February 19, 2023

What Is Labor Cost And Labor Cost Percentage

What Is Labor Cost And Labor Cost Percentage

Your restaurant’s labor costs are more than just employee wages. They’re comprised of the total dollar amount spent on labor across your operation. Here are all the components involved in calculating labor costs:

Source: restaurant365.com

You should aim to keep your labor costs somewhere between 28-33% of your total revenue. While this isn’t a steadfast rule – fine-dining establishes, for example, allocate much more to labor costs — spending too much on labor makes it much harder for your restaurant to turn a profit. Comparatively, a labor cost percentage that is too low indicates you’re not spending enough on your workforce, who are your most important asset to providing a top customer experience.

Source: restaurant365.com

A healthy percentage of labor costs guideline varies by industry and your particular restaurant’s business model. Most restaurants aim for labor cost percentage somewhere between 25%-35% of sales, but that goal may vary by restaurant industry segment:

  • 25%: quick service restaurants with less specialized labor and faster customer transactions
  • 25-30%: casual dining, depending on the menu and methods of service
  • 30-35%: fine dining, depending on in-house food production and service components

Knowing a number without understanding the big picture behind it can make it difficult to make improvements in the long-term. High labor costs can be the symptom of many different issues, and a quick fix of just cutting hours or paying low wages may only be a bandage on a deeper problem.

Your restaurant labor cost and labor percentage are two of the most essential business metrics to track, especially as minimum wages rise around the country. Labor is one of the biggest expenses for a restaurant. With the many moving pieces in a restaurant, labor costs are also always changing, requiring daily, weekly, and quarterly tracking and reporting. Understanding the story behind your labor cost is especially important as restaurant owners around the country address the repercussions of a rising minimum wage.

Labor cost is a significant part of your prime cost, a metric many restaurant owners use to analyze the efficiency of restaurant operations. Prime cost, made up of the total cost of goods sold (CoGS) and the total labor cost, represents most of the controllable expenses for a restaurant. Your prime cost, including your labor cost, is where you can improve to add more profit to your bottom line.

The methods for controlling restaurant labor costs vary by the type of restaurant. A quick service restaurant versus a full-service fine dining restaurant have different labor cost standards and require different approaches. As minimum wages rise around the country, location and locale also impact your restaurant labor cost. Knowing how to calculate labor cost percentage allows you to monitor this large expense and streamline your labor operations.

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