Restaurant labor cost percentage: Red flags and ways to improve

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One of the most significant costs in the restaurant industry—and any business, for that matter—is labor costs. Staffing a restaurant is non-negotiable unless you plan to run the entire operation yourself, so restaurant owners must hire and retain staff. If you’ve been in or around the industry, you’ll know this is one of the trickier parts of the business. Balancing your total labor costs with your bottom line is indeed a heck of a tightrope walk. So, knowing how to work out your restaurant labor cost percentage is key to making your business make mathematical sense.

By keeping a close eye on this metric and relevant benchmarks like your prime cost, restaurateurs can make informed decisions about staffing, pricing, and your overall business strategy. So, here, we’ll look at how to perform the labor cost calculation, what the results mean for your business, and strategies to optimize your labor costs while keeping your service top notch.

Restaurant labor cost overview

Restaurant labor costs aren’t just employee wages—they include all expenses related to staffing your establishment. This includes hourly wages, salaries, payroll taxes, employee benefits, mandatory insurance like workers’ compensation, uniforms and work attire, and anything else related to working at your restaurant. Labor costs are a significant part of any restaurant’s overall expenses and play a crucial role in profitability.

Labor costs are often one of the highest expenses in owning and running a restaurant. Naturally, you’ll want to pay your employees well. At the same time, it’s equally important to manage these costs effectively for your bottom line. Most restaurants aim for a labor cost of around 25-35% of sales, shooting for under 30% whenever possible. For reference, your prime cost, which is the cost of labor plus the cost of goods sold (COGS), should land somewhere around the 60% mark.

How to calculate restaurant labor cost percentage

Thankfully, determining your labor cost percentage is a fairly straightforward process. Simply divide your total labor costs by your revenue and then multiply by 100. In simple terms, it looks like this:

Labor cost percentage = (Total labor costs / Total revenue) x 100

This gets you to the percentage number mentioned above, which should hopefully be around or under 30%.

Let’s get a bit more into detail to see just how to collect your total labor costs and make this formula work. The following steps will get you there:

1. Choose a time period: a month, quarter, or year, for example.
2. Gather labor cost data. Add up all labor-related expenses for the period you chose, including wages and salaries, overtime pay, employee benefits, payroll taxes, and paid time off costs.
3. Determine your total revenue: Get a sales report from your point of sale (POS) system or restaurant management software for the same period.
4. Apply the formula as written in bold above.

Voila! You now have your labor cost percentage.

What are the industry benchmarks for labor cost?

It’s valuable to look at other restaurants’ labor costs to see what works and what doesn’t. As mentioned above, most restaurants aim for a labor cost percentage between 25-35%. However, this range can vary depending on the type of restaurant you run.

Fine dining restaurants, for example, often have higher labor costs, around 30-35%, due to the need for highly trained staff providing specialized services. Casual dining restaurants usually range from 25-30%, while quick service restaurants and fast food restaurants have lower labor costs, around 20-25%, since they rely on more streamlined restaurant operations and less on front-of-house (FOH) management.

Do note these are guidelines rather than a strict rule. Where you’re located, the cost of living in your area, seasonal fluctuations, and themes and concepts unique to your restaurant can all influence your ideal labor cost percentage.

4 ways to optimize your labor cost percentage

There are a number of ways to get the most out of your labor costs and keep your average labor cost down. Here are some strategies to get a good start.

1. Efficient scheduling

Efficient scheduling is crucial to lowering labor costs. Implementing a data-driven approach to scheduling can help you match staffing levels with expected demand. After all, having not enough staff can lead to overcrowding and diminished sales, while overstaffing directly hits your profit margins.

So, check out historical data, including sales, weather patterns, and event schedules to forecast customer traffic accurately. Use your best judgment to tie labor costs directly to demand so you don’t find yourself with staff sitting on their hands on a cold day in January. To get this done, consider using scheduling software that analyzes these forecasts to make custom tailored shift schedules.

2. Cross-training employees

Cross-training employees is a vital step in managing labor costs. This means training employees to handle multiple roles in the restaurant, allowing for a more flexible and adaptable workforce. There are several benefits to cross-training:

1. Contingency planning: If an employee calls in sick, a cross-trained staff member can step in to cover the shift without problems. For example, a server can swap over to a bartender without much trouble if they know how to tend bar.
2. Adaptability: Staff trained in multiple areas can handle various tasks as needed, letting you adjust as needed to changing demands during service.
3. Improved efficiency: Cross-trained staff can help in different areas during slow periods.
4. Employee happiness: Cross-training helps employees gain more skills and can give them a boost in their career, leading to potentially bigger roles and higher pay at your restaurant, improving the odds of employee retention.
5. Empathy and understanding: Cross-trained employees know what other employees have to deal with and will have a better time communicating and understanding the needs of their co-workers.

3. Technology solutions

Using technology designed for restaurants can significantly reduce labor costs while improving restaurant operations. For example, some valuable types of tech include:

1. Self-service ordering or seating: Use touch-screen kiosks for ordering or self check-in and seating to streamline customer interactions and reduce the need for staff to take orders or seat staff the old fashioned way.
2. Restaurant management software: Implement solutions like Yelp Guest Manager that optimize FOH service and sync with other vital tools like inventory management software, POS systems, and employee scheduling.
3. Kitchen display systems: Kitchen display systems allow for real-time communication between the front- and back-of-house, reducing errors and improving order accuracy, as well as saving staff time to run back and forth to the kitchen to shout out any order corrections or additions.

4. Menu engineering

It may not seem related to labor costs at first sight, but menu engineering can have a significant impact on labor costs by boosting your total sales and profit margin. By analyzing the profitability and popularity of each dish, you can make informed decisions about which items to feature most prominently in your menu.

The increased sale of high-profit items can improve overall revenue without increasing your labor costs. That chicken dish that’s more profitable than your filet mignon can be placed in a part of the menu that customers check out first, resulting in higher profits. Score!

Furthermore, engineering your menu to keep only the most efficient and profitable items will help streamline your kitchen operations. This will speed up work in the back-of-house and cut unnecessary food costs on items that weren’t selling well or at all.

At the same time, this will lead to improved inventory management, which helps you plan ingredients more carefully and leads to less waste and yet more efficiency in the kitchen, saving time for both you and your kitchen staff.

Labor cost percentage red flags

Keep a look out for several red flags when you’re calculating your labor cost percentage:

1. Consistently high labor cost percentage: If your labor cost percentage is consistently higher than the benchmarks discussed above for your restaurant type, something is going wrong. For example, if you’re north of 40%, you’ll need to find a way to cut costs. Look to inefficiencies in staffing or scheduling as your starting point.
2. Sudden spikes: Unexpected increases in your labor cost percentage could demonstrate there’s overstaffing, excessive overtime, or a drop in sales. Adjust accordingly.
3. Declining service quality: If your labor costs are steady but you’re noticing (or hearing about) worsening service, you’re likely understaffed. Consider hiring more staff where necessary.
4. High turnover rates: If you’re suffering from frequent employee turnover, especially rage-quits, there’s something wrong in your staffing or work environment. Training up new employees is wildly expensive, so do your utmost to keep high-quality staff happy.
5. Misalignment with sales: If your labor costs don’t match your sales patterns, you’ve likely got scheduling inefficiencies on your hands.

Trust both data and your gut to make any labor-related decisions, and always—repeat, always—talk to your staff and make clear you’re open to feedback to improve whatever needs improving. The staff you want to keep will tell you the truth, no matter how ugly.

Software to improve your labor cost percentage

Staffing a restaurant is certainly one of the hardest parts of the restaurant business. Hiring dishwashers, calculating hourly employees’ overtime hours, paying taxes—it’s taxing work, and costs both time and money. So, while reducing labor costs to be within a reasonable window is a great idea, implementing it can take time.

Luckily, a lot of the restaurant business that used to be handled manually can now be automated. Take the host position at the FOH—it can be supported with Yelp Kiosk. Yelp Kiosk allows for smooth guest check-ins, seamlessly merging in-person walk-ins as well as online waitlists and reservations, adding guests to the queue automatically.

AI-supported wait times lead to more satisfied guests and less guessing: Yelp Guest Manager quotes wait times with up to 96% accuracy.*

Kiosk relays that information to customers who want to check in when there’s a wait and saves your staff from being bombarded with questions. This means less busywork for your staff, who will have more time to provide great customer service—and in turn, restaurateurs may be able to save on labor costs due to the lighter load.

There’s much more Yelp can do. Reservations and waitlist management, for example, can be outsourced to your one-stop-shop FOH service found in Yelp Guest Manager, saving time and freeing up staff from the tedium of receiving and organizing reservations.

We’d love to show you what it’s all about, and it’ll cost you nothing to find out. Reach out to us for a free demo and we’ll get started. Yelp Guest Manager works for well less than minimum wage, and may be one of your star employees.

*Yelp Internal Data 2022. Based on a study of Yelp Guest Manager restaurants with at least 203 average monthly parties from January 2022 to August 2022. Excludes parties that self-removed before receiving notice that a table was ready. An estimate is accurate if the party is notified +/-5 minutes of the estimated range.