Anyone who works in the restaurant business knows how tough it can be to make a living in an industry where profit margins tend to hover at only around 6%. With margins so thin, it’s important to control every cost as carefully as possible. That includes the labor cost percentage for your restaurant.

                                           

Depending on the type of restaurant you run, it’s unavoidable that the cost of labor for all your staff will be one of your largest expenses, but it’s still worth learning about average labor cost percentages and some tips and tricks for managing and optimizing your expenses.

Read on to learn what you need to know about calculating the cost of labor in your restaurant, as well as some ways to manage those costs.

Understanding and calculating labor cost percentage

First, let’s cover the basics.

Your restaurant’s labor cost percentage is the total amount of money you spend on labor costs — including salaries, wages, healthcare, benefits and taxes — shown as a percentage of food sales.

To calculate this figure, we’ll want to start by adding up all of the associated labor costs for a given period. Look at the last 30 days, month, quarter, or year and add up all of the expenses that went toward paying staff members. It’s in your best interest to be diligent. You’re better to slightly overestimate when it comes to costs vs. underestimate.

Then, for that same period of time, add up all of your total food sales. Divide these two figures and multiple by 100 to convert that amount into a percentage.    

                                                     

For the sake of clarity, let’s try this out with an example.

Say you look at your books over the last 30 days and you see that you spent a total of $5,000 on wages and other salary costs. And, in that same period, you hit $25,000 in food sales.

Our calculation would then look like:

Labor Cost Percentage = ($5,000 / $25,000) * 100

That’s 20%. In other words, 20% of your gross revenue went to staffing your eatery.

So, what does this number mean in context — and why does it matter to your restaurant operations?

What Makes Labor Cost Percentage Such a Critical Metric?

Because labor costs are one of the highest costs associated with running a restaurant, it’s important to track this metric closely. A restaurant’s ability to turn a profit can hinge on something as small as scheduling an extra staff member on a slow night. Keeping your labor costs in check can have an immediate and huge impact on your profitability. Plus, it’s often one of the easiest costs to control. While you may not be able to bring down food cost or lower your building lease, you can keep your team as lean as possible (without sacrificing service, of course!) and closely monitor how many people should be working at any given shift.

 Read More: 14 Essential Restaurant Metrics Every Owner Should Measure and Track

What is a good labor cost percentage for restaurants?

A common rule of thumb is that restaurants should aim to keep labor costs at about 30% of sales.

However, for some restaurants that number can be lower and, for others, it needs to be higher. Every restaurant is different and has different labor needs.

Casual establishments, like counter-service cafes or fast-food restaurants, often have lower labor costs. But a fine-dining restaurant is going to need to spend more on labor, because the service demands made on staff are so much higher. Fine-dining staff often need special skills, experience, and a talent for providing the best service, and they expect to be paid accordingly.

Average labor costs by restaurant type

Since different types of restaurants have different labor needs and therefore different costs, Upserve estimates these averages for each restaurant type:        

                                               

All of those costs are variable, and shouldn’t be taken as hard and fast rules. They can be used as guidelines to see if your restaurant is hitting close to the mark. If you run a fast food restaurant with labor costs hitting 40% of your sales, you may want to make some adjustments to bring that cost down.

It’s important to set a goal and use that as a benchmark for your restaurant’s overall results and financial performance. You can set a goal to keep your labor cost percentage under, say, 30%, and build a monthly or quarterly budget based on that number. Then, assess how well you did and make adjustments as needed. It may become clear that you consistently run at 35% rather than 30%, which means you’ll probably need to make adjustments elsewhere in order to maintain profitability. This is a delicate balancing act that all begins with closely measuring and evaluating your costs.

How to evaluate and optimize labor costs for food service

Once you’ve started calculating your restaurant labor cost percentage, you can start evaluating and optimizing it to ensure you’re maintaining a comfortable profit margin. These tips can help you keep labor costs as low as possible, so they don’t unnecessarily eat into your profits, but doing so without sacrificing service for your guests.

Understand your prime costs

Your labor cost percentage doesn’t show the whole picture when it comes to your restaurant’s expenses. To truly know whether your cost-to-sales ratio is healthy, you need a comprehensive idea of how much it costs to produce the things you sell. That’s where your prime cost comes in.

A restaurant’s prime cost combines its total labor costs with its cost of goods sold (COGS). Here’s how to calculate it.

To calculate cost of goods sold (COGS), add together beginning inventory and purchases, and then subtract ending inventory. This will tell you how much you’re spending on all of the items and ingredients that go into the food you’re selling.   

calculate cost of goods sold (COGS), add together beginning inventory and purchases, and then subtract ending inventory.

To calculate prime cost, add together labor cost and cost of goods sold (COGS).

 To calculate prime cost, add together labor cost and cost of goods sold (COGS).

This number gives you a good picture of the overall costs that it takes to keep the restaurant staffed, keep guests served, and prepare the food you’re selling. Remember, it’s not all of your costs–it doesn’t include overhead like rent, utilities, and marketing.

To calculate your prime cost percentage, divide prime cost by total sales, and multiply by 100.

                                       

Your prime cost should be around 55-60% of your sales to ensure your restaurant’s profitability. How much of that is COGS versus labor costs can vary and it can even fluctuate over time depending on your restaurant’s needs and outside factors, like seasonal food costs or staffing needs. Keeping your prime cost under 60% is a good benchmark for creating a COGS and labor cost budget.

Divide labor costs into groups

Rather than just calculating your restaurant’s total labor cost percentage, you should also figure out labor costs for different groups.

How you divide this will depend on how your restaurant works. One way to divide up the numbers and gain some additional insight is to use the three classic buckets for restaurant operations:

  1. Front-of-house staff (hosts, servers and bartenders)
  2. Back-of-house or kitchen staff (chefs, cooks and dishwashers)
  3. Managers

But, if there isn’t a clear division of roles or other limitations, you may split these costs up another way that makes more sense. One way is to divide costs between hourly and salaried employees–this could be especially useful if you’re looking for ways to control costs at certain times throughout the day or on certain days of the week.

Looking at labor costs for different groups gives you a clearer picture of how you’re spending money on staffing. If your goal is to decrease labor costs, this can help you see which area(s) might be a good place to start looking for cuts.

Adjust costs based on needs

If your restaurant is fully booked, it requires a full staff. If the restaurant is only half-booked and you still have a full staff on the floor, your sales decrease by half, which effectively means your labor cost percentage doubles.

One way to ensure you’re optimizing what you spend on staffing your restaurant is by being deliberate in how you schedule your workers. On slow days, you can get by with a partial crew. If a normally busy night is slower than expected, you might need to send some people home early.

It’s also helpful to cross train your staff so you can run the restaurant with fewer people — rather than needing a server and a bartender, you might have a staff member who’s trained to do both and can handle both positions during a slow shift.

Focus on staff retention

Restaurant turnover is astronomical — the turnover rate in the industry is around 73%, compared to 46% for all private sector workers. And studies have show that losing a front-line employee can cost an employer nearly $6,000, which equates to as much as $150,000 per year that restaurants spend because of employee turnover.        

                                           

One important way of cutting your labor cost percentage that might easily be overlooked is focusing on keeping the employees you have.

Keep communication open with your staff and encourage them to bring problems to you. Create a work environment that shows them they’re appreciated and valued. Make your restaurant a place people want to work, so your team is more likely to stay.

Read More: The Restaurant Turnover Rate is Astronomical. Here’s Why (And How to Fix It)

Don’t rely too much on one number

When trying to set your restaurant’s budget, labor costs are obviously a huge factor. But they’re just one part of the bigger picture. To truly optimize your restaurant’s budget, you have to look beyond seeing labor costs as just a percentage of sales number you want to hit.

For example, let’s say your goal is labor costs at 30% of sales, but during January, labor costs hit 40%. You know that 40% is a problem, but you have to do more digging to figure out why. Just by looking at a number, you don’t know if your kitchen or front-of-house has been overstaffed. You don’t know if a couple of unexpected slow days cut into sales. You don’t know if a holiday or a special event required having more staff on the floor.

Keep in mind that your labor cost percentage is just one small part of the puzzle that is your restaurant budget. It’s important to be aware of your labor costs and to make sure they don’t get out of control, but to keep in mind that there are many other factors that affect sales, costs and overall profitability.

Want to learn more about restaurant accounting and finance? Download our Restaurant Accounting & Operations Guide.