Running a restaurant demands your full attention. From crafting delicious menus to creating memorable guest experiences, you pour your heart into your business. Amidst this hustle, one number silently dictates your profitability: your labor cost percentage. It can feel like a constant battle to balance excellent service with a healthy bottom line. But understanding this key metric gives you immense power.
This guide will walk you through the labor cost percentage formula, help you understand industry benchmarks, and identify common challenges. You'll also learn smart strategies to optimize your team for maximum impact and a healthier profit margin.
Key Takeaways
Labor costs are your biggest expense, typically the second-largest after food, covering wages, benefits, taxes, and overtime.
Manage staffing efficiently to protect profits, avoid burnout, and maintain an excellent guest experience.
Regularly monitor labor cost percentage, apply smart strategies, and use tech solutions to maximize your restaurant’s profitability.
Rising wages, turnover, scheduling, compliance, and manual errors can all contribute to inflated costs.
Platforms like iOrders automate ordering, integrate POS, streamline delivery, and enhance marketing, saving time and controlling labor costs.
What Does Labor Cost Mean for Your Restaurant?
Your labor cost is the total amount you spend on staff during a given period. It goes beyond just wages; it includes everything from salaries and payroll taxes to benefits and insurance. Since labor is one of your largest operating expenses, keeping a close eye on it is essential to maintaining profitability.
What’s Your Restaurant’s Labor Cost Percentage?
Your labor cost percentage shows how much of your revenue is going toward paying your team. It’s a key measure of how efficiently you’re running your operations. A high percentage might mean you’re overstaffed or not using your team effectively, while a low one could signal understaffing or burnout risk.
How to Calculate Labor Cost Percentage
To track this, you just need two numbers for a given time frame (weekly, monthly, or quarterly):
1. Total Labor Costs (This includes everything you spend on your team):
This means approximately one-third of your revenue is spent on labor.
What’s a Healthy Labor Cost Percentage?
Knowing your percentage is just the first step. Comparing it to industry benchmarks helps you assess your performance. A “good” labor cost percentage varies by restaurant type.
Here’s a guide to typical labor cost percentage benchmarks:
Restaurant Type
Target Labor Cost%
Key Characteristics
Quick-Service (QSR)
20-30%
Faster service, fewer staff per customer.
Fast Casual
28-32%
A hybrid model, often featuring a combination of counter service and dine-in options.
Casual Dining
30-35%
Table service, moderate complexity.
Fine Dining
35-40%+
Higher staff-to-guest ratio, specialized roles.
Ghost Kitchens/Food Trucks
15-25%
Lower front-of-house staff needs.
Your ideal labor cost target will depend on your concept, location, and the complexity of your menu, but these ranges provide a helpful starting point.
Labor is one of your biggest operating expenses, and if you’re not tracking it closely, it can quietly erode your profits. Here’s why it pays to monitor it:
Better Margins: Lowering your labor percentage means more profit stays with your business.
Smarter Staffing: You’ll know when to scale your team up or down based on demand, avoiding both waste and service slowdowns.
Operational Clarity: When you understand your labor costs, you can make sharper decisions around scheduling, pricing, and process improvements.
Team Satisfaction: Balanced scheduling prevents burnout, avoids overtime issues, and keeps your team productive and motivated.
Knowing why labor cost control is vital is just the start; let’s look at the real challenges you face in managing it on a day-to-day basis.
Common Challenges in Controlling Restaurant Labor Costs
Even with a reliable labor cost formula in place, keeping this expense in check is rarely straightforward. You deal with unique day-to-day realities that make labor management a constant challenge. A clear understanding of these hurdles is key to finding workable solutions.
Rising Wages & Inflation: As wages and inflation continue to climb, especially across North America, your payroll costs naturally rise too, often faster than your pricing can keep pace.
Staffing Shortages & Turnover: Recruiting and retaining dependable team members has become increasingly challenging. When you're short-staffed, operations suffer. High turnover means you're stuck in a cycle of rehiring and retraining.
Complex Scheduling: Striking the right balance in your schedule is tricky. Having too many staff during slow times wastes money; having too few during peak hours costs you in service and lost sales. Keeping overtime under control only adds to the complexity of the situation.
Compliance with Labor Laws: With labor regulations varying by state or province from wages and break rules to benefits, you need to stay on top of compliance. A small oversight can result in costly penalties.
Protecting Guest Experience: Cutting labor costs can’t come at the expense of service. The real challenge lies in optimizing your labor while still delivering the high-quality experience your guests expect.
Manual Processes & Inaccurate Data: If you’re still relying on spreadsheets or manual timecards, you're more likely to deal with errors. That slows you down and clouds decision-making.
Managing labor costs effectively isn’t just about formulas; it’s about building smarter systems, staying agile, and aligning your team with your restaurant’s long-term goals.
What are the Strategies for Managing Labor Costs Effectively?
Managing labor doesn’t mean cutting staff; it means running lean, not short. Here are some practical strategies you can start using:
Strategy
Description
Benefit
Smart Scheduling
Align staff levels with peak and off-peak hours using sales data.
Reduces overstaffing and cuts unnecessary wage expenses.
Cross-Training Staff
Train employees to perform multiple roles (e.g., host and bus tables).
Increases flexibility, reduces the need for extra staff during lulls.
Minimize Overtime
Monitor hours closely; adjust schedules to avoid unplanned overtime.
Direct cost savings and improve staff work-life balance.
Boost Employee Retention
Create a positive work environment, offer fair wages/benefits, and provide training.
Reduces the high costs of hiring and training new staff.
Optimize Workflow
Improve kitchen layout, streamline service steps.
Increases productivity, allows more to be done with less.
Utilize Technology
Use systems for automated scheduling, POS integration, and online ordering.
Reduces manual tasks, improves accuracy, and saves labor time.
Managing labor efficiently shouldn’t drain your time or resources, and with iOrders, it doesn’t have to. Designed for independent restaurants, Quick service restaurants (QSRs), ghost kitchens, and small to mid-sized businesses, iOrders equips you with tools to optimize your operations and control staffing costs.
Here’s how you can stay efficient and profitable with iOrders:
POS-Integrated Orders: Orders from all channels flow directly into your POS. This eliminates manual entry, reduces kitchen errors, and speeds up service, helping your team stay focused during rush hours.
One Dashboard for All Orders: Handle dine-in, pickup, and delivery from a single screen. Your staff won’t waste time jumping between platforms or devices, which means fewer errors and faster service.
Branded Ordering Without Commissions: Keep your profit margins intact. With iOrders powering your website or app, you avoid third-party commissions and retain full control over pricing and promotions, directly supporting your labor overheads.
Outsource Delivery Without Hiring Drivers: Tap into logistics partners like Uber Direct or DoorDash Drive to handle delivery for a flat fee per order. You cut the cost of hiring, training, and managing in-house delivery teams, all while maintaining your restaurant’s branding.
Smart Marketing That Drives Consistent Sales: Run automated campaigns and personalized outreach using real customer data. More consistent revenue means your labor costs stay proportional and predictable.
Loyalty Programs That Build Repeat Business: Launch reward programs and targeted offers using collected customer data. A reliable base of returning guests keeps sales steady, making labor planning easier and more cost-effective.
With iOrders, you’re not just managing staff, you’re optimizing operations to keep labor costs lean and aligned with sales growth.
Conclusion
Keeping your labor cost percentage in check isn’t just about balancing the books; it’s a key part of running a smarter, more efficient restaurant. Now that you have the formula and understand the factors that go into it, you can start using this number to identify inefficiencies and maximize your team's performance.
You deal with rising wages, scheduling issues, and day-to-day pressures. However, with the right tools such as iOrders, you can simplify scheduling, reduce manual work, and make more informed decisions based on accurate data.
When you take control of your labor costs, you're not just saving money. You’re creating a stronger, more profitable operation.
Want to see how iOrders can help streamline your staffing and improve your margins? Book a demo today.
FAQs
What is considered “Total Labor Costs” for this formula?
Your Total Labor Costs include all direct employee expenses: wages, salaries, overtime, bonuses, payroll taxes (employer’s portion), employee benefits, and workers’ compensation premiums.
How often should I calculate my labor cost percentage?
To effectively manage your restaurant's profitability, you should calculate your labor cost percentage frequently. Weekly or bi-weekly calculations are ideal for quick adjustments. Monthly calculations are a minimum.
What’s the ideal labor cost percentage for a casual dining restaurant?
For a casual dining restaurant, an ideal labor cost percentage typically falls between 30 to 35%. However, this can vary based on your specific concept and local market conditions.
My labor cost percentage is too high. What’s the first step I should take?
If your labor cost percentage is too high, start by reviewing your scheduling practices. Are you overstaffed during slow periods? Analyzing sales data to align staffing with demand is often the most impactful first step.
Can technology help me reduce my labor costs?
Absolutely! Technology like iOrders can significantly help. It automates order entry, centralizes management, streamlines delivery logistics, and provides insights that reduce manual tasks and improve overall staff efficiency, directly impacting your labor cost percentage.
Does reducing labor costs mean cutting staff?
Not necessarily. Reducing labor costs is often about optimizing efficiency, not just cutting staff. This can involve better scheduling, cross-training, minimizing overtime, and utilizing technology to help your existing team work more effectively.
