From scheduling employees and providing benefits, to staying in step with state wage laws, managing labor costs comes with a full plate of responsibility. Understanding your restaurant labor cost is a necessity for efficient operations.
So pull out that income statement. It’s time to take a look at your restaurant labor costs. In this guide, we’ll share a few useful ways to calculate and manage labor costs.
What’s Included in Restaurant Labor Cost?
Let’s begin by defining what labor costs are (and what they are not). Labor costs fall under the operational costs of a restaurant. Because restaurant labor costs include more than just employee wages, labor costs can quickly add up and typically make up the lion’s share of operating costs.
In addition to hourly wages and salaries, other necessary expenses surrounding employees factor into total labor costs. These include:
- Paid time off (PTO)
- Healthcare benefits
- Employee taxes
- Overtime pay
- Sick days
In short, expenses that directly relate to employees will fall under labor costs. While the above expenses are crucial to calculate, there’s more to consider when examining how much you’re spending on labor costs. For instance, the time spent onboarding and training new employees is a cost that you incur with each new hire.
The time it takes for the employee to be fully trained is a cost that should not be overlooked. After all, this is time that a manager or other employee is taking in order to bring the new employee up to speed. If time is money, then keeping track of onboarding and training is an essential part of managing costs.
Calculating Restaurant Labor Cost
Looking to pare down labor costs at your restaurant? The first step is understanding what your current costs are. Below, we’ll look at a simple method of calculating restaurant labor costs and share a useful restaurant labor cost formula.
Labor Costs as a Percentage of Sales
A common method of determining labor costs is to calculate labor costs as they relate to sales. Using a restaurant labor cost formula, you can determine where your current costs sit. Here’s how it looks:
Let’s walk through this together.
Begin by adding together the money that was spent on employees during a certain time period. This includes wages, benefits, payroll taxes and any other expenses directly related to employees. Then, take your revenue before taxes for that same time period and divide labor costs by this number.
Once you have your labor costs divided by total revenue, multiply by 100 for the labor cost percentage. For example:
Labor Cost Percentage for February= ($9,000/$30,000) x 100 = 30%
But what percentage of sales should labor cost be in a restaurant? While many in the industry recommend a restaurant labor cost percentage of 30% or less, this is not applicable to every restaurant.
For instance, an upscale dining establishment may have a higher labor cost percentage than a casual restaurant due to the increased focus on high caliber service.
Why Labor Costs as a Percentage of Sales Fall Short
While understanding labor cost as a percentage is helpful, this number is a broad one. By lumping together all employee costs, you end up with a general overview of where costs are going but not a lot of detail.
The labor cost percentage is a good indicator of profitability. However, it does not display the fluctuating labor costs by day, by employee or by mealtime. So understanding where to make changes that increase efficiency can be difficult.
This is why calculating labor costs using more in-depth methods (as we will below) is a great supplement to the labor cost percentage number.
Calculating Your Restaurant’s Prime Cost
We know that labor costs are part of operating costs in a restaurant. But labor costs also contribute to what is known as the prime cost. Prime costs take into account the cost of labor along with the cost of food. Prime cost paints a more complete picture of costs since it allows you to look at labor costs in relation to other costs, rather than as an isolated number.
So the restaurant labor cost formula for prime cost looks like this:
The Cost of Goods Sold or COGS includes all the food products and ingredients you purchase to serve your customers. Because COGS is linked to your profit margins, understanding it is crucial. While adding all this up may seem like a tall order, don’t worry. There is a straightforward formula for calculating COGS.
For the second portion of prime cost, you’ll need to calculate the restaurant labor cost. For this, take a look at the hourly wage that each employee is earning. Then, add on additional expenses that we discussed above (benefits, payroll taxes, etc.). With these additions, an employee that you are paying $11 an hour may actually cost you $14 an hour.
Once you have the COGS and the labor costs added, you’ve arrived at your prime cost. Take this number and divide it by your total sales. Then, multiply by 100 to determine the cost to sales percentage. In other words, this number signals what portion of your sales is going towards costs of running the eatery.
While prime cost ratios vary based on the type of restaurant, location and more, a great range to fall into is between 55%-60%. At this rate, a restaurant can remain profitable without skimping on quality service or ingredients. But keep in mind that this is an average and may not apply to your unique establishment.
In-Depth Methods of Calculating Labor Costs
If you feel like labor costs are bubbling over but don’t know what the source is, read on. As the designated restaurant labor cost calculator at your establishment, you’ll find these methods useful in identifying and managing labor costs.
Accounting for Fixed Labor Costs vs. Variable Labor Costs
Because it is bound to fluctuate throughout the year, many view labor cost as a variable cost. But this is only partially true. Since you have to maintain a minimum amount of staff to keep the restaurant running at all times, there is a fixed labor cost element at play.
In slow seasons, the need for supplemental labor dwindles. But as surges in demand occur, the need to bring on more employees causes variable labor costs to spike. It’s beneficial to examine labor costs in two separate categories—fixed and variable—to manage this.
While you can’t trim down fixed labor costs, you can examine variable labor costs and determine when there is less need for this additional labor. By utilizing an on-demand staffing service, you can cut down on variable labor costs. Since bringing on independent contractors means you can add labor without incurring traditional overhead costs, this is one method worth exploring.
Calculating Restaurant Labor Costs by Hours Worked
The number of hours worked is a key variable that influences labor costs. By breaking costs down into targeted segments, you can spot inefficiencies in operations.
The labor costs associated with a chef are not the same as those of a hostess. So, split the employees into groups based on salary. Then, perform the following calculation:
For example, if you pay servers a minimum wage of $10.00 an hour and they worked a total of 350 hours that week, the calculation would be:
($10.00 x 350) = $67.31
So, you spent an average of $67.31 per hour of work throughout the average week.
You’ll repeat this process for each group of employees. The information you glean can help you anticipate costs and create more efficient employee schedules. To complete the calculation, add all of the numbers per group together. This final sum reflects the total labor cost by hour worked at your restaurant.
How to Lower Your Restaurant Labor Cost
There’s no secret ingredient that lowers labor costs all at once. But a combination of cost-cutting techniques can help you bring labor costs from a rapid boil to a manageable simmer. Increase efficiency with these tips.
Enhance Retention Efforts
Retention. Retention. Retention. This element of keeping costs down is hard to overstate (hence the repetition). The costs of hiring, onboarding and training new employees is no small expense. So, hanging onto good employees is the first step in lowering costs. Offering regular employee rewards to top performers and promoting a culture of growth (read: opportunities for promotion) are both great ways to keep people on board.
Offering paid rewards is another effective retention booster. While spending more to bring down costs may sound counterintuitive, offering bonuses can encourage employees to perform better and stick around at your establishment. You can structure bonuses around attendance, manager feedback or another metric that motivates employees to excel.
Use on Demand Hiring
Want to cut back on labor costs without sacrificing food or service quality? You can do just that with a modern, on-demand hiring platform like Qwick. When you need more staff but don’t have the budget to accommodate extra costs like benefits, healthcare and more, Qwick brings qualified professionals to your door.
Qwick can also help you reduce costs associated with overtime. Since state regulations require increased pay for overtime hours worked, costs can quickly add up during busy seasons. To mitigate this, you can outsource labor efforts with Qwick. This way, the restaurant still runs well, and you pay regular wage amounts rather than an excess of overtime wages.
Examine Labor Cost Data
Now that you know how to determine your restaurant labor cost percentage and more, take the time to examine the numbers regularly. By looking at labor costs over the weeks and months, you can spot issues that arise and formulate strategies to tackle them.
If your POS system includes a labor report, be sure to pore over it to identify areas that could be improved. From overscheduling employees during certain hours of the day to paying for scheduled hours vs. actual hours worked, there are many costly mistakes that a labor report can help you spot.
Bring Down Your Restaurant Labor Expenses with Qwick
Labor costs are something that every restaurant manager must track carefully. Knowing where costs are going is the first step. But working to bring them down is just as important. With Qwick, you get the benefits of highly trained professionals without the traditional extra costs that come with bringing on a full-time employee.
Rethink your labor costs by trying Qwick today.