Restaurant Labor Cost Formula: Complete Guide

Running a restaurant is hard work. One of your biggest headaches involves managing labor costs. Runaway labor expenses can eat away at your profits and leave you in a cash crunch. 

If you’ve ever looked at your payroll numbers and thought, “This seems way too high,” you’re not alone. Most restaurant managers have felt this pressure, too. 

But here’s the good news. There’s a clear, simple way to calculate and adjust your labor costs. Once you know how to use the restaurant labor cost formula, you can take control of your schedule. Here’s how.

What are the most common restaurant labor costs?

Labor costs are all the expenses tied to paying your employees. When you think about it, this includes more than just wages. Here’s a breakdown of common labor cost categories in the restaurant industry:

• Hourly wages and salaries: The base pay your team earns 
• Overtime pay: Time-and-a-half or double time for employees working extra hours 
• Payroll taxes: Social Security, Medicare, and unemployment taxes 
• Employee benefits: Health insurance, retirement contributions, and paid time off 
• Training costs: Time and money spent onboarding your team 
• Scheduling mistakes: Overstaffing during slow shifts or forgetting to cut staff

Sometimes, restaurant managers forget to include taxes or benefits in their cost estimates. 

What percentage should labor costs be in a restaurant? 

Your labor costs should be around one-third (33%) of sales. If you can get this figure lower, you’ll have more room to generate a profit. On the other hand, if your labor costs are significantly higher than your sales, you’ll find yourself in a cash crunch. 

Restaurant labor cost formula and 3 examples

The restaurant labor cost formula is:

This tells you what percentage of your revenue is going toward labor. Again, you want one-third or less of your revenue to go toward labor expenses. Here are three quick examples to demonstrate how you can use this formula. 

Example 1: A slow Monday

Restaurants are known for having slow and busy days. Suppose that you just wrapped up a super slow Monday and want to know your labor costs. Here’s what that might look like:

• Total labor costs: $750
• Total sales: $2,000

This number is higher than the average. It could mean you were overstaffed or sales were lower than expected. Either way, it’s worth a closer look. 

Example 2: A busy Friday night

Slow nights can increase your labor cost percentage. On the other hand, busy shifts can swing the numbers in the other direction. Suppose that your team had a busy Friday night and racked up the sales:

• Total labor costs: $1,200
• Total sales: $6,000

If you can consistently keep your labor costs below the 33% threshold, you’ll be in good shape. 

Example 3: A training day

Investing in your team is important. While paying to train new hires will deliver long-term benefits, you still need to count the costs. Here’s an example using the restaurant labor cost formula:

• Total labor costs: $1,000 (including new hire training)
• Total sales: $2,500

Training is important, but it comes at a cost. Tracking your restaurant labor cost in all situations helps you make the best decisions about when and how to train your staff. 

How calculating labor costs can help your restaurant’s bottom line

Once you start using the restaurant labor cost formula to track your labor expenses, you can do the following: 

Spot scheduling inefficiencies

Tracking labor costs helps you identify patterns. Suppose that Tuesday is your slowest day, and your percentage of labor costs is consistently too high. In that case, you may want to adjust your staffing levels on Tuesdays. 

Improve labor forecasting

Once you understand your labor costs, you can decrease them through accurate forecasting. Forecasting is all about identifying how many employees you need for each shift. Cut back during slower times and add staff during busy periods. 

Make better business decisions 

Perhaps you’re thinking about expanding hours or adding a new menu item. Knowing how labor costs affect your margins helps you decide whether that move is worth it. Numbers give you confidence. They take the guesswork out of managing your restaurant. 

How to use automated software to calculate restaurant labor costs

Manually calculating labor costs every day or week takes time. You don’t have that kind of time when you’re running a restaurant. With the right back office software, you can effortlessly calculate restaurant labor costs. Here’s how: 

Step 1: Set up your schedule

Remember, there is a right way and a wrong way to schedule restaurant staff. Software like When I Work helps you build smarter schedules faster.

Once you sign up, build your schedule. You can build shifts by role, skill level, or availability. When I Work has drag-and-drop tools to make this process simple. After you’ve input your people and built a template, you can automatically create future schedules in When I Work. 

Step 2: Use time clock tracking

When I Work has a built-in time clock. It tracks employees’ hours in real time. They can clock in via our user-friendly mobile app. 

Worried about employees abusing this feature? Don’t be. You can set up a geofence to make sure team members are on site before clocking in. 

Step 3: Review labor costs vs. sales

Check the built-in reports that compare labor hours and cost to sales. You’ll know exactly when you’re hitting the target. You can also pinpoint which shifts had excessive labor costs. Look for trends and make targeted changes to boost your bottom line. 

Step 4: Communicate with your team

Need to adjust a shift or swap roles? Use team messaging to chat with employees right inside the platform. You can also use the messaging feature to cut staff members when the restaurant is slow. Make changes dynamically to reduce labor costs. 

Discover and cut your restaurant labor costs with When I Work

Ready to automate scheduling and cut your labor costs? When I Work employee scheduling software provides real-time visibility into your labor expenses and staffing needs. 

When I Work is packed with tools to make your life easier. The time clock accurately tracks all labor hours. The result is better control over your labor expenses. The built-in messaging tool helps you keep employees in the loop, make cuts, and ensure your restaurant is staffed appropriately. 

Sign up for a free trial of When I Work today!