Your Ultimate Guide to Reducing Restaurant Labor Cost

If you have ever scheduled lots of front-of-house staff members for a shift at your eatery, you might think about reducing restaurant labor costs by sending employees home early. On the one hand, this solution makes sense. But on the other hand, it is just a short-term one - you still need to take a strategic approach to control labor costs to prevent long-term damage to your revenue.

Besides, the Executive Order raising the minimum wage to $15 for Federal Contractors has affected the restaurant industry. Restaurant owners are now more concerned about their business' labor cost percentage.

In this guide to managing labor costs, we have got you covered.

What is restaurant labor cost?

Restaurant's labor costs mean the overall costs that a restaurant business spends on its employees, including:

- Hiring

- Training

- Hourly wages

- Overtime pay

- Bonuses

- Paid sick days and time off

- Employee uniforms

- Employee healthcare

- Payroll taxes

- Other perks such as travel and housing.

Total labor costs are part of prime cost known as the sum of total employee cost and cost of goods sold (CoGS). Businesses in the hospitality industry usually determine their efficiency using prime cost.

The importance of efficiency in restaurant labor costs

1. Higher popularity of online ordering and delivery

This convenient order fulfillment service brings lots of benefits. Nevertheless, it also leads to more intense competition between eateries and a potential rise in labor costs if you are meant to keep up with demand by hiring more employees.

2. Changes in mindset

More and more people prefer working from home. Where Covid-19 made it acceptable, the sustainability of this working model is attributed to government subsidies.

Average labor costs by restaurant type

Source: BDO

- Quick service restaurants and casual restaurants: Lower labor cost percentage (about 25% of gross revenue)

- Table service restaurants: Higher labor cost percentage (around 30-40%)

- Fine dining restaurants: The restaurant's labor cost percentage is on the higher scale (likely going up to 40% or even higher)

How to calculate labor cost percentage in your restaurant business

1. What is the restaurant labor cost percentage?

As a percentage of sales, labor cost percentage means how much you spend on labor costs compared to the gross sales in a particular time period.

2. How to calculate labor cost percentages

There are two ways of calculation:

- Employee cost as a percentage of total sales = Total employee cost / Total sales x 100

- Employee cost as a percentage of operating costs: Total employee cost / Restaurant's total operating costs x 100

3. How to calculate your CoGS

Again, to determine your restaurant's prime cost (that is ideally no more than 60% of total sales), you need to learn about not just your labor costs but also the total CoGS. CoQS is the amount spent on the ingredients and items for creating your menu’s dishes and beverages. Here is the formula for calculating CoGS:

COGS = Beginning inventory + Purchases – Ending inventory

How to reduce restaurant labor costs

1. Create a clear workflow

This involves:

- Group each worker according to rank for enhanced efficiency and a clearer duty delineation. You may use a Top-Down approach to streamline operational flows. It is the decision-making process happening at the highest level before being communicated to the staff members.

- Ranking each task based on value. Pay attention to key positions where you get to put fail safes in place. Also, ensure that no one becomes the only point of failure in operating your business.

2. Monitor your restaurant labor costs

Tracking employee costs regularly helps you define when they are getting too high. This enables the ability to find the problem areas and timely take informed decisions to lower restaurant labor costs. What is great is that a suitable point-of-sale (POS) system can make this process more efficient and effective.

3. Reassess your staffing needs

Think about your specific needs when developing a staffing strategy for using season, part-time, and full-time workers.

Full-time restaurant employees can be more costly owing to the requirement to offer them additional benefits. Still, should you be a small business with no more than fifty employees, these requirements may not apply to you. Either way, having at least one full-time staff in key positions can help, particularly with handling high turnover or training other workers.

Speaking of part-time employees, you will especially need them during a busy weekend and when sick days and holidays roll around. Seasonal staff can also be a cost-effective way to accommodate your human resources needs during hectic seasons.

4. Have a well-trained workforce

Often, more trained employees perform better, which decreases the number of work hours and has things done faster. This would ultimately increase your restaurant’s operational efficiency and reduce labor costs.

Besides, cross-training your employees is recommended to improve their productivity. Train every staff to do multiple tasks so that they can be of help wherever needed.

Here are other ways to create a more efficient team:

- Build steps of service

- Hold regular staff meetings to relay pertinent changes

- Conduct regular employee reviews.

5. Use restaurant technology and automation for controlling labor costs

One2's ordering system helps lower labor costs.

Automating specific tasks has substantially decreased the need for human interference, reduced errors, and increased service speed and customer satisfaction. Some highly rated technologies include:

- Online ordering and fulfillment system

- POS system that makes sales and instructions for servers more specific and accurate

- Restaurant analytics software that helps with measuring KPIs (Key Performance Indicators)

- Automated marketing that makes for marketing staff workload reduction

It is important to address that all of these technologies with benefits are made accessible in the true turnkey technology solution One2. This menu management and ordering platform should help you:

- Increase bottom-line revenue

- Afford to offer pay raises for your employees

- Improve employee retention.

6. Schedule your restaurant staff properly

A few tips in this regard include:

- Schedule fewer employees on each shift to avoid overstaffing and strike a fine balance

- Consider scheduling staff depending on a sales forecast (slowest sales day, dinner rush, etc.)

- Embrace the split shift.

7. Avoid overtime pay wherever possible

If not monitored, overtime can rapidly eat away at your eatery’s labor budget. Here are some tips in this sense:

- Check the labor report once a month or once a week for overtime calculations to figure out any chances for reducing these costs in the future

- Ask your restaurant staff to clock in and out within certain time windows.

8. Keep your employees happy

The foodservice industry is notorious for its high rate of employee turnover, coming with staggering costs of $5,000 per worker they turn over. However, you can tackle this with a strategic hiring and retention strategy:

- Hire smart by searching for quality candidates

- Foster a positive work culture

- Develop clear lines of communication

- Manage staff workload to help them become more productive in their positions

- Allow for work flexibility

- Provide better growth opportunities

- Create a clear staff welfare policy.