How To Calculate Labor Costs: Key Metrics For Restaurants

Not surprisingly, fast casual and quick serve restaurants have slightly lower labor costs, where employees can serve multiple customers more quickly and employees can often work across multiple areas. Upscale restaurants require higher labor costs, where employees are more specialized and often require more training.

What Is a Good Percentage of Labor Cost?

A healthy percentage of labor costs guideline varies by industry and your particular restaurant’s business model. Most restaurants aim for labor cost percentage somewhere between 25%-35% of sales, but that goal may vary by restaurant industry segment:

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• 25%: quick service restaurants with less specialized labor and faster customer transactions
• 25-30%: casual dining, depending on the menu and methods of service
• 30-35%: fine dining, depending on in-house food production and service components

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While these industry benchmarks can be helpful to indicate your performance in the industry, every restaurant has different challenges, strengths, and sticking points.In addition, calculating labor cost as a percentage of sales may be a guideline, but it doesn’t provide all the detail necessary to implement improvements. For instance, different job categories may have completely different labor metrics, or a holiday or special event may skew your labor reporting. Knowing a number without understanding the big picture behind it can make it difficult to make improvements in the long-term. High labor costs can be the symptom of many different issues, and a quick fix of just cutting hours or paying low wages may only be a bandage on a deeper problem.

Understanding the story behind your labor cost is especially important as restaurant owners around the country address the repercussions of a rising minimum wage.

How to Control Labor Costs with a Rising Minimum Wage

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Restaurants all over the country, in different states, counties, and cities are experiencing new mandates and regulations raising the minimum wage. According to the New York Times, twenty nine states and the District of Columbia currently have state-level minimum wages higher than the federal minimum wage, making the effective minimum wage (what the average worker must be paid) at least $11.80 per hour.

Rising minimum wages come with regulatory complications about tipped, hourly, and other types of labor that can make a restaurant manager’s head spin. For example, beginning in 2020, the city of Seattle increased the minimum wage differently for different companies. Companies employing more than 500 workers have required minimum pay increases from $16 an hour to $16.39 per hour. Companies with fewer than 500 workers have required minimum pay increases from $15 to $15.75 per hour—if the company does not contribute $2.25 per hour to medical benefits or the employee does not earn $2.25 per hour in tips.For restaurant companies with locations in 10 states and 23 cities, keeping track of anywhere between 10 to 23 different minimum wages in each location for reporting purposes is a monumental task. However, some restaurant operations software now offers tools to stay compliant with multiple minimum wage laws. Instead of spreadsheets or documents for each location, a minimum wage adjustment report can pull information for each employee underneath a selected job type to monitor the pay each employee should receive versus how much they earned. This allows restaurant owners to see the amount of money needed to pay a worker if they did not reach the minimum wage required.

How can I reduce my labor cost percentage?

Bringing it all together

Workforce management is one of the more difficult and time consuming areas of running a restaurant business. It’s also not the most rewarding task, as it can take several weeks to see any changes in your labor cost percentage. But spending the time and implementing the right strategies in workforce management can have as big of an impact as reducing your COGS and therefore prime cost. If you make the effort, you’ll see the payoff as your margins start to rise.

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