How to Calculate Restaurant Labor Cost Free Calculator Included

how to figure out labor percentage

If a normally busy night is slower than expected, you might need to send some people home early. Anyone who works in the restaurant business knows how tough it can be to make a living in an industry where profit margins tend to hover at only around 6%. With margins so thin, it’s important to control every cost as carefully as possible.

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It’s important to be aware of your labor costs and to make sure they don’t get out of control, but to keep in mind that there are many other factors that affect sales, costs and overall profitability. Another option is to work with third-party order taking sites and apps. These are apps and sites like GrubHub, UberEats, and DoorDash–which 3 in 10 millennials are using at least two times a week. Look into what hour it gets busy on Fridays, and arrange your schedule to reflect that demand. This more granular approach might take an investment of time, but it will pay you back with a lower labor cost percentage. When you determine your labor cost percentage, you can make a deeper analysis of your employee expenses.

What Data Should HR Track?

Fixed labor costs are, then, the labor you will pay no matter how much revenue you drive. Your cleaning crew, complete with periodic restaurant hood cleaning and everything else. Last-minute bookings, discounts or promotions might also have a significant impact on the figures.

If a worker is regularly working overtime, this needs to be taken into account. If their regular rate is $10, an additional $5 will be added on as the half, which makes the hourly rate $15 per hour after 40 hours worked. Labor costs are rising across the board in all industries for several reasons. Minimum wage has increased in several states, and hourly pay for workers has increased by nearly 5% over the past year . People have left the workforce en masse, driving unemployment rates to historic lows and giving job candidates the upper hand in negotiating higher salaries. Select aunified solutionfor HR, payroll and timekeeping to increase process efficiency and provide accurate and complete labor data to your stakeholders. Cutting the shackles of third-party apps with their 30% commissions is a great way to do this.

Tips on How to Evaluate and Optimize Labor Costs

And with the rising cost of living and an increase in minimum wage for tipped employees on the horizon? Plug your target labour percentage into a spreadsheet, and then add your sales data for each period (whether it’s a month, week, or day). Multiply the two figures, and you’ll get a total labour budget for that period. You don’t want your labor cost percentage to be too high OR too low. If it’s too high, your business may not be financially sustainable.

how to figure out labor percentage

When trying to set your restaurant’s budget, labor costs are obviously a huge factor. You can set a goal to keep your labor cost percentage under, say, 30%, and build a monthly or quarterly budget based on how to figure out labor percentage that number. Then, assess how well you did and make adjustments as needed. We’ll get into some practical suggestions soon, but first, let’s look at how much labor costs should be in different restaurants.

How to calculate direct labor cost

Let’s explore how to calculate and reduce the labor costs in your restaurant. You’re in charge of the hours, the price, and who’ll be clocking in come Monday. We carry insurance, sick time, and since they’re our W-2 employees, yes, their overtime. Because we’re a “business expense,” we’re a tax write off just the same as buying a stapler or a new copy machine. The thing about labor costs is there’s no standard across the board. Now, remember, use divided by sales can give you very different numbers if you’re using raw labor cost versus total. In 2020 the largest increase in year-over-year labor cost was in the air transportation industry at nearly 107%.

  • Labor is easily one of a restaurant’s largest costs, and can compete with food costs for being the biggest expenses restaurants face.
  • If you like, you can also use the Copy menu to apply the same percentages and/or estimated revenue to future weeks or months.
  • Using a first-party ordering platform and app allows you to connect directly with your customers and save up to 30% in commissions.
  • After dividing by 52 to get the average over the course of the year, restaurant labor costs for the cooks at this restaurant is $76.92 per hour worked on average.

Labour costs should include salaries, wages, and ideally, any other payroll costs such as National Insurance and pension contributions. Whatever you include in calculations, keep it consistent — otherwise you won’t be able to compare different periods. Let’s say one of your staff members, who makes $10 an hour, clocks an hour of overtime every week. At time-and-a-half, that’s an extra $15/week that’s eating into your bottom line. If overtime becomes consistent among multiple employees, you could be out thousands of dollars. The following formula is used to calculate a labor percentage. Remove tedious pen-and-paper processes from your payroll and labor management processes with products designed specifically for restaurant payroll.

Save on Restaurant Labor Costs With Training and Thoughtful Scheduling

It’s one of the easiest ways to reduce costs in restaurants. If your labor cost percentage is high, there are a number of things you can do to lower it, like using staff scheduling software and implementing helpful restaurant technology. However, when you know your labor cost percentage, you’ll be able to navigate tough times more successfully.

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If you run a fast food restaurant with labor costs hitting 40% of your sales, you can probably make some adjustments to bring that cost down. This is the amount of money that the restaurant has spent on paying staff over a specified period of time. These premiums range anywhere from $10 to $100, and even if your employees are consenting to these shift changes, those premiums can quickly rack up your labor cost percentage. Regardless of size, location, or concept of their business, here are some tips that all restaurateurs can try in their efforts to control labor cost percentage. The cost of labor per employee is their hourly rate multiplied by the number of hours they’ll work in a year.

Having this report allows you to make better decisions regarding staffing for peak hours and open and close times for your business. As you can see, even if you know exactly how to calculate labor cost formulas, doing it repeatedly for each employee, new hire, and promotion on every job is exhausting. Your time is better spent optimizing your operations for better profit margins. Finally, calculating your labor costs help you pinpoint revenue leaks that are eating into your earnings. Some examples include employee cell phone usage, company vehicle mileage and hiring costs. Monitoring spending trends in these areas can also help you flag potential fraud. If your employees know how to perform multiple functions, they can assist the team during busy shifts and reduce the need to hire additional staff.

how to figure out labor percentage

By calculating and understanding labor cost percentages, restaurant operators can keep their fingers on the pulse of their restaurant’s health. And if things aren’t looking rosy, the steps we outlined above can help you get things back under control. Keeping your employees around for longer means you won’t have to waste time on the interviewing, hiring, and retraining hamster wheel, which whenever it’s running drives up your labor cost percentages. As you can see, different restaurants have different costs. Ghost kitchens and QSR have the lowest labor cost percentages, while fine dining restaurants have some of the highest—which is understandable when you think about the service costs involved. Calculating your restaurant labor costs over a particular month or quarter can be very useful—for example, an ice cream restaurant will have very different percentages in summer versus winter. You also have to consider the difference between fixed and variable costs when it comes to how to compute labor costs.

If you’re using labour percentages for planning, your sales estimates need to be reasonably accurate for the metric to actually mean anything. So, instead of just using last year’s data, make adjustments based on more recent performances, menu changes, any booked reservations, and any events. If you’re expecting higher than usual takings, you’ll need more staff on the rota, too. If decreasing your labor cost percentage is proving difficult, rest assured that you can also improve efficiency by reducing other operating costs, like food costs and rent. Knowing your restaurant’s labor cost percentage is critical to operating and maintaining a financially healthy business. You may hesitate to add a new server since it will mean an increase in labor cost. However, the numbers show that this new addition results in a lower labor cost percentage, directly improving the restaurant’s profit margins.

  • Federal unemployment taxes are paid strictly by the employer.
  • As described above, some restaurants have busier times of year, where their labor costs and revenues both increase.
  • The same goes for Social Security and Medicare withholding as a percentagebased on gross pay.
  • Looking at labor costs for different groups gives you a clearer picture of how you’re spending money on staffing.
  • Say you look at your books over the last 30 days and you see that you spent a total of $5,000 on wages and other salary costs.

Great equipment comes with a higher price tag, but could save you significant operating costs in the long run. This way, if you’re short-staffed, you won’t need an employee to work a double shift . Plan your schedule ahead of time — monthly, if possible — with Scheduling, powered by Sling or other scheduling apps such as 7shifts, HotSchedules, and TSheets. Cross-train and turn your employees into jacks of all trades. For example, if your hostess can jump in when a server goes home sick, she can keep diners happy without adding extra payroll.

Increase Employee Retention

This number will be your restaurant’s labor cost percentage of sales. You can do it as a percentage of sales or as a percentage of total operating cost. Use the revenue, or gross sales, from your business’ income statement to calculate the employee labor percentage for a year. You can measure a shorter length of time by using information from interim sales reports. It’s one thing to have hourly employees work overtime on occasion, but if you’re consistently paying out overtime, it may be time to hire additional staff. Keep a close eye on consistent overtime “offenders” who work a greater number of hours than scheduled without a specific request from management.

how to figure out labor percentage

That’s how you can figure out if you need to reduce them to increase your overall profit margins. Next, you have to take into account all related expenses that you owe for Maria, such as taxes and healthcare. Only after you calculate them can you get the actual labor cost per hour for a particular staff member, or the true cost per hour. You have to keep tabs on your labor expenses and to constantly compare them to your revenue, so that employee costs don’t harm your bottom-line. This is called labor cost percentage and is the key to solid business management and growth. Labor costs account for, on average, 68.3 percent of an employee’s yearly salary or wages.