Imagine walking into your favorite restaurant and being greeted by a cheerful hostess who guides you to your seat. You enjoy a delicious meal served by an attentive waiter, and at the end of the night, you leave with a smile on your face.
But behind the scenes, a world of labor costs, schedules, and percentages makes your dining experience possible. In this blog post, we’ll dive into the world of restaurant labor cost percentage and how restaurant owners can optimize their workforce for the best results.
Key Takeaways
- A good restaurant’s labor cost percentage typically falls between 29% and 33%.
- Effective strategies for managing labor costs include monitoring overtime, utilizing seasonal employees, using sales forecasts for scheduling, ensuring accurate timekeeping, increasing order-taking options, and cross-training employees.
What is Restaurant Labor Cost?
Restaurant labor costs are associated with hiring and maintaining a workforce. This includes hourly wages, salaries, payroll taxes, employee benefits, etc. Managing labor costs is essential for any restaurant owner wanting to remain profitable and competitive.
A restaurant’s labor cost percentage is a way to measure the relationship between labor costs and gross sales. It’s an essential metric for restaurant owners, as it helps them understand how much of their revenue goes toward paying their employees and maintaining their workforce.
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What Makes Up Labor Cost?
Labor cost includes hourly wages, payroll taxes, and employee benefits. Hourly wages are the most direct labor cost, representing the money paid to hourly workers for their time on the job.
Payroll taxes are another component of labor costs, and they consist of payments made to the government for taxes such as Social Security and Medicare. Employee benefits, such as health insurance, paid time off, and retirement plans, also contribute to a restaurant’s total labor cost.
Labor Cost Percentage
A restaurant’s labor cost percentage is a crucial metric that helps restaurant owners understand how efficiently they use their workforce. A high labor cost percentage can indicate that the restaurant is not generating enough revenue to cover its workforce expenses, leading to a lower profit margin.
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Conversely, a low labor cost percentage may mean that the restaurant generates more revenue per employee, allowing it to operate more efficiently and maintain a higher profit margin. This balance is essential for a restaurant’s long-term success.
Labor Cost Percentage Formula
Calculating labor cost percentage involves dividing a restaurant’s total labor cost by gross sales. Here is how to calculate labor cost percentage:
Labor Cost Percentage = (Total Labor Cost / Gross Sales) x 100
Step-by-Step in Calculating Labor Costs
- Calculate the total hourly wages for all employees.
- Add up any salaries paid to management or other non-hourly workers.
- Include payroll taxes, such as Social Security and Medicare.
- Account for employee benefits, such as health insurance, paid time off, and retirement plans.
- Add up all the components to find the total labor cost.
- Divide the total labor cost by the restaurant’s gross sales.
- Multiply the result by 100 to find the labor cost percentage.
Example:
Suppose that John owns a small restaurant and wants to calculate his labor cost percentage. Here’s a step-by-step example of how to calculate the labor cost percentages
Step 1: Calculate the total hourly wages for all employees. John has five hourly employees who work a combined total of 200 hours per week.
Their average hourly wage is $12. So, the total hourly wages would be 200 hours x $12 = $2,400 per week.
Step 2: Add up any salaries paid to management or other non-hourly workers. John has one salaried manager who earns $800 per week.
Step 3: Include payroll taxes, such as Social Security and Medicare. Payroll taxes typically amount to about 7.65% of the total wages and salaries.
In John’s case, the total wages and salaries are $2,400 (hourly wages) + $800 (manager salary) = $3,200. So, the payroll taxes would be $3,200 x 7.65% = $244.80 per week.
Step 4: Account for employee benefits, such as health insurance, paid time off, and retirement plans. John provides health insurance for his employees, which costs $500 per week. He also offers each employee two weeks of paid time off per year.
With a total of 6 employees, this would amount to 12 weeks of paid time off per year. Assuming an average weekly wage of $3,200, the total cost for paid time off would be $38,400 per year or $738.46 per week.
Step 5: Add up all the components to find the total labor cost. The total labor cost for John’s restaurant is $2,400 (hourly wages) + $800 (manager salary) + $244.80 (payroll taxes) + $500 (health insurance) + $738.46 (paid time off) = $4,683.26 per week.
Step 6: Divide the total labor cost by the restaurant’s gross sales. Let’s assume that John’s restaurant has gross sales of $15,000 per week. To calculate the labor cost percentage, he would divide the total labor cost by the gross sales: $4,683.26 / $15,000 = 0.3122.
Step 7: Multiply the result by 100 to find the labor cost percentage. Finally, to express the result as a percentage, John would multiply by 100: 0.3122 x 100 = 31.22%.
In this example, John’s restaurant has a labor cost percentage of 31.22%.
Restaurant Labor and Total Operating Costs
Understanding the relationship between restaurant labor and total operating costs is essential for restaurant owners who want to maintain a healthy profit margin. Total operating costs include labor, food, rent, utilities, and other expenses associated with running a restaurant.
To calculate restaurant labor as a percentage of total operating costs, follow these steps:
- Calculate the total labor cost (as explained in the previous section).
- Add up all other operating costs, such as food, rent, and utilities.
- Combine the total labor and operating costs to find the total restaurant cost.
- Divide labor cost by the total operating cost.
- Multiply the result by 100 to find the restaurant labor cost percentage in relation to total operating costs.
Restaurant labor costs by hours worked
Calculating labor costs by hours worked can help restaurant owners better understand the specific expenses associated with their workforce. To calculate labor costs by hours worked, follow these steps:
- Determine the hourly wage for each employee.
- Multiply the hourly wage by the number of hours worked by each employee.
- Add up the results for all employees to find the total labor cost for hours worked.
For example, if a restaurant has three employees who work 30, 25, and 35 hours per week, respectively, at an hourly wage of $10, the total labor costs for hours worked would be:
(30 hours x $10) + (25 hours x $10) + (35 hours x $10) = $900
What is The Ideal Labor Cost Percentage for Restaurant?
The ideal labor cost percentage for the restaurant industry can vary depending on factors such as location, type of restaurant, and management style. However, industry experts generally agree that a good labor cost percentage for a restaurant falls between 29% and 33%.
Maintaining a labor cost percentage within this range allows restaurant owners to balance managing expenses and maintaining a high-quality workforce. However, it’s important to remember that every restaurant is unique, and the ideal labor cost percentage can vary based on individual circumstances.
6 Tips for Managing Labor Costs
Managing restaurant labor cost is crucial for the success of any owners. In the following sections, we’ll provide six essential tips to help restaurant owners effectively lower rising labor costs while maintaining a high-quality workforce.
Discover The 7 Tips for Your Restaurant Operations Management
Monitor and Control Overtime
Monitoring and controlling overtime is crucial in managing a restaurant’s labor cost percentage. By closely monitoring employee hours and implementing strategic scheduling, you can reduce the need for overtime pay.
Ensuring employees are not scheduled for overtime hours each week can decrease the chances of surpassing the threshold for overtime pay.
Furthermore, scheduling software can help streamline the scheduling process, making managing employee hours easier and reducing labor costs.
Another aspect of controlling overtime involves regularly reviewing employee schedules and identifying patterns that may lead to excessive overtime.
Also, restaurant owners can adjust employee schedules and minimize overtime expenses. In doing so, they can maintain a more cost-efficient workforce while providing excellent customer service.
Lastly, fostering a culture of open communication with employees about overtime expectations can lead to a more transparent and accountable work environment.
When employees understand the importance of controlling overtime costs, they may be more inclined to work efficiently and manage their hours responsibly, ultimately contributing to a lower labor cost percentage.
Utilize Seasonal Employees
Utilizing seasonal employees can be an effective strategy for managing labor costs, especially during busy periods. By bringing in temporary workers during peak seasons, restaurant owners can maintain a lower labor cost percentage by better managing their workforce.
Hiring seasonal staff helps control labor costs and prevents burnout for permanent employees who might otherwise be required to work extended hours during busy times.
A well-planned seasonal hiring process involves assessing the restaurant’s needs during peak seasons and adjusting hiring practices accordingly.
By determining the number of temporary employees needed and the specific roles they will fill, restaurant owners can optimize their workforce for peak times while managing labor costs effectively.
In addition, providing thorough training for seasonal employees ensures they can efficiently contribute to the restaurant’s operations during busy periods.
Well-trained seasonal staff will help maintain service quality and minimize the risk of costly mistakes that could negatively impact labor cost percentage.
Use Sales Forecasts to Plan Schedule
Using accurate sales forecasts to plan employee schedules can significantly contribute to lowering labor costs. Restaurant owners can anticipate busy periods and adjust staff schedules by analyzing historical sales data and identifying trends.
Proper planning ensures the restaurant is well-staffed during peak times while avoiding unnecessary labor costs during slower periods.
Effective sales forecasting involves regularly reviewing and updating sales data to maintain accurate predictions.
By staying informed about emerging trends and adjusting staff schedules as needed, restaurant owners can optimize their workforce and control labor costs more effectively.
In addition, sharing sales forecasts and scheduling strategies with employees can help create a sense of teamwork and shared responsibility for managing labor reports.
When employees understand the rationale behind their schedules, they may be more inclined to work efficiently, contributing to a lower labor cost percentage for the restaurant.
Ensure Accurate Timekeeping for Employees’
Ensuring accurate timekeeping for employees is a critical component of managing labor costs. With the restaurant technology platform, you can guarantee that employees accurately track their hours, preventing discrepancies that could lead to inflated labor costs.
Moreover, accurate timekeeping can help identify employee-hour trends and patterns, informing better scheduling decisions.
Another benefit of accurate timekeeping is identifying and addressing any issues with employee attendance or punctuality.
If restaurant owners can address these issues promptly, they can maintain a more efficient workforce, ultimately contributing to a lower labor cost percentage. Investing in a reliable timekeeping system can significantly improve a restaurant’s overall management of labor costs.
Lastly, promoting a culture of accountability and transparency around timekeeping can encourage employees to take responsibility for their hours.
When employees understand the importance of accurate timekeeping, they may be more likely to track their hours diligently, resulting in a more cost-efficient workforce and a lower labor cost percentage.
Increase Order-Taking Options
Increasing order-taking options, such as online ordering or self-service kiosks, can help lower labor costs by enabling employees to serve multiple customers simultaneously.
These options can lead to increased efficiency and ultimately reduce the labor cost percentage, especially in quick-service restaurants.
By investing in technology that facilitates alternative order-taking options, restaurant owners can streamline the ordering process and increase overall efficiency.
As a result, employees can focus on providing excellent customer service and managing other tasks, leading to a more effective workforce and lower labor costs.
Furthermore, expanding order-taking options can also lead to increased sales, as customers may appreciate the convenience and accessibility of online ordering or self-service kiosks.
As sales increase, the labor cost percentage may decrease, further contributing to improved financial performance for the restaurant.
Review Your Seasonal Hiring Policy
A well-structured seasonal hiring policy can play a significant role in managing labor costs. By carefully evaluating your restaurant’s needs during peak seasons and adjusting your hiring practices accordingly, you can minimize the impact of labor costs and reduce employee turnover.
First, analyzing your restaurant’s historical sales data and identifying the busiest periods throughout the year is essential. Once you’ve determined the peak seasons, you can create a seasonal hiring plan that outlines the number of temporary employees needed, the duration of their employment, and the specific roles they will fill.
This plan should be reviewed and updated regularly to account for any changes in your restaurant’s needs or market conditions.
Lastly, it’s crucial to train seasonal employees efficiently and effectively, ensuring they are prepared to handle the demands of their roles during busy periods.
Proper training contributes to a more productive workforce and reduces the likelihood of costly mistakes that could negatively impact your restaurant’s labor cost percentage.
Cross-train employees
Cross-training employees to perform multiple tasks can be an effective approach to managing labor costs. When employees can fulfill various roles, it allows for greater flexibility in scheduling and reduces the need to hire additional staff for specific tasks. This can result in lower labor costs and a more efficient workforce.
One benefit of cross-training is that it allows restaurant owners to optimize their workforce during both busy and slow periods. With employees capable of handling different tasks, owners can maintain adequate staffing levels without incurring unnecessary labor costs.
Moreover, cross-trained employees can help improve overall productivity and customer service by quickly adapting to the restaurant’s needs. By investing in cross-training programs, restaurant owners can maintain a high-quality workforce contributing to a lower labor cost percentage and a more successful restaurant operation.
In Conclusion
Managing labor costs is a crucial aspect of running a successful restaurant. By understanding labor cost percentages and implementing strategies to optimize workforce efficiency, restaurant owners can maintain a healthy profit margin while providing excellent customer service.
Implementing the tips outlined in this blog post can help restaurant owners strike the perfect balance between managing labor costs and maintaining a high-quality workforce. This balance is essential for the long-term success of any restaurant.
Get in touch with our experts at XOA TAX today for assistance with your workforce management.
