs.

Move beyond asking, “what percentage of sales should labor be in a restaurant?”

Calculating labor as a percentage of sales can be useful. But determining staff productivity solely based on this percentage doesn’t give you the detail needed to identify areas for improvement.

For example, let’s say company policy is for labor as a percentage of sales to be 20% or less. This week it’s running at 27%. While this tells you that your costs are running higher than expected, it doesn’t break down different job categories, e.g., servers, cooks, bussers, making it impossible to determine which categories contribute to the issue.

It also doesn’t tell you the time of the day, week, or meal period where the most significant variances may occur. To truly identify where labor costs are creeping up, there’s no getting around the necessity of having a complete and detailed picture.

Looking at labor costs this way also doesn’t account for holidays or other special events that might warrant more staff time. The biggest thing to remember about restaurant labor costs is that they’re just one part of a whole, and sometimes they’re just a symptom of another issue. Rather than rushing to reduce labor costs, try to figure out what’s really going on and fix the problem itself rather than putting a reduced labor costs bandaid on it. One of the best ways to do this is to starting tracking earned vs. actual labor hours. 

Save on restaurant labor costs with training and thoughtful scheduling

Use labor scheduling and time and attendance systems to ensure top-level visibility and identify which employees might go into overtime before it is too late. These systems can also point out if your employees tend to clock in early or dilly dally around before actually getting to work if you pair the system with a quick inspection of how your staff start their shifts. Try turning your data into visual reports such as graphs to give you a quick, visual way to evaluate multiple sets of data —and crucially, identify outliers.

Invest in training your staff, and they’re less likely to leave. A well-trained team is also more productive because valued employees with a path to professional growth are less likely to leave for another restaurant that doesn’t offer those things and, sadly, too many don’t.

Use labor scheduling and time and attendance systems to ensure top-level visibility and identify which employees might go into overtime before it is too late.

Average labor costs by restaurant type

Ok, now that we’ve covered the basics, it’s time to look at some restaurant labor cost averages based on the various restaurant types. Now that you know how individualized labor costs are at each restaurant, you can keep that thought in mind as you peruse these averages to get a sense of whether or not you’re in the right ballpark:

• Fast-food restaurants: 25%. As Chron explains, “certain fast-food restaurants can achieve labor costs as low as 25 percent,” but that doesn’t mean that labor costs can’t (or shouldn’t) run higher. If you think about it, it makes sense. Food moves faster, profit margins are higher, and the labor is relatively unspecialized, which costs less to deploy.
• Table service restaurants: 30%-40%. Where specific restaurants fall on this range depends on “the menu and extensiveness of service,” Chron notes. “Food costs (including beverages) for the restaurant industry run typically from the 28 percent to 35 percent range, depending upon the style of restaurant and the mix of sales.”
• Fine dining: Varies, but tends towards the higher end of the 30%-40% scale or beyond. As Restaurant Business notes, “a fine dining restaurant with many components on the plate and breads, pastries, pastas and other products made in-house will have a much higher labor cost than a steakhouse selling high-end but relatively simple-to-prepare food like steak, baked potato, and thaw-and-serve flourless chocolate cake.”

Your restaurant POS system can help you track employee performance and costs, identify areas that need improvement, and more. Need help choosing your restaurant technology? Chat to one of our point of sale experts!