How to get (and stay) on top of your restaurant labor costs

As a restaurant operator, you know all too well that there are some things you have little or no control over. Sure, costs like rent, utilities, and insurance are fairly predictable. However, many factors can still make your overall costs harder to control. Food costs, supply chain disruptions, and regulatory changes are all common culprits. 

No wonder restaurateurs of all types take restaurant labor costs so seriously—whether they operate quick-service restaurants, chains, or other types of restaurants.

Of course, learning how to get (and stay) on top of labor costs takes a clear understanding of how they work. Not to mention the will to adjust key factors that can impact your restaurant’s bottom line. 

No one-size-fits-all: Labor cost percentages can (and should) vary

Despite the variety and volume in the restaurant industry, there are generally accepted ranges for a “good” labor cost percentage. However, what’s good for the restaurant down the street may not be a good labor cost for you—a lot depends on the type of restaurant you run, its location, and your business model. 

For example, labor cost percentages for full-service restaurants often fall between 30% and 35% of total revenue. This includes front- and back-of-house staff. By comparison, quick-service restaurants (QSRs) and fast-food chains typically run more streamlined operations. This means lower staffing needs and, by extension, labor costs between 25% and 30% of total revenue.

Source: Upserve.com

Casual dining restaurant business models usually fall somewhere between full-service and QSRs, ranging from 28% to 32%. And for fine dining, where higher staff-to-customer ratios enable more personalized service, labor costs can sometimes exceed 35%.

Ranges aside, though, some common factors influence the ideal labor cost percentage in each type of restaurant:

• Service model: As mentioned, higher service levels typically mean higher labor costs.
• Location: Labor costs can also be higher in areas with a higher cost of living (e.g., Manhattan, Honolulu, San Jose, etc.) or where minimum wage laws are stricter.
• Menu pricing: Restaurants that offer higher-priced menu items can sometimes afford higher labor costs since they, in theory, generate more revenue per customer.
• Operational efficiency: For all types of restaurants, well-managed scheduling, employee cross-training, and keeping overtime to a minimum helps owners keep their labor costs within the ideal range.  

Are you calculating your restaurant labor costs correctly?

Crunching the numbers to calculate your restaurant labor cost doesn’t have to be complicated. Here’s how you can do it in five simple steps.

1. Round up your labor cost data

For a specific time period—weekly, monthly, or yearly—total the following numbers up to determine your restaurant’s overall labor costs:

• Gross wages: Include hourly wages, salaries, and overtime pay for all restaurant employees.
• Payroll taxes: Include social security, Medicare, and all other applicable taxes.
• Employee benefits: Include health insurance, any retirement contributions, and paid time off.
• Miscellaneous costs: Include additional costs, such as for uniform rentals and cleaning, staff meals, or any other employee-related expenses.

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2. Determine your total revenue

With total labor costs established, determine what the restaurant’s total revenue was during the same period of time. This amount will be your total sales, also referred to as gross revenue.

3. Calculate your labor cost percentage

Next, plug these two amounts into a simple formula to determine your labor cost percentage:

([Total labor costs] / [Total revenue]) x 100 = Labor costs %

For example, let’s use some reasonable monthly amounts for an average-sized Chinese restaurant:

([Total labor costs ($10,500/mo.)] / [Total revenue ($35,000/mo.)]) x 100 = 30%

4. Analyze, then adjust

With your labor cost percentage in hand, compare it to benchmarks like those mentioned earlier. If the percentage is too high, consider your options for cutting costs. (We’ll share some more specific tips shortly.) 

On the flip side, labor cost percentages way below restaurant industry benchmarks often signal operational issues worth addressing. These could include underpaying team members or understaffing your restaurant, just to name a couple of potential problems. 

5. Monitor over time

Finally, and perhaps most importantly, monitor labor costs over time to ensure they stay within an acceptable range. Keeping an eye on your profit margins is a key part of succeeding in the restaurant business, so you’ll want to make sure your total operating costs aren’t cutting into them. 

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3 ways to keep your restaurant labor costs under wraps

1. Optimize scheduling and forecasting

Do your employee’s work schedules match your restaurant's demand? If you're overstaffed during slow periods or understaffed during busy times, your labor costs will spiral out of control before you know it. Overtime costs will start piling up, and poor customer service may even become an issue and hurt your revenue. 

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By using historical data, trends, and predictive analytics to anticipate busy and slow periods, you can schedule the right number of staff at the right times.

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To start learning from your historical metrics, gather your past sales data, customer traffic patterns, and peak hours unique to your restaurant. The following can be great sources of info to help you spot key trends:

• Your point of sale (POS) system: Ensure your POS system is set up to track and record detailed sales data, including timestamps for each transaction.
• Customer traffic counters: Install traffic counters at entrances to track the number of customers entering your restaurant at different times of the day and week.
• Manual tracking: If your restaurant is new or smaller and has limited data, start manually recording customer counts, sales, and other relevant metrics at different times.

Having accurate and organized data is the foundation for identifying meaningful trends that can help you make smart financial decisions.

From there, data analysis tools can help you see patterns in sales and customer traffic. Many POS systems in the restaurant industry have these tools built-in and often allow you to break data down by day of the week, time of day, and even specific menu items to understand when and why certain periods are busier or slower. Some tools even allow you to visualize this info via charts and graphs, making it even easier to spot trends.

No matter the tools you use, though, just be sure to compare the trends you identify with external factors. Things like local events, weather conditions, and any marketing or promotions you’re running.

Once you’ve got the whole picture, adjust staffing accordingly.

Example: What scheduling optimization might look like

The owners of Don Pepperoni’s Pizzeria notice that Fridays consistently have a higher volume of pickup orders. While many restaurants experience an uptick in business on weekends, Don Pepperoni’s owners go a step further by analyzing the specific patterns in their Friday business. This insight allows them to make mission-critical adjustments:

First, they up the number of back-of-house staff on Fridays, particularly from late afternoon through early evening, when demand is highest. That way, they’re ready to handle the increased volume of orders without overwhelming the kitchen staff.

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Additionally, they prioritize having part-time or on-call staff available to step in during peak pickup hours. This strategy provides the flexibility to manage sudden surges in orders without the financial burden of hiring additional full-time employees.

2. Dial in overtime

True, your employees may sometimes need to work extra hours. But cracking down on unnecessary overtime is a great way to lower your restaurant labor costs.

Plus, excessive overtime can burn out even the most dedicated employees. This means lower productivity and higher turnover so it’s in everyone’s best interest for you to keep tabs on OT. Where should you start?

First, define what overtime counts as overtime, and what doesn’t. Then, communicate this policy to all managers and employees (especially new employees). Make sure you’re clear—overtime should be avoided unless absolutely necessary and approved by a manager or you, the restaurant owner.

Second, when doing employee scheduling, align schedules with your demand forecasts to reduce the need for OT. Additionally, try to avoid scheduling the same employees for long shifts multiple days in a row.

Then, track overtime in real time using employee scheduling software. Some core features to look for include:

• Accurate time tracking: An accurate record of when employees clock in and out will ensure they get paid for the exact hours they work while helping you maintain a good labor cost percentage.
• Enhanced payroll integration: It’s helpful to be able to automate the transfer of logged hours to payroll processing, both to prevent human error and to make your life simpler.
• Productivity insights: If you know how each employee spends their time across various tasks, it’ll be much easier to optimize their workflows and efficiency, which will ultimately lower labor costs.

In addition to tracking time and overtime to improve your scheduling, a couple of other things can be helpful. One is cross-training employees so that you can use front- and back-of-house employees fully. Another is adjusting staffing levels as needed or redistributing workloads to minimize the need for overtime in the long run.

Example: Managing overtime in practice

Sunny Side Café is a popular brunch spot in a busy neighborhood. Maria, the owner, notices that her payroll expenses have been higher than expected over the last few months and realizes that several employees are regularly working overtime.

First, Maria establishes a new policy that overtime must be approved in advance by management and is only allowed under specific circumstances. She communicates this policy clearly to all her staff. She then installs a time-tracking system that alerts her when employees are nearing their scheduled hour limits. This gives Maria time to adjust scheduling to make sure she has enough staff during peak hours without relying on overtime. More specifically, she decides to increase staffing on weekend mornings but reduce it slightly in the afternoon when the café is less busy.

Maria also decides to reduce her reliance on a few key staff members. To do so, she cross-trains her baristas and servers to handle both roles. This way, if one barista calls in sick, a server can step in without causing another employee to work overtime.

3. Outsource non-core functions

A third way to control restaurant labor costs is outsourcing some of your non-core functions. That way, your full-time employees can focus on the tasks where they’ll be most useful rather than juggling a million lower-priority to-dos.

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What aspects of restaurant operations can you safely outsource? The answer lies in making sure you have a crystal clear understanding of the functions that you do and don’t need to have total control over. 

• Core functions: Any task linked to the primary purpose of your restaurant—making and serving food. This includes things like menu planning, food preparation, cooking, and kitchen management.
• Non-core functions: Important tasks that support your business but are not directly tied to your core mission—think payroll, cleaning, making deliveries, and marketing. (Though customer service overall is a core function, even taking phone orders can fall into the non-core bucket since busy phone lines leave your front-of-house staff a lot less time to deliver great service to customers in the restaurant and handle other important tasks.) 

Once you’ve identified your non-core functions, do a cost vs benefit analysis to see which ones you could outsource to lower labor costs. Calculate the costs associated with keeping the task in question in-house, including related salaries, benefits, training, and management time. Compare this total with the cost of outsourcing, including fees, service charges, and any additional costs such as contract management. If outsourcing is significantly cheaper and quality can be maintained, go for it! 

Example: Enlisting help to boost efficiency and control labor costs

June owns Exotic Blossom, a small, family-owned Chinese restaurant. She’s been feeling the effects of rising labor costs, which are now threatening to increase even more. 

It’s hard enough for her son—June’s one front desk employee—to juggle taking orders from customers in person, packing takeout orders, and handling payments. The phone ringing off the hook only makes things harder. 

Customers are sometimes left waiting at the register while her son answers the phone. Plus, Exotic Blossom misses out on many orders when the phone line is busy and when no one is available to answer. But June doesn’t want the expense of hiring another employee to help at the front desk. 

She decides to try Tarro Phone Ordering, which gives her access to a team of AI-powered agents trained to take calls specifically for her restaurant. With an industry-best order accuracy rate of 99.5%, they can handle even the most complex orders and the most tricky calls. 

Tarro customers typically see 5% to 10% decreases in labor costs, along with revenue increases of 10% to 20%. June’s case is no different. She’s finally able to keep her labor costs under wraps, while also earning more new and repeat customers. 

Cut your labor costs while maintaining customer experience

You can’t control all the costs that come with running a restaurant. But you can absolutely take control of labor-related expenses.

While optimizing scheduling and limiting overtime are effective good to do this, they can be time-consuming tasks in themselves. In contrast, in-house restaurant technology like Tarro can save you time (and spare you many headaches!).

For instance, both our phone ordering system and delivery service scale up and down with demand. When your restaurant is at its busiest, there will always be an order-taker or delivery driver ready to offer exceptional customer service—24/7, 365 days a year. And, during slower times, you won’t be paying an hourly employee to sit by the phone or wait for the next delivery request.

Curious how Tarro can take much of the hassle of scheduling front-of-house staff and streamlining delivery operations off of your plate? Learn more about our solutions or request more info today!

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