Labor and food products have always been the two main categories of expenses for restaurant businesses. Restaurant labor costs include not only wages but also various other components such as payroll taxes and healthcare. When all labor-related restaurant expenses are combined, their overall percentage of sales is between 25 and 35 percent. In this article, we’ll do a breakdown of the main restaurant labor costs. We’ll also look at some cost-cutting measures that can help food service establishments maximize profits. Make sure to check other articles on similar topics like the ones on food waste in restaurants and green restaurant practices.
Key takeaway: Along with food product expenses, labor costs are the biggest restaurant expense as a percentage of all costs. Labor costs include not only salaries and hourly wages but also bonuses, payroll taxes, healthcare, and other expenses.
Restaurant Labor Costs Breakdown
Besides salaries, which are the most obvious example of restaurant labor costs, there are multiple other categories of labor-related expenses. Let’s dive a little deeper into the main ones.
Hourly Wages and Salaries
Calculating employee payments can be tricky as it often combines both hourly payments and fixed salaries. Usually, managerial staff have fixed salaries. Chefs and other skilled personnel are often salaried as well. On the other hand, entry-level positions and the majority of other restaurant employees are paid hourly. Typically, back-of-house employees have a much higher hourly payment compared to waiters. Although some establishments in the food and beverage industry have introduced tip-pooling policies, this practice is considered illegal in some states.
Their goal is to incentivize good performance by staff members. Employees are usually subject to receiving a bonus only after certain key performance indicators (KPIs) are met. These KPIs can be personal or related to the overall performance of the business. For example, customer retention can be used as a measure of the service provided by staff members. Mystery shoppers and inspections done by managers can also be part of the bonus evaluation process. In order to reduce staff turnover, some restaurants have introduced bonus policies that increase with each year.
Restaurants that experience understaffing or have high seasonality changes in business might have a lot of restaurant labor costs related to overtime pay. Overtime pay is paid at a higher rate compared to regular hourly payments. Therefore, restaurants should properly manage their staff in order to avoid overtime labor as much as possible. Relying too much on employees that work overtime can lead to burnouts and other negative effects.
Payroll taxes are wage-related taxes paid by the business to the IRS. This should not be confused with income taxes. The difference between payroll and income taxes is that the former is paid partially by the business owner while the latter is paid fully by the individual. The payroll taxes include various federal, state, and local taxes like social security, medicare, and federal unemployment tax (FUTA).
Employers are required to offer health insurance to their full-time employees if the number of employees is over 50. Restaurants with less than 50 FTE are not required to offer health insurance in most states. Nevertheless, some businesses have a policy to offer insurance to all their employees even if they’re not required to. That not only decreases the turnover rate but can also be used in a restaurant’s marketing.
Sick Leave and Vacation
According to stats from the US Bureau of Labor Statistics, 77% of employers offer paid time off to their employees. Each company has a different policy when it comes to vacation days. Usually, they offer a fixed number of days for new employees that increases with each year spent in the company. When it comes to sick leave, there’s no federal law legislation related to paid sick leave. However, some states have passed laws requiring paid sick leave for employees. Businesses that aim to become sustainable restaurants often offer paid sick leave to their employees. That’s because this discourages employees from coming sick to work which can result in disease outbreaks.
Other Labor-Related Expenses
Even though they might fall into different categories, there are a lot of additional expenses that can be considered part of a restaurant's labor costs. A few examples of such expenses include team buildings or Holiday gifts for employees.
Calculating Restaurant Labor Costs
There are multiple formulas related to calculating restaurant labor costs. Let’s see the most popular ones.
- Labor as a percentage of sales = (Sum of all restaurant labor costs / restaurant revenue) x 100;
- Labor as a percentage of costs = (Total restaurant labor costs / Total restaurant costs) x 100;
- Labor cost per meal = (Restaurant labor expenses / number of meals served).
Cost-Cutting Ideas for Restaurant Labor Costs
There are multiple ways food service establishments can cut costs. From negotiating contracts with vendors to investing in energy-efficient appliances and light bulbs. Let’s examine a few ways employers can cut labor costs.
- Avoid overtime pay. Restaurants that aim to be efficient should manage their staff in a way that avoids overtime payments. In order to cut restaurant labor costs, businesses need to optimize their team and count on overtime hours only when truly necessary.
- Embrace online ordering. With the help of online ordering software for restaurants like Revolution Ordering, businesses can use their staff more optimally and increase their profits. You can also offer discounts during slow hours in order to use labor more efficiently.
- Increase staff retention. Managers are often focused primarily on customer acquisition and retention. However, reducing the staff turnover rate can be a great way to reduce restaurant labor costs. New employees often need a couple of weeks to get used to the working environment. Furthermore, they need to undergo training that also costs money and time. Constantly having new employees can also have a negative effect on customer retention.
Frequently Asked Questions about Restaurant Labor Costs
Whether you are looking for ways to reduce the restaurant labor costs of your business or you’re planning to start your own restaurant, BlueCart’s blog will help you with multiple useful articles. Below we have also gathered some of the commonly asked questions related to restaurant labor costs.
What’s the Turnover Rate in the Restaurant Industry?
According to statistics, the average annual turnover rate in the restaurant industry is close to 80%. It’s important to note that this number is inflated due to the high turnover rate during the pandemic. Nevertheless, the turnover rate in the restaurant industry has been rising. Keeping the staff satisfied is one of the important elements of a restaurant’s success. Restaurant managers should focus on meeting the requirements of their employees better in order to reduce labor costs related to training new employees.
What Is Restaurant Labor Cost per Meal?
Labor costs per meal can easily be calculated by dividing the sum of all labor costs by the number of meals served. Keep in mind that this performance indicator is not very sophisticated and shouldn’t be used to calculate the profit margin of single meals as they might require different times to prepare. Another important formula that restaurant managers often use is the restaurant prime cost formula. The formula itself is the total cost of goods sold + total labor costs. If you divide that number by the sum of all sales, you’ll get the prime cost as a percentage of all sales.
What Is a Good Labor Cost Percentage?
On average, a percentage between 28% and 33% is considered to be normal for restaurant labor costs. However, there are instances where that percentage can be higher. For example, fine dining restaurants that employ top-notch chefs are expected to have a higher percentage of labor costs. Fast food restaurants, on the other hand, normally have a lower percentage. An increase in the restaurant labor cost percentage directly translates to a decrease in profits. That’s why many restaurant cost-saving ideas are related to decreasing labor costs by reducing turnover rate and cross-training staff members.