5 Tips for Reducing Labor Costs in Your Restaurant

By Bruce Macklin

If you’ve ever scheduled too many front of house staff for a shift at your restaurant, you might think that you’re reducing labor costs by simply sending staff home early. And while this is a sensible short term solution, you still need to get strategic about proactively controlling labor costs to avoid long term damage to your restaurant’s bottom line.

The hit to your bank account caused by subpar scheduling goes far beyond one overstaffed shift. With fewer tips, fewer tables, and less to do, your servers might start looking for a workplace with a higher table turnover rate and a lower staff-to-table ratio. You could end up facing the steep expense of losing – and subsequently hiring and training – new employees.

As a restaurateur, you need a long term plan for controlling and reducing labor costs. This should include an HR strategy backed by data and powered by technology. In this guide to restaurant labor costs, we’ll explore:

What labor costs include
How to calculate your restaurant labor cost percentage
How to evaluate your labor costs
How to reduce labor costs with 5 easy tips

Understanding Restaurant Labor Costs

Before you can learn how to decrease the cost of labor at your restaurant, you first need to understand what your labor expenses actually include. The key items on this list are salaries and wages, overtime pay, benefits, payroll taxes, and paid time off costs.

Your next step in reducing restaurant labor costs is to get a sense of how much money you should budget for the cost of labor, on average. Luckily, there’s a trusty number known as restaurant labor cost percentage to help you set a benchmark for your spending.

How to Calculate Your Restaurant Labor Cost Percentage

Figuring out your restaurant labor cost percentage and sticking to a healthy number will help keep your bank account in the black. Your restaurant labor cost percentage will tell you how much money you’ve paid employees in a given period of time vs. how many sales you’ve generated during that time.

Here’s a simple formula to calculate your restaurant labor cost percentage:

(Total Labor Costs for the Period / Total Sales for the Period) x 100

= Restaurant Labor Cost Percentage

Your restaurant labor cost percentage should never reach above 30%. This means for every $10 you generate in sales, you should spend no more than $3 on the cost of labor. However, keep in mind that this figure will vary depending on whether you run a quick service or fine dining restaurant, with the latter seeing higher labor cost percentages.

Tips for Evaluating Your Labor Costs

Now that you understand the basics of restaurant labor costs, you can begin the process of reducing labor costs by taking a look at your current expenses.

Calculating Your Prime Cost

Knowing your labor cost percentage is a great place to start, but it doesn’t provide you with the full picture of your restaurant’s financial health. To understand whether your cost-to-sales ratio is solid, you need to be aware of how much it costs to produce the items you sell. This is known as your prime cost, and it combines your total labor costs with your cost of goods sold (COGS).

To determine your restaurant’s prime cost, first add up your total COGS to find out how much you’re spending on the items and ingredients required to create the dishes and drinks on your menu. Here’s how to calculate COGS:

Beginning Inventory + Purchases – Ending Inventory = COGS

Your next step is to add your labor costs (remember, those expenses include salaries and wages, overtime pay, benefits, payroll taxes, and paid time off) to your total COGS to arrive at your restaurant’s prime cost:

Labor Cost + COGS = Prime Cost

Divide Labor Costs into Groups

To get a crystal clear picture of your restaurant’s expenses, you should take the time to calculate your labor costs for various categories of staff (i.e., front of house, back of house, and managers), rather than only calculating your total labor cost percentage. The benefit of reviewing your labor expenses in this way is that it’ll make it easier for you to target specific areas when cutting costs.

5 Easy Tips for Reducing Labor Costs

You’ve laid the groundwork – now it’s time to dive into how to reduce labor costs in your restaurant.

1. Check Your POS Labor Reports

Reviewing the labor reports from your POS system regularly against seasons, holidays, times of days, etc. will help you become a pro at scheduling the exact amount of staff you need when you need them (and not when you don’t). This is a key strategy for reducing labor costs – and avoiding boredom-induced cleaning sprees!

When you create your schedule, remember that you’re purchasing labor, not just writing a name on a calendar. This means every time you schedule an employee for a shift, you’re buying the work they’re doing.

When you can’t be sure how busy your restaurant might get, placing service staff on call is a great way to navigate cost variables that you can’t determine in advance.

2. Cross Train Your Staff

Cross training is one of the most efficient ways to make sure your restaurant employees can work multiple types of shifts and feel like they’re advancing their skills.

For instance, if your guest turnover is manageable Sunday through Wednesday, you might train all wait staff on how to use the reservation system. This way, they can manage reservations and walk-ins in tandem on low-volume evenings.

3. Keep Your Team Happy

The restaurant industry is notorious for its high employee turnover rates, which come with staggering costs of up to $150,000 per year. Keeping your employees from jumping ship is one of the best long term strategies for reducing labor costs.

4. Minimize Overtime

You need to monitor your employees’ hours daily. Your POS system should allow you to craft a report that includes a breakdown of hours worked by each staff member, the number of shifts they worked, and the pay they accrued for those hours.

5. Invest in a Mobile POS

Restaurant automation technology can help you solve a lot of different business challenges, and a mobile POS is a superstar when it comes to reducing labor costs in your restaurant.

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You now know the main types of restaurant labor costs and how to calculate important metrics. By leveraging your restaurant’s POS system, cross-training your staff, and keeping your nose to the numbers, you’ll be better equipped to manage busy nights, slow nights, and staffing needs proactively.

by Bruce Macklin

Bruce has been in the restaurant industry for more than 20 years. He started in the dish pit and worked his way up to management, where he helped several restaurant owners cut their costs, effectively manage their staff, and fine tune their operations.