management | 4 mins read

How to Calculate and Control Restaurant Labor Cost Percentage

how to calculate and control restaurant labor cost percentage
Grace Njaramba

By Grace Njaramba

When we talk of restaurant labor cost, we are referring to the sum of all wages paid to the workers in any restaurant at the end of an accounting period, which is inclusive of benefits and payroll taxes. Without a doubt, labor is typically the highest cost of operating a restaurant.

The good news, however, is that there are ways to control labor costs for restaurant owners, such as automating the scheduling process. We'll be looking at this in a while, but yes, automating your scheduling process is important if you hope to bring your labor cost down. Perhaps you didn't know this, but good restaurant employee scheduling software can give you a better insight into your labor costs, especially so if integrated directly into an equally good POS System. That way, you can come up with appropriate measures to control your labor cost while at the same time increasing your sales.

How to Calculate Restaurant Labor Cost Percentage

I know you are eager to get to the point, but it is important for you to understand everything that goes into your labor cost, which includes-

Wages and salaries
Payroll taxes
Health care
Sick days and vacations

The total sum of the above costs is, therefore, your total labor cost. So, if, for example, the wages and salaries, overtime, payroll taxes, and the rest add up to say, $150,000, every week, that's your weekly labor cost.

To get an idea of how high or low your weekly labor cost is, you have to calculate the cost as a percentage of your gross sales. To do so, divide the amount ($150,000) by your weekly gross sales, then multiply the number by 100. For example, if your gross sales for the week are $600,000, then your weekly labor cost percentage is 25%.

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What Is the Ideal Labor Cost Percentage for Restaurants?

The ideal labor cost for restaurants should be less than 30% of gross sales. When combined with food cost, your ideal total percentage (labor cost plus food cost) should be less than 60%.

Of course, the ideal labor cost percentage may differ from industry to industry, i.e., fast casual, casual, quick service, but the lower your percentage; the better it will be for your bottom-line.

You may also calculate your labor cost percentage by using your operating costs, as opposed to your gross sales. In this case, you will use the same format shown above, but replace the gross sales with your operating costs. Also, you don't have to calculate your labor cost percentage based on a weekly basis; you may choose to do it monthly or annually.

With a good POS system, it will be easy for you to retrieve your sales data over a given period of time. A modern POS System, like Plum POS, should offer you more than sales processing. Some features you can expect with Plum POS include, but are not limited to, labor, communication, and inventory management.

How to Control Your Restaurant's Labor Cost Percentage

Perhaps you've just calculated your labor cost percentage for the last week, month, or year, and realized it's more than 30% of your gross sales or total operating cost. No need to worry, just like I mentioned at the beginning of this article, it is very much possible to lower your labor cost.

Before learning how to lower labor costs, you first need to know what's considered a bad restaurant labor cost percentage. The answer to this question will depend on your specific industry, but anything upwards of 40% means its time to get to work. As you may have already figured out, a high labor cost percentage means less profit for you.

Here are some labor cost-lowering strategies being applied by restaurant owners today!

Prevent or Reduce Turnover - a high employee turnover rate can be expensive for any restaurant owner. Actions you can take to prevent or reduce turnover include recognizing and appreciating your workers, improving communication, conducting regular employee performance reviews, employing candidates with great references from former employers, and offering flexible schedules.

Avoid Overstaffing - overstaffing can quickly turn into a major expenditure for any restaurant. It can also reduce employee morale, especially in the case of waiters having to pocket fewer tips because they are too many on the floor. To determine the number of employees to schedule for any given shift or day, make use of a forecasting tool like Zip Forecast which, when used with a scheduling app like Zip Schedules, will make your restaurant more predictable in terms of the number of employees you need on any given day.

Set Clear Guidelines About Employee Hours - establish clear attendance policies, especially when it comes to absenteeism and tardiness. You may have to make use of a POS System to automatically log employee hours.

Avoid Overtime Costs - overtime can be minimized or avoided by making sure you have enough employees for any given shift, and keeping an eye on employee hours to identify overtime offenders.

I hope this article helped you understand how to calculate and control your business' labor costs. For more ways to better manage your business and its labor costs, check out our article on the 10 Ways Task Management Software Will Transform Your Business, which is also on the Hubworks Blog.

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