How To Calculate Labor Costs: Key Metrics For Restaurants

While averages are precisely that,—averages,  they do let you know how you’re performing compared to restaurants in your industry. In order to truly optimize your restaurant’s budget, you have to look beyond seeing labor costs as just a percentage of sales number you want to hit. 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. 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.

In fact, it can cost almost $6,000 to replace just one employee in the hospitality industry. Sam discovers that her smoothie shop’s labor cost percentage is 28%, which is below the 30% industry benchmark. Once you have those figures, you’re ready to plug them into the labor cost percentage formula.

It’s the better way to manage your team.

This number gives you a good picture of the overall costs that it takes to keep the restaurant staffed, keep guests served, and prepare the food you’re selling. Read on to learn what you need to know about calculating the cost of labor in your restaurant, as well as some ways to manage those costs. Anyone who works in the restaurant business knows how tough it can be to make a living payroll for restaurants 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. Finally, a POS with tableside ordering capabilities is another great option for FSRs. When FOH staff can input orders and process payments right at the table, they can spend more time with guests AND turn tables more quickly.

It should also ensure accuracy and security so you can remain compliant with federal and state laws. This category refers to any money offered to employees apart from https://www.bookstime.com/ their regular compensation. This money includes bonuses, commissions, awards and gifts, as well as indirect compensation, like stock option plans and profit-sharing.

Predict Overtime & Reduce It When Possible

Unsurprisingly, younger workers are concentrated in the low-paid occupations; they are more likely to be cashiers/counter attendants and hosts/hostesses, and are less likely to be chefs, bartenders, and managers. Channeling his inner Henry Ford, Berry suggested that investing in employees will ultimately lead to better service and, hopefully, better revenue. Determining the proper wage or cost of hiring a new employee is not easy, which is discussed here. The FICA tax is a mandatory payroll deduction that serves to cover Social Security and Medicare. The employer needs to cover 6.20% for Social Security and 1.45% for Medicare. The base salary is affected by some of the factors we mentioned at the beginning of this article.

Alternatively, you could allow a manager to double as food delivery driver when dine-in service is slow. These individuals would be first cut for lunch (to ensure they have enough downtime between shifts to make it valuable for them) and first cut for dinner (to ensure they don’t spill into overtime). Sam of Sam’s Smoothie Shop wants to know her labor cost percentage for the year that just ended, 2020. A well-trained team is also more productive because valued employees with a path to professional growth are less likely to leave for another restaurant that doesn’t offer those things and, sadly, too many don’t. Labor cost is one component of a larger performance metric for restaurants known as prime costs.

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Companies employing more than 500 workers have required minimum pay increases from $16 an hour to $16.39 per hour. However, some restaurant operations software now offers tools to stay compliant with multiple minimum wage laws. This allows restaurant owners to see the amount of money needed to pay a worker if they did not reach the minimum wage required. Payroll percentage is your payroll cost as a percentage of sales revenue. A high payroll percentage may signal that you’re spending too much on payroll.

Looking at labor costs this way also doesn’t account for holidays or other special events that might warrant more staff time. The biggest thing to remember about restaurant labor costs is that they’re just one part of a whole, and sometimes they’re just a symptom of another issue. Rather than rushing to reduce labor costs, try to figure out what’s really going on and fix the problem itself rather than putting a reduced labor costs bandaid on it. One of the best ways to do this is to starting tracking earned vs. actual labor hours. Restaurant labor costs are typically the highest costs of owning a restaurant. Restaurateurs commonly aim to keep labor costs between 20% and 30% of gross revenue.

Does Inventory Count as End-of-Year Restaurant Profit?

Table 4 shows median hourly wages of restaurant workers and other workers, both overall and for various demographic groups. Outside of the restaurant industry, the typical worker makes $18.00 an hour. This means that wages are more than 40 percent lower in the restaurant industry than in other industries.

This can be a more affordable option than an employer-sponsored health insurance plan. Contributions are tax-deductible to the employer and employees receive reimbursements tax-free. Also there are no minimum or maximum contribution amounts, and no minimum participation requirements. But there are a lot of regulations you should be aware of when it comes to this sort of offering, so make sure to consult with your legal and financial advisors. A defined benefit health plan (also called a group health insurance plan) provides medical care for employees and their dependents either through insurance, reimbursement, or another method. You must be an employee of the company to be part of this group health plan.

The Cost of Recruiting

Certainly, tipping has its defenders, including servers who see it as a key part of their compensation. And a tacked-on charge can offend potential customers who bristle at the idea of an obligatory tip, regardless of the quality of service they receive. At Ruby’s, in Maine, Ms. Stum noted that one customer asked to have the 20-percent service fee taken off the bill, then added it back as a tip. Social Security tax is 6.2 percent of the taxable wages paid to each employee each year (up to $127,200 for 2017, a number that changes annually). The best payroll service, whether you’re looking for an app for your mobile device or a solution you can use on the computer (or both), your payroll company should prioritize making your payroll process as easy as possible.

• This means that wages are more than 40 percent lower in the restaurant industry than in other industries.
• If bartenders are significantly more expensive than servers, try replacing a bartender with two servers.
• Within all demographic groups, restaurant workers are significantly less likely to have either type of benefit than workers outside the restaurant industry.
• Figure B and Table 4 show that restaurant workers have substantially lower hourly wages than workers in other industries.

Younger workers (under age 25) and “prime-age” workers (age 25–54) in the restaurant industry are both highly likely to be poor or near-poor, with 41.1 percent and 46.5 percent, respectively, living below twice the poverty line. Among restaurant workers, poverty rates are significantly lower among workers in unions. While 43.1 percent of non-unionized restaurant workers live below twice the poverty line, the share drops to 30.3 percent for unionized restaurant workers.

Low Wages and Few Benefits Mean Many Restaurant Workers Can’t Make Ends Meet

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