What is restaurant labor cost?
Restaurant labor cost is the amount of money that a restaurant spends on labor. This includes wages, benefits, and other costs associated with running a restaurant.
6 KPIs to Track to Bring Your Restaurant Labor Costs Under Control
Introduction to Restaurant Labor Cost
Restaurant labor cost is the money spent by restaurant businesses on interviewing, inducting, training, hiring, paying, maintaining, and retraining employees. It includes elements like salaried employee wages, overtime, hourly wages, payroll taxes, health insurance, incentives and bonuses, supplies, paid days off, meals, public transportation allowances, training allowances, and so on. The labor cost incurred by restaurants can be computed on a weekly, monthly, or yearly basis.
The cost of labor (and food) varies from one restaurant format to another, based on the difference in the product sales mix, hours of functioning, quality of food and service, and pricing of products. Due to this fact, the labor cost of a full-service restaurant is usually higher than that of a casual dining or a fast food restaurant.
Fast food establishments, in fact, can limit their expenditure on labor to 25% of sales, while table-service restaurants may find their labor costs as high as 35-40%, according to a Houston Chronicle article. Moreover, the labor cost of a fine-dining establishment, which offers a bigger bouquet of products and has more items made in-house, would be substantially higher than that of a steakhouse that sells baked potato and steak, items that are comparatively easy to make. On average, restaurant labor cost across all dining formats is usually between 30-35% of revenue.
The cost incurred on labor is the biggest area of expenditure for a restaurant business. The higher the expenditure on labor, the more the profit margin will be squeezed, and this is already a razor-thin figure for the restaurant industry. A restaurant must therefore try to keep this expense under control and aim for a labor cost in the range of 20-30%.
Restaurant labor costs can be classified as fixed and variable expenses. The former is the outlay on permanent and salaried employees like hosts, servers, chefs, bussers, and managers. The latter is payment made to the temporary workers a restaurant may bring in on high-traffic days.
How to Calculate Labor Costs
A crucial first step to creating a business plan for your restaurant is to calculate labor costs. In order to calculate restaurant labor costs, you need to add up expenses like employee wages, incentives, bonuses, insurance, allowances, and so on.
However, what makes this calculation a bit complex is the fact that every employee may not work for the same duration and so, hours worked need to be factored in while calculating the expense incurred on labor. Point of Sale (POS) systems, in this regard, produce the data a restaurant needs to calculate labor costs, enabling it to make plans to align expenditure with forecasted demand/sales.
Broadly speaking, restaurant labor costs can be worked out either as a percentage of total sales or as a percentage of total operating costs.
Divide the labor cost at your restaurant by your total annual revenue and multiply the figure by 100 to arrive at labor cost as a percentage of sales. The total annual revenue of a business, in this connection, is usually what is called its bottom-line, or earnings before taxes or other deductions are levied.
In the same way, calculate restaurant labor cost as a percentage of operating costs by first finding out how much is spent on labor per dollar expenditure on rent, food and drink, marketing, etc. Multiply this result by 100 to get a percentage.
Accurately track employee data and labor costs
Save time with an employee scheduling software program.
Labor Cost KPIs to Track- No. 1 - Total Labor Cost
Total labor cost is the sum of the cost of hours worked by all the employees of an organization and all related benefits and payroll taxes. This is a crucial labor cost metric that is used for budgeting the financial results of businesses. For all your efforts to keep labor costs low, you can't do without employing a reasonable number of permanent and, if need be, temporary workers. A labor cost that stays below 30% of sales is considered a good labor cost for a restaurant.
The total labor cost of a restaurant includes the following line items-
- Direct labor cost- This includes the wages and overtime pay of production employees.
- Indirect labor cost- The salaries, wages, and overtime paid to all other workers come under indirect labor cost.
- Payroll taxes- This refers to the portion of the payroll tax-related expenses borne by the employers, for instance, medicare tax (that funds a part of the medicare insurance), social security tax (used to fund retirement, survivorship, and disability benefits), and unemployment taxes (levied for funding unemployment benefits).
- Employee benefits- These are all the other costs incurred by employers on behalf of their employees, like the employers' share of medical insurance and life insurance.
Labor Cost KPIs to Track- No. 2 - Prime Cost
Prime cost is another key labor performance indicator and can be calculated by adding the cost of goods sold (COGS) to the labor cost. The restaurant labor cost formula involves dividing the labor cost of the restaurant by its total annual revenue or operating costs.
COGS, in this regard, refers to the direct costs incurred to produce the items sold. These costs are essentially the sum of starting and purchased inventory minus the ending inventory.
For a restaurant, prime costs include food costs, beverage costs, taxes, payroll expenses, and employee benefits.
Labor Cost KPIs to Track- No. 3 - Employee Turnover Rate
This calculates the number of employees that leave an organization over a specified period of time. Turnover usually happens when employees are unhappy with their organization and find greener pastures elsewhere.
Reasons could include low wages, inefficient management that assigns employees arbitrary and/or long shifts, inadequate leave, hard work not recognized, and/or treated poorly by higher-ups.
Apart from demonstrating how satisfied/dissatisfied its employees are, the turnover rate is also a commentary on how effective the organization is at retaining its best employees and offering them adequate career growth opportunities.
An organization that can keep its employees happy will get the best out of them. Lucrative pay and perks, however, may lead to a higher restaurant labor cost percentage, but these will be of great help to the organization in the long run.
Employee turnover rate can be calculated by dividing the number of employees quitting over a period of time, by the number of employees that are still working at the organization at the end of that specific period.
Accurately track employee data and labor costs
Save time with an employee scheduling software program.
Labor Cost KPIs to Track- No. 4 - Customers Served Per Server Per Hour
One of the main objectives of a restaurant is to boost its table turnover rate (the number of diners seated divided by the total number of tables available). This requires servers to be highly efficient and polite.
Calculating the number of guests served by each server per hour gives an idea of how well/poorly each server in your restaurant is functioning. It tells you if certain servers require extra training to increase their efficiency, and points out the best workers who could be rewarded to keep them motivated.
This KPI also helps operators know if servers are finding it difficult to keep up with high customer traffic. This will prompt them to hire more people to manage tables.
You can calculate this KPI by dividing the total number of customers served by the number of hours worked.
Labor Cost KPIs to Track- No. 5 - Server Mistakes Per Guest
To keep your restaurant running at peak efficiency and safeguard your brand image, you need to monitor how frequently incorrect items get rung in and need to be voided. Voiding an item involves adding it back to the unsold inventory.
Server mistakes per customer can be calculated by dividing the total number of mistakes made by a server by the total number of products rung in.
Too many server errors can raise the cost of operations and make customers unhappy. When your guests are unhappy, they may walk away from your business, resulting in lost sales and revenue. Damage to brand image may have long-term consequences for your restaurant and could lower the morale of your staff.
Labor Cost KPIs to Track- No. 6 - Per Person Average
The per-guest average or per-person average of a server helps track the sales volume a server generates. With this information, business owners can identify servers who drive the highest sales and those who struggle to do so.
While calculating a server's per-person average, however, you must not ignore elements like the quality of customer service, the number of customers served every hour, and the table turnover time, which measures the duration customers spend in the restaurant -- from the time they sit down to the time they leave.
Divide the total server sales by the total number of customers served to get the server's per-person average.
Keep Employees Happy
Use mobile apps, checklists, and digital technology for employee scheduling.
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Frequently Asked Questions
What is the formula for Labour cost?
The labour cost formula is- Labour Cost = Total Hours Worked x Hourly Rate For example, if an employee works 40 hours in a week and their hourly rate is $10, their labour cost for that week would be $400.
What percentage should labor cost be in a restaurant?
There is no one definitive answer to this question. Depending on the type of restaurant, the location, the menu, and a number of other factors, labor costs can range anywhere from 15% to 35% of a restaurant's total operating costs.