Controlling and reducing labor costs can significantly impact a restaurant’s bottom line. Mastering the delicate balance between providing exceptional service and managing labor expenses is essential for success in the restaurant industry.
In this article, we’ll share 15 practical tips on effectively reducing labor costs in a restaurant. Let’s dive into it!
Serving food in a restaurant is just one aspect of the restaurant business, but a restaurant owner must combine culinary and business skills.
The biggest costs in running a restaurant are food costs, and labor costs are the second largest expense in running a restaurant. No one-size-fits-all solution will help reduce labor costs as the reasons for high costs may differ.
Perhaps you employ too many people for the amount of work? The reason might also be low employee retention, high overtime costs, inefficient scheduling, or undertrained staff that requires more time to perform tasks. Maybe you commit errors in tracking work hours which can lead to overpayment and increased labor costs?
Identifying the reason for high labor costs is a great starting point to significantly reduce labor costs. If you are wondering how to reduce labor costs, below we pointed out 15 tips on reducing and managing labor costs.
What are restaurant labor costs?
Restaurant labor costs encompass the financial commitments associated with compensating the workforce, including wages, benefits, and taxes, within a dining establishment. These costs constitute a substantial segment of a restaurant’s operational expenditures, encompassing remuneration for various roles like servers, bartenders, chefs, cooks, dishwashers, hosts/hostesses, and managerial positions.
Typically, restaurant labor costs encompass base wages, overtime pay, employee benefits (such as health insurance and retirement plans), and employer-related taxes (such as payroll taxes and workers’ compensation insurance).
Effective management of a restaurant’s labor costs is crucial for a restaurant’s financial health, as an imbalance with excessive expenses relative to revenue can diminish profit margins, while inadequate staffing levels may undermine the quality of customer service.
How to calculate labor cost percentage?
There are two ways to calculate your restaurant labor cost percentage:
- as a percentage of sales – in this case, you need to divide total labor costs by total revenue and multiply it by 100.
- as a percentage of total operating costs – in this case, you need to divide total labor costs by total operating costs and multiply it by 100.
What is a good labor cost percentage for a restaurant?
Ideal labor cost percentages vary among different types of restaurants. For instance, managing a full-service, fine-dining restaurant often leads to a higher labor cost percentage than operating a casual dining establishment.
What’s more, you need to remember that every restaurant has its distinctive operating costs and expenditures. A labor percentage that proves viable for one restaurant, enabling it to operate profitably, could potentially threaten another establishment’s financial sustainability.
According to Chron, restaurant labor cost percentages generally range from 25 % to even 40%. Quick-service and fast-food restaurants typically allocate approximately 25% of their revenue, while casual dining establishments have a higher labor cost percentage – usually between 25% and 35%.
On the other hand, fine dining restaurants tend to have even higher labor costs, typically falling in the range of 30% to 35%.
15 Ways to control and lower labor costs
Below you will find 15 tips that will answer the question of how to reduce labor costs in a restaurant and help you manage labor costs effectively.
Tip 1. Familiarize yourself with restaurant labor regulations
To ensure compliance with labor laws, it’s crucial to familiarize yourself with restaurant labor regulations.
Stay informed about minimum hourly wages and overtime rules, how often your employees should have a break during their shift, and how long it should last, and regularly review labor reports to maintain a legally sound and ethical workforce management strategy.
Tip 2. Schedule restaurant employees accordingly
Efficiently schedule restaurant employees based on anticipated customer demand to optimize labor resources. Ensuring appropriate staffing levels can improve service quality while reducing labor costs and managing them effectively.
Tip 3. Regularly review schedules
You need to review your schedules regularly to reduce a restaurant labor cost percentage. Don’t copy-paste the schedule from the last week. Take your time to analyze the situation and plan the work of your restaurant staff according to the demand for restaurant staffing optimization.
Tip 4. Create schedules according to sales forecasts
Designing schedules according to sales forecasts is crucial for effective staffing in a restaurant. It’s essential to base your decisions on data analysis rather than intuition. Analyze sales data to pinpoint busy nights and high-traffic times, enabling you to allocate staff resources optimally during those periods.
Thanks to this approach, you can have even fewer employees at the shift while ensuring you meet customer demand without overstaffing. Analyzing historical sales data and the sales forecast allows you to identify trends like specific days of the week or times when business consistently peaks.
Tip 5. Use labor management software
You can use restaurant scheduling software to facilitate reviewing and creating optimized schedules.
If your restaurant often doesn’t have enough staff, and you worry about covering all shifts properly every day, or, on the contrary, you schedule too many employees believing that it will improve customer service, but it turns out that some of your employees are getting bored as there is not enough work to be done, using a restaurant scheduling app can help.
This software is essential for ensuring you have enough staff and keeping things running smoothly in the restaurant business. Moreover, many restaurant scheduling programs include reporting and analytics tools that assist managers in monitoring restaurant labor costs and overseeing employee attendance and punctuality.
Tip 6. Use restaurant technology
The restaurant industry is constantly changing, and more and more technological solutions appear to facilitate restaurant management and improve its profits. Don’t ignore these trends and make use of restaurant technology solutions.
Introducing kitchen display systems (KDS) can improve kitchen efficiency and reduce preparation times, saving time and labor.
Implementing table ordering with QR codes reduces customer waiting time and lowers restaurant labor costs.
Tip 7. Recruit high-quality personnel
Hiring the right people for a restaurant is important. When you bring in talented and hardworking employees, they can make the customers happy, improve the overall dining experience, and create a pleasant work atmosphere. Look for the best people with the right skills and a positive attitude.
Tip 8. Cross-train employees
Hiring talented people is one side of the coin. On the other hand, you need to invest money in cross-training your employees. In the restaurant industry, employee cross-training is a valuable practice. It is about teaching restaurant staff to handle various roles and tasks, such as waiting tables, cooking, and bartending, beyond their primary responsibilities.
Staff cross-training boosts workforce flexibility, guarantees smooth operations during busy periods, and equips employees with a wider range of skills, leading to better customer service and increased operational efficiency.
Tip 9. Employ part-time help
Think of employing part-time workers in your restaurant. It is a good solution for many restaurants with more customers on certain days or evenings.
This may also apply, for example, to the holiday season, when more customers come to the restaurant. In that case, you can think of both part-time and seasonal employees.
If your employee suddenly gets sick, it is worth having some hourly employees who will be able to replace him on that day.
Consider what your restaurant needs when planning to use full-time, part-time, and seasonal workers in your staffing strategy.
Tip 10. Ensure job satisfaction among your team
A satisfied employee is an effective employee. Restaurant managers and owners need to consider how to ensure job satisfaction among their staff to manage a restaurant effectively.
How to do this? You can analyze who is bringing the most tips or is excellent in upselling to your guests and reward them for that.
You can also regularly talk with your employees about how they’re doing. Encourage them to share their thoughts with you, listen to them, and implement improvements. Everyone likes to be heard and see that their opinion matters.
Tip 11. Establish an adequate salary structure
We work to earn money, so restaurant owners must establish an adequate salary structure for their staff.
Commission-based salary can be a motivating factor for many employees. Consider introducing a fixed salary plus an additional commission that depends on an employee’s performance and the restaurant’s total sales.
Tip 12. Reduce employee turnover
Lowering employee turnover helps to reduce restaurant labor costs. Use some of the following strategies to help reduce restaurant labor cost percentage:
- Offer fair wages
- Provide employee benefits like health insurance, retirement plans, and paid time off
- Foster a supportive and respectful workplace culture where employees can communicate their concerns and feel valued and appreciated
- Invest in cross-training employees to help your staff improve their skills and advance
- Maintain open and honest communication with your staff
- Acknowledge and compensate for exceptional performance, whether by expressing appreciation verbally, offering incentives, or providing opportunities for advancement through promotions
- Conduct exit interviews to understand why employees leave and utilize this feedback to improve
Tip 13. Enhance employee retention
Enhancing the retention of employees is crucial for keeping labor costs at a stable level. One of the worst situations for a restaurant is hiring and training an employee who decides to change his job shortly thereafter. That’s why focusing on factors that will help restaurant owners retain employees for longer is important.
Competitive remuneration, a friendly atmosphere or rewards, and appreciation for the contribution to the growth of restaurant sales are just a few strategies that reduce the turnover rate among restaurant staff in the hospitality industry.
Tip 14. Minimize overtime hours
Overtime significantly affects the budget of every company. If you don’t monitor them closely, it may turn out that they significantly increase labor costs in your restaurant.
Of course, there may be situations when you need an employee to work overtime, and some employees will be happy to do so because they want additional earnings.
As a general rule, start monitoring overtime costs. Check out your labor report at least once a month (preferably once a week) to verify whether and how much you can save if there is no overtime in your restaurant.
Tip 15. Comprehend the full scope of prime costs
A restaurant’s prime cost typically refers to the combined expenses associated with two primary components:
- Cost of Goods Sold (COGS): it refers to the cost of purchasing and preparing the food and beverages served in the restaurant (including raw materials, ingredients, food preparation, and kitchen-related expenses).
- Labor Costs: it refers to all expenses related to compensating employees, including wages, benefits, and taxes.
To calculate the prime costs, you must add your costs of goods sold and labor costs. Now you can see what percentage of your restaurant’s prime cost is labor cost. Even if it’s high, it doesn’t necessarily mean you need to lower it.
For example, you can use ingredients more efficiently to lower prime costs without cutting employee hours.
You can also think about ways to use your staff more efficiently. For this purpose, you can use cross-training to teach employees additional skills that will help reduce labor costs
- Effective scheduling and monitoring of staffing levels are crucial for reducing restaurant labor costs while maintaining quality service.
- Cross-training employees to handle multiple roles fosters flexibility, reducing the need for excessive hiring and training expenses.
- Use technology for real-time monitoring of labor costs, allowing immediate adjustments to optimize labor cost percentage and minimize overtime.
- Restaurant labor cost percentage can be reduced by lowering the turnover rate among your staff.
- Implement automated time and attendance tracking systems to ensure accuracy and compliance, reducing labor cost errors.
- To reduce restaurant labor costs and enhance profitability in a restaurant, use technology solutions like self-ordering kiosks, online ordering systems, and QR code ordering.
Frequently Asked Questions (FAQ)
Labor costs in restaurant operations can be reduced through various methods that control labor costs while maintaining efficient restaurant operations. Below are five effective approaches:
- Optimize staff scheduling: Carefully plan employee schedules based on sales forecasts and historical data.
- Cross-train your restaurant staff: Train your staff to perform multiple roles and tasks.
- Minimize overtime: Set clear overtime policies and schedule breaks strategically to minimize the need for overtime work.
- Implement technology: Use restaurant management software and online ordering systems.
- Offer incentive programs: Implement incentives that reward employees for improved performance, cost-saving ideas, or meeting labor cost targets.
The five basic steps to controlling labor costs in a restaurant are
- Scheduling optimization
- Labor cost monitoring
- Staff cross-training
- Effective time management
- The review of labor cost management strategies and their adjustment
Reducing labor cost per unit involves optimizing your workforce’s efficiency to produce more output with the same or fewer labor hours. To achieve this, you can use the following strategies:
- Invest in comprehensive employee training to improve their skills and efficiency.
- Integrate automation and technology where feasible to reduce the manual labor required.
- Optimize staffing levels to ensure you have the right number of employees for the workload.
- Recognize and reward high-performing employees.
- Implement time-tracking systems and analyze employee work hours to identify areas where time can be better allocated or reduced.
- Regularly monitor your efforts to reduce labor cost per unit.
According to Chron, a restaurant labor cost percentage generally falls between 25 % to 40%.
However, as a general guideline, many restaurants target a labor cost percentage between 25% and 35% of their total revenue.
The two biggest expenses in a restaurant are usually
- The cost of goods sold (COGS): This includes what it costs to buy and make the food and drinks served in the restaurant. It covers things like the price of ingredients, cooking materials, and kitchen-related expenses.
- Labor costs: This means all the money spent on paying employees, including their wages, benefits, and taxes. It includes the staff who serve customers (like waiters) and those who work in the kitchen (like chefs).
For example, if a restaurant spent $10,000 on employee wages, benefits, and taxes in a month and served 5,000 meals simultaneously, you can find the labor cost per meal by dividing $10,000 by 5,000 meals.
The formula is as follows: Labor Cost per Meal = Total Labor Cost / Number of Meals Labor Cost per Meal = $10,000 / 5,000 Meals Labor Cost per Meal = $2
This means it costs the restaurant $2 in labor expenses for each meal they serve during that month.