The labor cost plays a major role in a restaurant’s profitability. Finding a balance between the cost of labor and operating expenses is necessary to maintain the financial health of a business. 

Throughout this article, we will uncover everything from the labor cost definition and relevant formulas, to five innovative ways that restaurant tech can reduce the labor cost across the restaurant industry. Keep reading to learn everything you need to know!

Labor Cost: Definition

The labor cost refers to the amount of expenses that a business incurs from employing a team of employees. Not only does the labor cost consist of the total amount of money you pay in salaries, but also the expense of training your team members, as well as the benefits and days off you offer them. 

Some of the most common examples of labor costs include: 

• Employee salaries 
• Payroll taxes 
• Sick days
• Overtime 
• Insurance 
• Benefits
• Bonuses 
• PTO days and holidays 

Labor Cost: Formulas

The labor cost for a business is the sum of all employee-related expenses. This metric can look different from one business to another, as not all companies offer the same perks and pay structures to its employees. 

Now, if you would like to calculate the total labor cost, use the following formula:

Labor Cost Percentage = (Total Labor Cost / Annual Gross Revenue) x 100

However, if you want to know how to calculate the labor cost percentage as a portion of your total operating expenses, use this formula instead:

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

Now that you know how to calculate the labor cost percentage, let’s discuss several ways that you can innovate your restaurant and reduce the labor cost simultaneously.

5 Ways to Cut the Labor Cost With Restaurant Tech

It’s not a simple task to get the labor cost down to a low percentage. However, it’s super valuable for any business to do so. Not only will lowering the labor cost boost the restaurant profit margin, but it will allow you to spend more money on operating and overhead expenses, like the restaurant’s food cost. 

Here are five ways that technology can reduce the labor cost at your restaurant:

1. Delivery Apps Reduce Wait Staff Duties 

Online ordering apps can do wonders for a restaurant’s labor cost. Let’s say you open a bar or restaurant that doesn’t offer delivery. Anyone who wishes to dine at your eatery will dine-in. This can lead to much busier shifts for employees, resulting in a larger staff or a high turnover rate. 

By offering delivery, your customer base will likely be disbursed across in-house dining and online orders. If you want to take this strategy one step further, partner with third-party delivery platforms that hire freelance drivers. Though third-party partners are an expensive operating cost, not having to hire a team of drivers will help lessen the overall labor cost. 

2. In Room Dining Serves More Hotel Guests 

Hotels and cruise ships have been offering room service for ages. But what if we told you that on-premise restaurants can duplicate a traditional dining experience in guest rooms?

That’s right–hotel companies and cruise lines are able to serve more customers by offering in-room dining options. They do so by collaborating with delivery service providers or offering a concierge service. Some establishments even offer in-room tablets so that guests can quickly access dining options. Plus, in-room tech solutions help promote ADA compliance standards to the public and competitors alike.

The benefits of offering in-room dining are similar to traditional food delivery. Since the restaurant can serve more customers than what the brick and mortar eatery can accommodate, they can serve more customers. 

In doing so, restaurants won’t have to fear the risks of an understaffed business or work overload. Instead, they can keep their staff size at a minimum and still generate large profits. 

3. Restaurant Automation Speeds Up Standard Processes 

Automation consists of innovative restaurant technology that can put standard operations on autopilot. More often than not, the business owner will onboard restaurant automation to decrease the labor cost over time. 

Many automated and robotic technologies complete tasks that would otherwise be done by human employees. Features like voice ordering for restaurants and tableside menu ordering devices are just a couple of examples of how you can automate your eatery. 

To make daily operations even simpler, ensure that all of your restaurant’s labor solutions integrate with your POS system. That way, every automation feature can be updated and controlled in one place, accessible to all employees.

4. Kiosks Eliminate Server Responsibilities

If your restaurant offers casual dining or a fast casual experience, consider installing self ordering kiosks. Kiosks are an easy and cost-effective way to boost sales and keep customers happy with convenient service. 

Since kiosks involve self-ordering and sometimes self-serving features, they require fewer staff members. So even if it’s a large expense to incur initially, it can help reduce the overall labor cost in the long run. 

5. Scheduling Systems Eliminate Work Overload 

The labor cost always boils down to various factors involving your staff. Restaurants will often spend excessive amounts of money on the total labor cost by assigning too many employees to each shift. This is one of the most common restaurant issues but can be avoided entirely. 

With an employee management system or all-inclusive restaurant POS platform, the restaurant manager can schedule a sufficient number of team members for each shift. Not only will this ensure that restaurant operations run smoothly, but it will help eliminate excessive spending on labor and improve staff development. 

Frequently Asked Questions About Labor Cost

Financial literacy is vital knowledge for any business owner. However, hiring an efficient team is just as important. Read on to learn more about the labor cost formula and meaning within the restaurant industry. 

Is the Labor Cost a Fixed Expense? 

No, the labor cost is a semi-variable expense. Semi-variable costs include fixed and variable costs. For example, expenses like annual salaries might be fixed, while sick days might be variable expenses due to their flexibility. 

What Does Labor Cost Mean? 

Labor cost refers to the expenses that a business incurs for the employment of their staff. With this being said, the labor cost for a business can consist of anything from salaries to paid time off. 

What Is a Good Labor Cost Percentage? 

A labor cost percentage should be 20% to 30% of the company’s gross revenue. If this expense goes up to 35%, that is still acceptable; however, try not to exceed this percentage.

What Is a Typical Labor Cost for a Restaurant?

On average, restaurants try to keep their labor costs anywhere between 20% and 30% of gross revenue. Depending on the business’ profitability, this figure can drastically differ from one restaurant to another, 

How Do You Calculate Labor Cost In a Restaurant?

Divide the total labor cost by the annual revenue to determine a restaurant’s total labor cost. Then, multiply this number by 100. This formula will give you the labor cost percentage. 

Conclusion 

Closely monitor the labor cost at your restaurant. As you expand your business and grow your team, the labor cost can add up rather quickly. We recommend that you calculate your restaurant’s labor cost every quarter. If the business can maintain a figure within a 20% and 30% ballpark, you’re golden.  If it ends up being much higher, reconsider your financial strategies.