Josh Kopel | Award Winning Restaurant Consultant

Restaurant Labor Cost: Streamlining Budget with Effective Strategies

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Restaurant Labor Cost

The restaurant industry is a competitive one, and managing labor costs can be the key to success. To make sure you’re running a profitable operation, it’s vital that these expenses are optimized. Here we’ll explore techniques for budgeting efficiently lower labor costs as well as certain benchmarks and strategies to help streamline your overall cost management in relation to employees’ wages.

Key Takeaways

  • Labor cost management is essential for a successful restaurant operation.

  • Strategies such as scheduling and forecasting, cross-training employees, leveraging technology, and boosting employee retention can help optimize labor costs.

  • Adhering to legal regulations is key to ensuring compliance with fair labor practices in the restaurant industry.

The Importance of Restaurant Labor Cost Management

A busy restaurant kitchen with chefs and staff working

Managing labor costs for a restaurant is an essential part of running it successfully, and in order to maximize profitability it’s important to accurately monitor the restaurant’s actual labor costs and cost percentage. This can be difficult as unexpected events or slow days may arise that require additional staff members, which contributes significantly towards labor costs.

Strategies such as schedule forecasting, cross-training employees and leveraging technology solutions can help effectively control these expenses while also minimizing violations with fair workweek laws.

Also Read: Restaurant Profitability

The role of labor cost in restaurant operations

Calculating restaurant labor costs, which include wages, taxes and benefits as components of the calculating labor cost percentage with regards to sales, is a key factor in achieving success for restaurants. This requires effective management of variable operating expenses while controlling prime costs that consist mainly of COGS (costs-of-goods sold) and labor.

5 Day Restaurant Profitability Challenge

By calculating this labor cost percentage it can allow maximum control over such related variables that influence profitability thus impacting overall performance significantly. Fixed costs also play an important role when looking at labour, but these are much easier to maintain given their static nature within budgeting contexts.

Challenges in controlling labor costs

Controlling labor costs can be a tricky challenge due to several factors such as changes in demand, employee turnover and the adherence of legal regulations.

It has been calculated that when it comes to personnel replacement expenses linked with training and reduced production, restaurants could face up an average cost of approximately $5,864 per individual. High staffing rotation may result in costly excessive wages or even requiring additional staff members temporarily if there is not enough manpower available.

Pay special attention to local labor laws as violations could result in everything from penalties to class action law suits. Among which: minimum wage rules apply along with overtime stipulations, which include norms relating to staff benefits like health insurance and vacation period provisions.

Calculating Restaurant Labor Cost Percentage: A Step-by-Step Guide

Calculating restaurant labor cost percentage

In order to effectively manage labor costs, it’s important to calculate the percentage of total sales allocated towards those expenses. To do this accurately and make informed decisions about optimizing staff levels and reducing spending, you must follow a step-by-step process that starts with gathering relevant data such as wages, taxes, and benefits. Afterward applying the formula will reveal your restaurant’s labor cost as percentage of sales.

Also Read: Restaurant Business Plan

Gathering required data

When trying to ascertain the percentage of restaurant labor costs, it is essential that wages, taxes and benefits are accounted for. Taxes have a big influence on what business owners spend on employees as this sum incorporates both employee salaries but also taxes paid by the establishment in their name. When assessing these expenses one should incorporate all relevant staff perks like health insurance plans or retirement schemes etc., yet tips which usually go directly into workers’ pockets are not taken into consideration during calculating calculate restaurant labor costs and cost percentages.

Formula and examples

To calculate the restaurant labor cost percentage, we need to find out total labor costs and sales for a period. These expenses include wages, salaries, benefits, payroll taxes and overtime pay related to employees.

Divide the overall labour costs by the total amount of sales in order to get this figure –

($10 000/$40 000) x 100 = 25%.

Monitoring and adjusting your calculated calculate labor cost percentage is an effective way of managing staff expenditures so as to make business more profitable.

Industry Benchmarks: What’s a Good Labor Cost Percentage?

Comparison of labor cost percentages across different restaurant types

It is important to be aware of industry benchmarks for labor costs percentages and their influence on your restaurant’s performance. Restaurants are encouraged to keep the percentage of total sales attributed to labor costs at about 30% but in many markets that’s no longer realistic.

It should be noted that different types of restaurants – such as fine dining restaurants or quick-service establishments – can have variations in these figures due to factors like location, staff size and efficiency. By monitoring the relevant metrics associated with labour costs within the restaurant sector, you will put yourself in a better position when looking for areas where improvements could be made.

Comparing restaurant types

When compared to fast food or quick service restaurants, average labor costs that for fine dining establishments usually account for a higher percentage of their total operating costs. This is mainly due to the increased level of service and quality that customers expect in these types of establishments along with wages being paid at higher rates than other restaurant businesses.

Nevertheless, within any given type of restaurant, there can still be significant variation due to location size, staff size, and operational efficiency.

Strategies for Optimizing Restaurant Labor Costs

Restaurant staff undergoing cross-training

It is vital to devise strategies that will allow you to reduce your labor costs, as well as improve the quality of service and customer satisfaction at a restaurant.

Scheduling and forecasting

By leveraging the power of scheduling and forecasting, labor costs can be managed to maximize efficiency. Through analysis of past data and market research, a forecast can be established that will inform decisions on when best to employ staff or order inventory. Strategies such as utilizing customer traffic records over time periods or sales figures for predicting future activity help businesses identify how much they should spend in regards to labour expenses while also minimizing wastage. This way restaurants are able to decrease their labor cost percentage, which positively impacts profit margins.

Also Read  Restaurant Business Plan Template: Insights from Jot Condie, California Restaurant Association President

Cross-training and skill development

Labor costs can be significantly reduced and efficiency improved by providing employees with cross-training in multiple areas. This offers the additional advantage of supporting colleagues if one is absent due to illness or any other reason.

There may be potential roadblocks that need to be addressed before implementing such a system. These could include financial investment for training materials and staff time as well as resistance from managers/employees who might not readily accept changes like this.

Taking the necessary steps – allocating resources properly, transparency when communicating ideas, tailoring courses to each team member’s needs while offering adequate support throughout the process – along with patience will make it possible for organizations reap benefits associated with cross-training practices within their teams.

Leveraging technology

Technology use in restaurant operations can be a great aid to labor cost management, making processes more effective and efficient. Self-ordering kiosks for example are very helpful when it comes to cutting down on expenses related to front of house staff at quick service restaurants as they handle orders and payments while allowing employees to concentrate on providing quality customer service instead.

Employee Retention: Reducing Turnover and Its Impact on Labor Costs

Happy restaurant employees with positive work environment

When managing labor costs, employee retention plays a major role since high turnover rates can be expensive due to the need for hiring and training new staff. Strategies that work towards improving this element divide labor costs within the restaurant industry include: increasing compensation and benefits packages, fostering an atmosphere of positivity, as well as giving employees opportunities to develop their careers. By keeping an emphasis on job satisfaction and worker wellness, it is possible to reduce turnover levels which will in turn lower your labour expenses significantly.

The cost of turnover

The financial impact of employee turnover on a restaurant can be costly, with estimates reaching up to almost $6,000 per lost front-line worker. This includes losses in productivity as well higher labor costs such as added expenses for hiring and training new personnel along with hidden costs such as customer satisfaction deterioration. Taking into account these long-term outcomes is essential when considering staffing tactics and strategies that minimize labor costs or retain staff members better. High turn around rates tend to cause reduced profit margins. To increase recruitment/training fees resulting in unfavorable service quality and culture within the establishment.

Strategies for boosting retention

The restaurant industry can reduce their labor costs by focusing on strategies to improve employee retention. Benefits like competitive salaries, positive culture, autonomy and career growth opportunities help create job security and financial stability for employees. Restaurants should also embrace transparency in all communication and decision-making processes when creating a sense of ownership over work duties among staff members. Lastly, offering rewards & recognition as well as flexible scheduling are important components when attempting to promote satisfaction within the workplace. Ultimately these initiatives will aid in minimizing turnover rates thus reducing its costly effects on businesses operating within this sector.

Legal Compliance and Fair Labor Practices

The restaurant industry must comply with legal and fair labor regulations to avoid any penalties or unfavorable reputation. Businesses grossing at least $500,000 per year are held to the standards set by the Fair Labor Standards Act (FLSA) for minimum wage payments, overtime pay requirements, as well as child labor restrictions. It is also important that all state laws relevant to restaurants be adhered too so employees can feel secure in their workplace environment while restaurant owners can maintain a good standing within their community.

Understanding labor laws

In order to ensure compliance with labor laws, it is essential that all restaurant industry personnel become familiar with the regulations relevant to their field. The Fair Labor Standards Act (FLSA) sets out guidelines for labor reports such as minimum wage and overtime pay for workers as well as child labor provisions. Some states have additional requirements on topics like meal and rest breaks which must be observed accordingly.

To educate managers in this area correctly, one should provide training covering food safety, workplace safety protocols along with inventory management techniques, etc. Creating equitable staff schedules while recognizing appropriate law-boundaries too are equally important points when tackling these matters of legality within restaurants/the hospitality sector overall. Adhering to established legislation not only safeguards employees, but can also save companies from potential litigation down the line.

Ensuring compliance

Prioritizing legal compliance and fair labor practices should be of the utmost importance for a successful restaurant. To ensure this, there are several key steps that can be taken to guarantee their implementation. These involve providing comprehensive training opportunities to managers alongside recognition when warranted, accurate records being kept as well as paying employees properly. For extra security measures regarding labour laws adherence, it is wise to take advantage of software designed specifically for such circumstances so you avoid facing potential fines or penalties while also upholding your establishment’s standing with both staff and customers alike.


It’s imperative to be savvy in managing labor costs for a restaurant if you wish to maximize profitability and make the business successful. Knowing why this is important, calculating labor cost percentages with respect to industry benchmarks, and implementing optimization strategies to reduce labor costs like focusing on employee retention while also abiding by laws regarding such matters will ensure optimal budgeting and aid in turning any eatery into an income-generating powerhouse. Taking control of these expenses now should lead your restaurant towards the success you deserve.

Frequently Asked Questions

What is a good labor cost percentage?

When figuring out a suitable labor cost percentage, it’s essential to keep in mind that typically the amount should be approximately 20-40% of gross sales. The precise figure is determined by industry and calculated by taking the labor and cost of goods sold divided by total earnings multiplied by 100.

What is labor cost per meal?

To determine the Labor Cost Per Meal, one must divide the total labor cost by how many meals were served or alternatively calculate it as a result of multiplying together both the food costs and the hourly labor rate and amount of time required to prepare each individual meal.

How do you calculate labor cost?

You can figure out labor cost by taking the sum of an employee’s gross wages and associated costs, then dividing it by their yearly hours worked multiplied to 100%. Alternatively, divide all expenditure concerning labor by total sales for a higher labor cost percentage.

What strategies can be employed to optimize restaurant labor costs?

To maximize productivity and efficiency when it comes to restaurant labor costs, cross training staff members is a great strategy. Utilizing technology in the scheduling process as well as forecasting can help maintain compliance with fair workweek regulations while minimizing overall expenses.

How can technology be utilized to optimize labor cost management and enhance overall efficiency?

Technology can provide many benefits to the operational side of businesses, such as scheduling optimization prime cost, and improved inventory management. Through technology-based solutions like these, companies are able to better manage labor costs while increasing overall efficiency.

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