Why it Matters

When it comes to running a restaurant, labor is one of the largest and most variable expenses and without consistent oversight, it can quietly hurt your margins. With minimum wage increases continuing across many states and municipalities, labor costs are becoming less predictable and harder to control. Even small mandated increases can significantly impact your margins, especially if you’re operating on thin profit lines. Proactive tracking is key! Monitoring labor in real time allows you to make small, informed adjustments before they turn into larger financial issues.

What costs are included in labor costs?

Labor costs go beyond simply hourly wages, they include the total amount spent on staffing your entire business. Labor costs cover all employee-related expenses. This includes:

• Salaries and hourly wages
• Overtime pay
• Payroll taxes (Social Security, Medicare, unemployment taxes)
• Employee benefits (health insurance, retirement contributions)
• Paid time off (vacation, sick leave)
• Bonuses and incentives

How do you calculate labor costs?

Add up all employee-related expenses for a given time period:

Labor Cost = Wages + Salaries + Bonuses + Payroll Taxes + Benefits

What is labor cost percentage?

Labor cost percentage shows how much of your revenue is going toward labor:

Labor Cost Percentage = (Total Labor Cost ÷ Total Revenue) × 100

This metric helps you gauge efficiency and spot opportunities to adjust staffing or operations. For example, lets say your restaurant has $30,000 in labor costs and $100,000 in revenue, your labor cost percentage would be 30%.

What’s a “good” labor cost percentage?

While benchmarks can vary depending on the type of restaurant, many operators aim for a labor cost percentage between 25% and 35%. Some variables come into play, including:

• Quick-service restaurants (QSRs): Typically, lower labor percentages due to streamlined operations
• Full-service restaurants: Often higher due to more staff and guest interaction
• Fine dining: Usually the highest due to elevated service expectations 

The “right” percentage ultimately depends on your concept, pricing strategy, and operating model.

Key strategies to manage labor costs

Track your metrics consistently- Make it a habit to calculate your labor cost percentage on a daily or weekly basis. This helps you catch trends early before they turn into bigger issues. 

Align staffing with demand- Use historical data to understand when you’re busiest and when things slow down, then staff accordingly. Cutting hours during slower periods and leaning on part-time or seasonal help can keep you from overstaffing.

Cross-train your team- When employees can step into multiple roles, say a server helping as a host or a barista jumping on the register, you can run smoother shifts without needing extra staff.

Focus on retention- Turnover adds up quickly, so it pays to keep your current team engaged. Competitive pay, a strong workplace culture, and simple recognition can go a long way in keeping people around.

Use technology to your advantage- Scheduling and POS tools can take a lot of the guesswork out of labor management. With better forecasting and real-time data, you can build smarter schedules and adjust quickly when needed.

Keep overtime in check- Overtime can quietly drive up your labor costs. Stay on top of hours and try to prevent unnecessary overtime before it happens, because once it does, it’s already cutting into your margins.