Restaurants have a lot of costs: rent, utilities, supplies, insurance, labor or many others. And one of the highest costs will be – your labor. A lot of money in the hospitality industry is spent on labor.

You need to hire people to help with:

  • Cooking
  • Serving
  • Cleaning 
  • Etc.

Even a fast food or quick-service establishment will have high labor costs that quickly cut into profits. If you want to better manage your restaurant’s labor costs, you have a few options available. 

average labor cost for restaurant

How to Calculate Your Restaurant’s Labor Costs

What’s the ideal labor cost for restaurant businesses? It depends on many factors:

  • Type of eatery
  • Where you’re located
  • Experience
  • So much more

Restaurants will use two main metrics for calculating costs: prime and labor cost percentage. Both costs will help shed light on your overall labor costs and whether your business is performing well or not.

How to Calculate Your Prime Cost

Prime cost is all of your direct costs to produce an item added together. For example, if it costs $20 for pizza ingredients and labor costs to produce the pizza are $10, your prime cost is $30. An equation to determine prime cost is cost of goods sold + labor costs.

Cost of goods sold (COGS for short) is the total cost for producing the goods, such as:

  • Ingredients
  • Take-out containers
  • Etc.

Labor costs include everything paid to or on behalf of the employee, such as hourly wages, salary, payroll, benefits, taxes, vacation time and any other time paid for the employee.

Your prime costs are controllable and should account for 60% or less of your total sales.

If your prime costs rise about the 60% threshold, it can put a strain on your business.

How to Calculate Labor Cost Percentage

Restaurant labor percentage is a way for you to be able to better understand your true labor costs. You’ll need to determine a few things:

  • Labor cost range
  • Whether you’re performing a comparison

If you want to compare your labor costs to the same period a year prior, you can do so. You’ll also want to consider the labor cost range, such as last month or last quarter. Certain restaurant platforms can help you determine all of these costs.

You'll need to determine the full costs of labor, including all of the costs mentioned in the prior section, such as benefits, payroll and taxes.

An accountant can help you calculate your labor costs.

For labor percentage costs, you’ll need three figures:

  • Sum of labor costs for the predefined period
  • Sum of gross sales for the predefined period

Your percentage is determined by using (total labor costs / total sales) * 100. If you had $5,000 in labor costs and $10,000 in sales, you would do ($5000/$10000) = 0.50 * 100 = 50%.

It’s important to remember that these costs must relate to the specific period of time.

what should labor cost be in a restaurant

What Should Labor Cost Be in a Restaurant?

What's the average labor cost for restaurant businesses? It depends. Every type of eatery is slightly different, but the following are general costs:

  • 25% for quick-service eateries
  • 25% - 30% for casual dining
  • 30% - 35% for fine dining

In the ideal restaurant, your maximum labor cost percentage will be 30% or below. If you keep costs within this range, it will help you maintain healthy profit margins.

How to Control Labor Costs at Your Restaurant 

Now that you’ve calculated your restaurant labor cost, you can take steps to improve them. 

Here are some tips.

Leverage Technology to Streamline Tasks

Technology can streamline and automate tasks to save your staff time and improve efficiency. 

You can find solutions for specific types of eateries (cafes, fast-casual, etc.), but every restaurant can benefit from implementing the following technologies:

  • Self-ordering kiosks. If you run a quick-service restaurant, a self-ordering kiosk will save your team time. Customers can place their orders themselves while your staff focuses on preparation and serving customers. 
  • Reservation management system. Customers will have the ability to see your restaurant’s availability in real-time and reserve a table with the tap of a button. A system like this will save your staff from having to take reservations by phone. 
  • POS with tableside ordering functionality. If you run a full-service restaurant, a tableside ordering system will help your staff be more efficient. Customers can place orders themselves right from their tables and even pay for their meals directly from the tableside ordering system.

These are just a few of the many technological solutions that can help restaurants become more efficient.

Keep Your Team Happy

Reducing employee turnover is one of the most effective ways to keep your labor costs under control.

Research shows that the cost of employee turnover averages $5,864 per person. 

Finding ways to keep your team happy and reducing turnover will help you manage your labor costs more efficiently.

How can you keep your staff happy?

  • Offer benefits and time off
  • Offer generous pay
  • Plan team-building activities to build strong relationships 
  • Reward your team with bonuses and recognition

No one knows your team better than you, so find incentives that will appeal directly to them. Often, offering benefits and a competitive wage will keep staff members around. Focusing on building a positive work culture is also important for retention.

Optimize Your Schedules

Are you constantly overstaffing or understaffing your shifts? If so, you’re likely losing money and inflating your labor costs. Consistent understaffing can also lead to employee burnout, which will further increase your turnover and costs.

Optimizing your schedules can help ensure that your restaurant is adequately staffed.

But where do you start? With sales forecasting.

You need to know how busy your restaurant will be at particular times of the day, week, month and year.

With your busy times in mind, you can schedule the optimal number of employees for each shift.

Here’s another area where technology can help. For example, some POS systems can analyze your sales data to forecast your labor needs. 

Hire Part-Time Help

If you find that you’re consistently paying overtime or struggling with understaffing, consider hiring part-time or seasonal employees. Bringing in part-time or temporary help will ease the load on your full-time staff and help you keep labor costs under control.

It can be challenging to manage a restaurant’s labor costs, but these tips are a great place to start. Focus on implementing technology to streamline tasks, reducing employee turnover and optimizing your schedules to ensure you’re always properly staffed.