The restaurant industry is full of business entities and contributes to almost every niche market. It serves millions of people daily, resulting in a high labor cost across the board.

According to recent reports, there are over twelve million people who work within the restaurant and food services industry. With this in mind, the cost of labor across the industry group is extremely high. This ecosystem is only growing from here, too. 

The labor cost will make up a large portion of your operating expenses. To sustain a high restaurant profit margin, every business owner and restaurant manager must understand this metric and its formula. Are you ready to get started?

This blog will cover everything you need to know, from the cost of labor formula to how restaurants can reduce this expense. Read on! 

Cost of Labor: Definition

The cost of labor in a business consists of the expenses of employees. This means that the more staff members a business employs, the higher the labor cost will be. 

Keep in mind that there are many variables that make up the cost of labor. In fact, they extend far beyond the salaries. Some of the most popular parts of the labor cost include payroll, benefits, and taxes. 

In exchange for work and expertise, every business must incur some kind of labor cost. Depending on the business, industry, and employees, this expense can drastically differ from one company to the next. Just ensure that the team you invest in produces results. 

Labor Cost Calculator

Sometimes, it's much easier to use a calculator to estimate various expenses. If you're not using spreadsheet formulas or doing the math by hand, we suggest you use a labor cost calculator. It'll be much easier and provide you with accuracy. 

For your convenience, here are three online calculators that are completely free to use:

1. Quickbooks Cost Calculator 
2. Gusto Labor Cost Calculator
3. Jobber Labor Cost Calculator

If you're not using accounting software, keep one of the above resources on hand. That way, you'll be able to calculate labor expenses as needed. 

How to Calculate Labor Cost 

If you're wondering how to calculate labor cost with a calculator, we've got you covered. To begin, you'll need to have access to a few different metrics. First, you'll need to know how many staff members you employ. Then, you need to know how much money each one gets paid and how many hours they work each week.

Labor Cost Formula 

Calculating the labor cost of your business is simple. Just find the sum of all employee-related costs on a weekly or monthly basis. However, finding the cost of labor percentage is a bit more insightful. This figure refers to employment costs compared to gross sales. 

Once you have all employee-related costs on hand, it's time to calculate labor cost as a percentage of total operating expenses. Use the following formula to find your answer:

Labor Cost Percentage = (Total Labor Cost / Total Operating Costs) x 100 

Calculating the cost of labor percentage relative to sales is just as important for budgeting and strategic efforts. To get this figure, use the following formula:

Labor Cost Percentage = (Total Labor Cost / Total Sales) x 100

Want to make calculations even easier? Log both of these formulas into their own column on a platform like Microsoft Excel or Google Sheets. This way, you can continuously add and adjust data about your staff, while the platform does the bulk of the work for you. 

Restaurant Labor Cost Components 

Labor is a vital component of restaurant management and customer service. The staff that business owners employ and the work they accomplish directly correlates to the restaurant’s success. 

To no surprise, labor will have the greatest impact on customer satisfaction. This means that no matter how you choose to manage the cost of labor, ensure that you’re putting customer satisfaction first. 

When restaurants establish ways to be more productive and efficient simultaneously, it translates to the customers. Shockingly, there are ways that innovative restaurant technology can enhance both of these factors. 

Proper labor cost management is also vital to cost savings in general. The cost of labor can be a massive expense for restaurant owners. Though it might seem that growing the team is ideal for long-term growth, it can quickly hinder its success if the demand isn't there. 

With this in mind, carefully consider unit economics and employment costs. You might find that by implementing tools rather than more team members, the business can sustain exponential growth. 

If you wish to achieve restaurant success, ensure that you make smart decisions when it comes to labor. To clarify, a restaurant’s labor cost will likely consists of the following roles: 

• Managers 
• Dishwashers 
• Host and hostess
• Waiters and waitresses
• Various types of chefs
• The bar staff, such as the bartender and sommelier

Regardless of the staff that you employ, there are always ways to reduce the amount of funds you invest in labor. Want to learn more about which labor solutions can do the trick? See below for more details!

How Technology Can Reduce the Restaurant Labor Cost

Tech solutions are notorious for simplifying operations. With the help of restaurant automation features, many daily processes can be put on autopilot. Not only does this rule apply to staff members, but the customers, too. 

By lessening the number of duties and work overload that a team must deal with, you require fewer members. Here are some foolproof ways to lower the cost of labor in your restaurant:

1. Onboard an All-Inclusive Restaurant POS Platform

Did you know that restaurant payment technology can help reduce the business' labor cost? This is because many POS partners can integrate with other systems. In doing so, it reduces the time it takes staff members to conduct tasks. 

For instance, POS software can host quick transactions. It also eliminates POS hardware, making it that much simpler to use. Whether an employee needs to redeem loyalty points or retrieve a point of sale report, anything can be done in a flash with the right system. 

2. Use Restaurant Inventory Management Software

Restaurant inventory apps can indirectly benefit the cost of labor. It reduces the time that it takes to take inventory. In doing so, the staff is typically able to handle more pertinent tasks with their time. Similar to other tools that help save money, this solution can reduce the overall team size. 

3. Invest In Self Ordering Kiosks 

Self-ordering kiosks are one of the best ways for a casual dining entity to cut the labor cost. The reason is literally in the name! When customers are able to order food on their own, it eliminates the need of hiring wait staff. 

Kiosks are super popular in places like malls, fast food chains, and other casual restaurants. It's also the kind of food service option where a lot of the food is already prepared. So if you're operating a business where kiosks can be appropriate, you might also be able to reduce food costs, as recipes will be more standardized.

4. Create a Custom QR Code 

QR codes are a simple form of automation that can reduce costs. Upon arriving at their table, customers can be greeted with a QR code that takes them to the menu. In some cases, these custom barcodes will allow them to place orders. 

You might be wondering how something as simple as a QR code can reduce the cost of labor in a restaurant. Well, you're in for a pleasant surprise. When servers no longer have to run around the eatery providing menus and taking orders, they can dedicate more time to other tasks. In turn, you won't need as large of a team. 

5. Install Tableside Devices 

Tableside devices can significantly reduce a restaurant's labor cost. These devices allow customers to handle many tasks that a server would normally handle. Subsequently, fewer team members are necessary during each shift. 

For example, customers can use tableside devices to browse the menu, place orders, and pay the bill. Sure, you'll need employees to serve the dishes. But when you have tools that handle the bulk of the work, it becomes much easier for each server to handle multiple tables. 

One of the worst things customers can experience is long wait times. So if a party is ready to order or would like to pay the bill, they no longer have to wait on their server. Instead, they can do it themselves and avoid any frustration.

6. Introduce Mobile Ordering 

Partnering with delivery service providers will allow restaurants to cut back on the labor cost. Though it might be expensive to use-third online ordering apps, it'll save you more money in the long run. 

When restaurants offer off-premise delivery, they're able to cut down on labor expenses. This is because third-party apps outsource their delivery drivers. 

Plus, offering delivery is a foolproof way to maximize revenue at a restaurant. Brick and mortar eateries have a seating capacity. But when you offer takeout, the amount of sales you can secure is limitless. Just ensure that you have kitchen operations in place to manage high-volume shifts. 

7. Cross-Train Your Team and Offer Staff Development Resources

An easy way to reduce the amount of employees in a business is to cross-train every staff member. When businesses use this tactic, it becomes feasible to tackle more with less. 

In a restaurant setting, managers can cross-train servers, hosts, and bussers. This way, they can seat or serve customers, while cleaning up upon each party's departure. 

This tip will be especially useful for restaurants that aren't too busy. However, if you operate an eatery that gets substantial foot traffic, it's probably beneficial to consider advanced solutions. Then, you won't run the risk of an overwhelmed staff and long wait times. 

8. Keep the Staff Focused with Checklists 

So, let's say that you absolutely need the staff that you have in place. There are still ways to lessen the overall labor cost. The simplest way to do this is make their job as easy as possible to follow. 

Create checklists that team members can follow on a daily basis. Something like a wait staff or bartender checklist can go a long way. Implementing a checklist will also nurture habit-building practices. Over time, straightforward processes will become the norm. 

Frequently Asked Questions About the Cost of Labor 

There are numerous formulas and equations to monitor when operating a business. However, the money you lay out on labor should be at the top of your list. It's flexible, will take up a great deal of your budget, and can often change. Want to learn more about this metric? Read on for more details:

What Does the Cost of Labor Include?

A business' cost of labor typically includes the following components:

• Wages
• Salaries
• Benefits
• Payroll taxes
• Turnover costs 

How Is the Cost of Labor Calculated?

You can calculate the cost of labor by multiplying the number of hours worked by the hourly wage rate. Then, add any benefits, payroll taxes, and other expenses. Or, divide the total amount of money you pay employees by the number of hours they work. 

How Can You Reduce the Cost of Labor?

Businesses can reduce the cost of labor by onboarding solutions that streamline operations. By reducing the amount of work the staff has to do, you'll be able to employ fewer members. In some cases, businesses can delegate fewer shifts. 

What Factors Influence the Cost of Labor?

The most popular factors that can influence a business' cost of labor include:

• Minimum wage laws 
• Employee turnover rates
• Each state's employee taxes 
• A business' need for more labor
• The market demand for labor

Why Is Labor Cost Important?

Labor cost should be important to any business, as it makes up a large percentage of total expenses. If the cost of labor exceeds the budget, it can severely hinder the business' profits. 

Key Takeaways

No matter which industry you find yourself working in, the labor cost is important. However, this metric can fluctuate quite a bit for restaurants. Now that you know how to calculate it and the most popular contributing factors, you know exactly how to monitor it. Once you manage this expense and have it under control, a profitable food service business should be attainable.