What Are the Ideal Restaurant Labor Costs?
This summer, restaurants are projected to hire 525,000 extra workers to keep up with more people eating out. This is exciting news for the industry!
However, it’s important to be mindful of labor costs. Managing these costs well is crucial because if they get too high, they can quickly eat into your profits.
As summer ends and the demand changes, it’s essential not to overhire. Finding the right balance will help ensure your restaurant stays profitable.
So, what should your restaurant labor costs look like year-round? Let’s explore.
Components of Restaurant Labor Costs
Like any business, restaurants rely on people to get things done, whether it’s preparing ingredients, cooking food, serving customers, or washing dishes. These employees need to be paid and supported to do their jobs well.
When it comes to labor costs, there is more than just salaries to consider. Here are several key components:
- Salaries and wages: Your staff need fair pay, whether it’s hourly, daily, weekly, or at some other frequency. They also need to be paid for overtime work.
- Payroll taxes: These include payments for social security, Medicare, and other legally required taxes.
- Employee benefits: Good restaurants take care of their staff by offering health insurance, sick leave, vacation time, retirement plans, and other benefits that keep employees happy.
- Bonuses and incentives: Some restaurants provide quarterly incentives or rewards for top-performing employees. Others might share a portion of the restaurant’s earnings.
- Indirect costs: These include uniforms, hiring and training expenses, and any tools or resources your employees need to do their jobs well.
Sales or Operating Cost: Which Should You Base Your Labor Cost Percentage?
Restaurant owners don’t usually set a fixed amount for labor costs. Instead, they often calculate labor costs as a percentage of total sales or the cost of goods sold (CoGS). Some even base it on operating expenses.
So, which method is best?
Sales-based labor cost percentage
Most restaurants figure out their labor cost percentage by dividing labor costs by total sales.
For example, if a casual dining restaurant makes $400,000 in sales each month and spends $90,000 on salaries, taxes, benefits, and other labor costs, you divide $90,000 by $400,000 to get 0.225 or 22.5%. So, the restaurant spends 22.5% of its sales on labor.
Operating cost-based labor cost percentage
Some prefer to calculate labor costs based on operating expenses, which can include lease payments, inventory costs, research and development, and marketing.
Using the same example, if the restaurant spends $250,000 each month to operate, the labor cost percentage would be 36% ($90,000 ÷ $250,000 = 0.36; 0.36 x 100 = 36%). This method usually results in a higher percentage than the sales-based approach.
The good news is that you can use either method to see how much your restaurant spends on labor. Choose the one that makes the most sense for your business.
So, What’s the Ideal Restaurant Labor Cost?
Before the pandemic, US restaurants typically spent between 28.9% and 33.2% of their revenue on labor. During the pandemic (2020-2022), these numbers dropped but have since stabilized between 20% and 30%.
However, it’s important to note that some restaurants may have higher labor costs, sometimes reaching 40% or more.
Here at U-Nique Accounting, we recommend staying around the 30% mark to ensure healthy profit margins.
What Influences Restaurant Labor Costs?
Although restaurants spend, on average, around 31.6% of their sales on labor costs, the actual figures can vary based on several factors:
Restaurant type
- Quick-Service (Fast Food): These places usually spend 25% to 30% of their sales on labor. They can operate with minimal staff since there’s no need for wait staff or specialty roles.
- Casual Dining: Similar to fast food, casual dining restaurants also allocate 25% to 30% of their sales to labor.
- Fine Dining: Fine dining restaurants aim for a perfect dining experience, requiring well-dressed, professional staff and multiple roles like reservations officers and floor managers. Their labor costs can be between 30% and 40%.
- Standalone Bars: Bars have the lowest labor costs, around 18% to 24%, as they usually only need a bartender and a few assistants.
Location
Restaurants in city centers or areas with high living costs typically have higher labor costs. Minimum wage laws and the cost of living impact these percentages, and poor labor cost management can hurt revenues.
Staff scheduling
As we mentioned earlier, seasonal changes can impact your labor costs. For example, during the summer, you need more staff during busy times to handle more customers. But if you keep the same number of staff during slower times, it can cost you more than you earn. Make sure to adjust your staffing based on how busy you are to keep costs under control and stay profitable.
Need more help balancing your restaurant labor costs?
In short, restaurant owners and their accountants need to understand that labor costs are not just random numbers but a reflection of how well they manage their restaurant. Although labor costs can vary based on the type of restaurant, location, and scheduling, aiming for 25% to 40% of total sales is ideal.
Here at U-Nique Accounting, we help restaurant owners get a handle on their margins, including restaurant labor costs. If you need help dialing in your labor costs or managing other financial aspects of your restaurant, we’re here to help. Simply head over to our Getting Started page to book your first introductory call.
Until next time!
By MATT CIANCIARULO
