For many restaurants, labor is the single largest expense category. The average labor cost for a financially sustainable restaurant is 30 to 35 percent of gross sales, with 20 percent going to pay wage-earning staff such as servers and an additional 10 to 15 percent going to pay salaried workers such as managers. Manage restaurant labor costs carefully, but don't cut back on quality for the sake of saving payroll dollars or you'll end up losing valuable customers.
Calculating Labor Costs
The sum that your restaurant spends on labor can best be understood and assessed in relation to the amount of money it takes in overall. $1,000 per week in labor costs makes sense for a restaurant that grosses $3,000 weekly, but it is too high for a restaurant that grosses $1,500 per week. To calculate labor cost percentage for a specific period, divide the labor cost during that time by gross sales during the same time period.
Fixed and Variable Costs
Restaurant labor seems at first glance to be a variable cost, or one that fluctuates in direct relationship to business volume. The more customers your restaurant serves, the more staff you need on the floor to serve them. However, restaurants also incur fixed labor costs -- sums that must be paid regardless of sales volume. Restaurants must maintain a skeleton staff to be ready to serve walk-in customers even on days when there aren't enough customers to justify the base payroll costs. Managers may trim payroll hours by sending home idle workers, but some workers must remain ready to serve even on the slowest days.
Managing Labor Costs
Manage restaurant labor costs by tracking slow and busy times, and by cutting back on staffing levels during hours and days when you typically serve the fewest customers. Cross-train employees so they can perform multiple tasks, such as prep and dishwashing, eliminating the need to pay two workers during times when you only need one. Develop efficient systems for prep and service by streamlining processes, eliminating redundancies and cutting expensive and time-consuming waste.
Labor Costs in Perspective
A restaurant can survive with high labor costs if other expenses are low enough to compensate. Labor-intensive business models, such as freshly rolled pasta or artisan crepes, may require extra staffing, but your restaurant may be able to make up for the added expense by purchasing ingredients shrewdly or paying less than the industry average in rent. Alternately, your business may sell enough in volume to make ends meet despite a high labor cost percentage.
Devra Gartenstein founded her first food business in 1987. In 2013 she transformed her most recent venture, a farmers market concession and catering company, into a worker-owned cooperative. She does one-on-one mentoring and consulting focused on entrepreneurship and practical business skills.