It’s Friday night, your restaurant is packed, the kitchen is firing on all cylinders, and servers are hustling to keep up with orders. The energy is electric.
For some reason though, things just aren’t adding up. After all, nobody said managing a restaurant is easy. Perhaps you’re not making money despite being packed, or your team members keep quitting - leaving you high and dry. If that’s the case, it’s likely you’re paying too much or too little for labour.
Labour costs are one of the biggest expenses in the restaurant industry, second only to food costs. Get them right, and you’ll have a well-oiled machine that keeps profits flowing. Get them wrong, and you could be serving up financial headaches instead of delicious meals.
So, what should labour cost be in your restaurant? And more importantly, how do you make sure you’re balancing quality service with profitability? Let’s dive in.
What is Labour Cost in a Restaurant?
Labour cost is the total amount you spend on employees, including salaries, hourly wages, payroll taxes, benefits, and any other employee-related expenses. Unlike food costs, which fluctuate based on supply and waste, labour costs - for the most part - are a fixed part of your operating expenses that you must manage carefully.
Labour costs can be divided into two categories:
- Fixed Labour Costs: Salaried employees (such as managers and chefs) who receive a set paycheck regardless of how busy the restaurant is.
- Variable Labour Costs: Hourly employees (servers, cooks, dishwashers) whose wages fluctuate based on business demand.
By understanding where your labour costs go, you can start making smarter decisions about scheduling, hiring, and overall payroll management.
So, What Should Your Labour Cost be?
The golden rule in the restaurant industry is that labour costs should typically range between 25% and 35% of total revenue. However, this isn’t a one-size-fits-all formula. Your target labour cost percentage depends on your restaurant type, business model, and location.
Different restaurant types have different labour cost structures. Here’s how they compare:
- Quick-Service Restaurants (QSRs): Fast food and counter-service restaurants usually have lower labour costs, typically 20-30% of revenue, because they require fewer staff and rely on high-volume, low-cost meals.
- Casual Dining: Sit-down restaurants with table service usually have higher labour costs, ranging from 30-35% due to the need for hosts, servers, cooks, and dishwashers.
- Fine Dining: Upscale restaurants often see labour costs soar past 35% because of highly trained chefs, specialized servers, and a greater emphasis on guest experience.
- Food Trucks and Ghost Kitchens: These models can keep labour costs lower (15-25%) since they have fewer employees and don’t require front-of-house staff.
How to Calculate Labour Cost in Your Restaurant
The standard way to calculate labour cost percentage is: (Total Labour Costs ÷ Total Sales) x 100
For example, if your total labour costs for the month are $25,000 and your restaurant generates $100,000 in revenue, your labour cost percentage would be:
($25,000 ÷ $100,000) x 100 = 25%
Your total labour costs don’t just include hourly wages. Here are some other factors that you may need to include:
- Salaries and Wages: Both hourly and salaried employees.
- Overtime: Additional costs for employees working beyond standard hours.
- Payroll Taxes: Employer-paid taxes, including CPP and EI contributions.
- Employee Benefits: Health insurance, paid time off, retirement contributions, and bonuses.
- Training and Onboarding Costs: The time and money spent on hiring and training new employees.
What Factors Affect Labour Cost in Your Restaurant?
Labour costs don’t exist in a vacuum, they’re influenced by a variety of factors, many of which can shift unexpectedly. From menu pricing to local wage laws, even the smallest change can impact your bottom line. Understanding what drives your labour expenses is the first step to managing them effectively.
With that in mind, here are some of the key factors that can cause labour costs to fluctuate and what you can do to stay ahead.
Menu Pricing and Profit Margins
Your labour costs should be proportionate to your revenue. High-margin items (like alcohol and premium dishes) help offset labour costs, while low-margin menu items (like budget-friendly combo meals) may require tighter staffing to maintain profitability.
Staffing Needs Based on Sales Volume and Peak Hours
Having the right number of staff on duty at the right time is crucial. Understaffing leads to poor customer service, while overstaffing cuts into your profits. Use historical sales data to predict peak hours and schedule accordingly.
Local Labour Laws and Minimum Wage Increases
Labour laws, including minimum wage increases and overtime regulations, can significantly impact your labour costs. Staying compliant while maintaining efficiency is key to balancing payroll expenses.
Turnover and Training Costs
The restaurant industry is notorious for high employee turnover. Every time you hire and train a new employee, it costs money and productivity. Investing in retention strategies (like fair wages, career growth opportunities, and positive work culture) can save you money in the long run.
Key strategies to Optimize and Control Your Labour Costs
Now, while labour costs are a necessary part of running a restaurant, that doesn’t mean they have to run you. With the right strategies, you can optimize staffing, reduce unnecessary expenses, and improve efficiency, without sacrificing service quality. Let’s take a look at some of the best ways to keep labour costs in check while keeping your team happy and productive.
- Efficient Scheduling and Workforce Management Software: Did you know that you can use scheduling software to optimize labour costs based on forecasted sales and peak hours? These tools help prevent overstaffing, while ensuring you’re not caught short-handed.
- Cross-Training Employees to Reduce Overstaffing: Training employees to perform multiple roles (e.g., a server who can also bartend) allows for more flexibility, and reduces your need for excessive staffing.
- Minimizing Overtime Costs: Excessive overtime can quickly inflate your restaurant’s labour costs. By monitoring employee hours carefully and considering hiring part-time workers to cover peak periods, you can prevent spending too much on overtime pay. There is a balancing act though, overtime pay can certainly help you retain employees who want to pick up additional hours.
- Using Technology for Automation: Automation can reduce labour costs by handling tasks that traditionally require human labour. Some examples include:
- Self-service kiosks to reduce front-of-house staff.
- Online ordering systems to streamline takeout and delivery.
- Inventory management software to save time on tracking stock levels.
- Outsourcing Vs. In-House Staff: Some tasks, like cleaning and bookkeeping, can be outsourced to save on full-time salaries and benefits. Before making this decision, take the time to weigh the costs and benefits to determine if outsourcing makes sense for your business. There are pros and cons to both options.
Labour costs are a major factor in your restaurant’s profitability, but with smart management, they don’t have to eat up all your profits. By monitoring your labour percentage, optimizing your staffing, and leveraging technology, you can strike the perfect balance between efficiency and quality service.
The same can also be said for inventory costs. If you want to gain complete control and visibility of your restaurant’s inventory, book a consultation with Sculpture Hospitality and take control of your profitability today!
