How to Calculate Restaurant Labor Cost
Understand and accurately calculate your restaurant's labor costs to improve operational efficiency and financial health.
Restaurant labor cost represents the total financial outlay a restaurant commits to its workforce. This figure encompasses more than just employee wages, extending to various associated expenses. Understanding and meticulously tracking this cost is fundamental for restaurant operations, as it directly impacts profitability and overall financial health. It stands as one of the most substantial expenses for many establishments, making its effective management crucial for sustained success.
Elements of Restaurant Labor Cost
Calculating the comprehensive labor cost requires accounting for all expenditures related to employees. This begins with direct compensation, including hourly wages for staff such as servers and kitchen team members, as well as fixed salaries for management and administrative personnel. Overtime pay, which is typically calculated at 1.5 times the regular hourly rate for hours worked beyond 40 in a workweek, also forms a significant part of this direct cost.
Beyond direct pay, employee benefits contribute to the total labor expense. These benefits include employer contributions to health insurance plans, paid time off (such as vacation days, sick leave, and holidays), and retirement plan contributions like those made to 401(k) plans. Paid time off also represents a cost, as employees are compensated during periods of non-work. Bonuses and incentives paid to staff are also included in this category.
Employer-paid payroll taxes constitute another mandatory component of labor cost. These federal taxes include Social Security and Medicare contributions, collectively known as Federal Insurance Contributions Act (FICA) taxes. Employers contribute 6.2% for Social Security on wages up to an annual limit, and 1.45% for Medicare on all wages. Additionally, employers pay Federal Unemployment Tax Act (FUTA) taxes. State unemployment taxes (SUTA) are also required, with rates varying by state and employer history.
Collecting Labor Cost Data
Accurate calculation of restaurant labor costs relies on systematically gathering specific financial data for a defined period, such as a week, month, or quarter. Hourly wage data is sourced from timekeeping systems, which record employee clock-ins and clock-outs. Modern systems often utilize biometric scanners, mobile applications, or digital punch clocks, ensuring precise tracking of hours worked. These systems can integrate directly with payroll software, streamlining the calculation of total hourly wages.
Information regarding salaries, employee benefits, and bonuses is retrieved from payroll records maintained by the restaurant or its payroll service provider. These records document fixed salary payments, employer contributions to health insurance premiums, paid time off accruals and usage, and retirement plan contributions. The specific costs associated with each benefit, such as monthly premiums or accrued leave values, must be extracted for the chosen period. Employer-paid payroll taxes are also found within these payroll records or accounting software.
In addition to labor-related figures, collecting corresponding total sales data for the exact same period is essential for subsequent analysis. This sales information is available through the restaurant’s point-of-sale (POS) system. Maintaining consistency in the time frame for both labor costs and sales data is critical to ensure a meaningful and accurate comparison. This data forms the foundation for determining the total labor expenditure and evaluating its relationship to revenue.
Determining Total Labor Cost
Once all necessary data has been gathered for a specific period, the next step involves aggregating these figures to arrive at the total labor cost. Wages, encompassing both hourly pay and fixed salaries, form the primary element of this summation. This includes regular and overtime compensation paid during the selected timeframe.
Employee benefits, including health insurance, paid time off, and retirement plan contributions, are then added to the wage total. Bonuses and other incentives also contribute to this sum. Finally, the employer’s share of payroll taxes must be included, covering Social Security, Medicare, and federal and state unemployment taxes.
The total labor cost for the period can be represented by the formula: Total Labor Cost = Total Wages (Hourly + Salaried + Overtime) + Total Employee Benefits (Health Insurance, PTO, Retirement, Bonuses) + Total Employer Payroll Taxes (FICA, FUTA, SUTA). This figure represents the restaurant’s investment in its human resources for the chosen operational cycle. It is a crucial input for further financial analysis and performance measurement.
Calculating Labor Cost as a Percentage of Sales
After determining the total labor cost for a specific period, the final step involves expressing this cost as a percentage of the restaurant’s total sales for that same period. This calculation indicates how much of every sales dollar is allocated to labor expenses. The formula used is: (Total Labor Cost / Total Sales) x 100. For instance, if a restaurant’s total labor cost for a month was $20,000 and its total sales were $80,000, the labor cost percentage would be 25%.
The resulting percentage measures labor efficiency relative to revenue generation. It allows restaurant operators to compare their labor spending against industry benchmarks, which often range from 20% to 35% of gross sales, varying by restaurant type. A higher percentage might suggest areas for optimizing staffing or scheduling, while a low percentage could indicate understaffing. This metric empowers management to make informed decisions about staffing levels, pricing strategies, and operational efficiency.