7 Ways to Keep Your Restaurant Labor Costs Down Without Sacrificing Quality

What is Restaurant Labor Cost?

The restaurant business is a complex system with many factors at play. To run a restaurant with a decent profit margin, it is important to calculate the prime cost, that is the sum of all expenses. These include rent, utilities, food, and labor costs. A robust restaurant accounting system can help crunch these numbers accurately.

Now, frontline workers play a critical role in the restaurant industry. Each employee, from the chef, to the manager, bartender, and busser, represents one cog in a very important machine. Better-trained employees mean better customer service, which can significantly increase profits through increased sales and reduced product returns or service complaints.

Restaurant employees are the core of a business; they are the ones who deal with, and attend to customers every day. It is therefore of the utmost importance for a restaurant to build a robust and satisfied workforce. This necessitates significant expense. Labor and food costs are two of the larger business expenses a restaurant must bear.

The labor cost for a restaurant is the amount of money it spends on its employees. It includes all the expenses of maintaining a restaurant's workforce -- wages, bonuses, payroll taxes, healthcare, training, and travel expenses. It is important to manage these expenses judiciously to minimize labor costs, while providing an excellent dining experience for your customers.

Every restaurant owner should consider the operating costs involved when calculating labor expenses in their revenue projections, because everything starts with acquiring an employee base you can trust. Ultimately, restaurant labor cost percentage is a key indicator of profitability.

What is labor cost percentage? It is the portion of a restaurant's revenue dedicated to its employees, compared to its total sales over a given period. It includes both salaried and hourly employees, and, if eligible, the full range of benefits. The labor cost percentage is a method of determining the percentage of sales dedicated to staff payroll expenses as opposed to other expenditures.

Knowing this figure can help you make business decisions related to labor costs, like whether or not it makes sense for your business to hire more staff members or take advantage of seasonal hiring opportunities. Labor cost percentages also helps cash flow managers determine if, and by how much, menu prices should increase if they want their business to be profitable. After calculating this figure, restaurant owners may realize that they need to raise menu prices to cover their labor costs. The average labor cost percentage for most restaurants is between 15-35% of total sales. Of course, it changes depending on the nature of your business, the location, and the services you offer.

How to Calculate Restaurant Labor Cost

Understanding labor costs begins with calculating the total amount your restaurant spends on labor. This includes wages for salaried and hourly employees, as well as other costs associated with labor -- bonuses, overtime pay, payroll taxes, and employee benefits like healthcare and sick or vacation days. For better clarity, you can break down your labor costs by roles or divide the hourly and salaried staff members into groups based on their salaries. Then test different combinations of staff members and shifts to streamline your labor costs.

The cost of labor in restaurants can be affected by many factors. For example, the nature of a restaurant, whether fine dining or fast food or quick service, can affect labor costs. Fine dining establishments require a higher level of service, which means more staff.

A restaurant's location also plays a role- restaurants in major cities tend to have higher labor costs than those in less populated areas, because living and working in a major city is more expensive, and thus workers have higher wages.

Similarly, smaller restaurants usually have lower labor costs than larger ones because they require fewer staff members to run effectively. Then again, restaurants that serve complex or time-consuming dishes usually have higher labor costs than those that serve simple fare; more kitchen staff are needed to prepare complex or artisanal dishes.

To calculate labor cost percentage, a restaurant needs to input three pieces of information- a predetermined period for your calculations, labor expenses during this specified period, and sales during the same period. Once all of your figures are entered, it's just an equation you need to follow to calculate labor cost percentage.

Labor Cost Percentage = (Total labor cost per period / Total sales for the period) x 100.

Ways to Cut Labor Costs- Implement an Effective Scheduling Software

As a manager, if you draw up a work schedule based wholly on instinct, you are perhaps spending a lot of money on unnecessarily high labor costs. Implementing an efficient employee scheduling system can help you save those extra dollars in operating costs and ensure better employee engagement and improved productivity.

You don't always need to retrain your employees. Instead, an easy upgrade to an automated employee scheduling system backed by data and analytics will work better. Such a system will make sure that the right person is assigned to the right job on the right shift. For example, there may be no need to hire a bartender at a restaurant during the first half of the day if it's holiday season, so the system will automatically assign the bartender when required. Every establishment has unique requirements, so you can't duplicate the best practices of one place at another.

Implementing a tried and tested software like Zip Schedules can streamline your restaurant staffing needs and control the total labor costs. This cloud-based employee scheduling solution generates flexible work schedules, keeps track of employees' availability, communicates the schedule to employees well in advance, reduces scheduling conflicts, helps with Time Tracking, tracks employee performance, and monitors labor costs.

Review Employee Overtime

Overtime should not be confused with an extra shift. Overtime wages can significantly affect your total labor cost percentage. It is always cost-effective to utilize salaried exempt employees over non-exempt staff for extra shifts. When non-exempts cross the limit of their workweek hours, exempts have to take up the remaining work, and the company pays wages to two different sets of employees for the same work. It will shoot the labor cost percentage sky-high. This problem, too, can be eliminated by a scheduling system.

An employee scheduling software alerts management when an additional shift is about to push an employee into overtime. It can help you create a better solution for handling peak workloads. For example, you know that Christmas lunch will be slow business, as many prefer home-cooked meals to eating out, while New Year's Eve will be busy at a restaurant. In that case, a restaurant can save on additional staffing on Christmas and utilize that money at New Year.

A scheduling tool allows you to calculate how many employees you need at any time, based on your past sales and future prediction of the number of expected guests. If people are being underutilized during peak times, consider cutting back on their number of hours or even letting them go completely.

Ways to Cut Labor Costs- Re-evaluate Your Recruitment Strategy

Before the pandemic, there was an acute shortage of skilled labor in the food service industry. The pandemic only made it worse. According to reports, most restaurant staff reported increased verbal and physical abuse from customers, and sometimes from their managers throughout the pandemic. Besides, many customers stopped eating out and also stopped tipping the restaurant staff, thanks to the shrinking economy, lockdown restrictions, and job losses. With many big and small restaurants shutting down, most employees moved on to other jobs with better shift schedules and better wages.

If reports are to be believed, staffing will be an issue affecting the restaurant industry for some time. However, it has also allowed the industry to recalibrate and redefine its recruitment strategy.

With more technological advancements like point-of-sale systems and automated and mobile payments in restaurants, cafes, and other eateries, there is an increased demand for tech-savvy workers. As a result, re-evaluated recruitment strategies will work well. The new strategy may require restaurants to pay higher salaries and provide increased benefits, but it will benefit the organization in the long run.

Inclusion of the younger generation is a growing focus. Many restaurants are already hiring Gen Z as servers and managers because they are better at using modern technology.

Ways to Cut Labor Costs- Reduce Employee Turnover Rate

Restaurants have one of the highest turnover rates among businesses. The cost of training and retraining newer employees can significantly increase the labor cost of a restaurant business. One way to reduce the turnover rate is by offering higher wages, better benefits, and more opportunities for advancement.

Additional training programs that can help new hires become more productive and efficient in their work can help in a big way. When equipped with knowledge of advanced technological tools, today's workforce tends to show high engagement and involvement in their jobs, reducing the turnover rate. It isn't a surprise that digital tools have made work less stressful for employees. A Forbes report reveals that organizations that invest in innovative and customized machine learning and Artificial Intelligence-driven software engage their workforce better than their peers who do not use such tools.

By investing in their workforce and saving money on labor costs in the long run, restaurants can also improve customer satisfaction levels.

Ways to Cut Labor Costs- Foster a Collaborative Work Environment

A Collaborative Work environment can help you achieve your goals faster and without strife because the team will work together to achieve the same goals. A workforce with team members from diverse backgrounds and handling different responsibilities has different perspectives. Each perspective and every experience can be used to collaborate and benefit one another, with the recognition of each individual.

The key is to make everyone feel valued and have their opinions heard. However, it is also important to maintain this balance to reduce biases from developing that could potentially harm further cohesion within the team.

One of the best ways to foster a collaborative environment is to cross-train your staff. It means that employees should be trained in multiple tasks and for multiple roles in order to be able to step up and pitch in for one another in difficult situations. This will help them master new skills and crafts and improve professionally, which will eventually benefit them in future job searches. It's something that both, the restaurant owner and their employees enjoy since it encourages professional growth.

Cross-training also takes less time than hiring additional staff, which, in turn, benefits the company. In addition, a cross-training program builds relationships between employees, makes their work more efficient and helps create a better rhythm within the organization.

Ways to Cut Labor Costs- Go for Automation

Automated systems such as digital menu boards can help control labor costs. Since customers are able to make their own choices, staffing is kept to a minimum, which is certainly beneficial for small businesses. In addition, time spent not having customers talking with restaurant staff can be used to help further increase efficiency and throughput.

The need for digital menu boards skyrocketed during the pandemic. Following Covid-19 protocols, customers became more comfortable with these new devices. Restaurants soon realized they could scale back on in-person ordering and pump more money into better-equipped digital menu boards.

Similarly, an automated beverage dispensing system doesn't require additional labor, minimizes wastage, and maximizes output. In addition, adopting equipment with advanced technology that consumes less energy and uses advanced sensors and cloud-based diagnostics is also one of the possible ways to deal with other increasing costs.

Ways to Cut Labor Costs- Utilize Technology

It won't be an overstatement to say, technology is replacing human labor in the restaurant industry. Of course, human labor and human interaction are still a big part of running a restaurant business. But by leveraging technology, a restaurant can significantly reduce labor costs.

Restaurant technology has grown in tremendous ways in recent years. Online ordering and reservation, automatic billing, and multichannel payment gateways are only some technological features that make restaurant operations convenient.

The tech-first approach is designed to keep the customer at the center of the entire experience. But by leveraging such technological solutions, a business reduces the staff involved in taking and processing orders.

However, for tech to provide a seamless experience, restaurants need software solutions that easily integrate with other existing software systems in the operations. For instance, an efficient point of sale system like Plum POS will allow you to accept payments for items sold, keep track of inventory, and record orders. With in-built data analytics features, you can crunch your sales data to make informed decisions for efficient scheduling. A point-of-sale system also integrates with the payment processing center and can be operated from any mobile device. Besides, these systems integrate with Kitchen Display Systems (KDS) to swiftly relay the order to the kitchen in-charge or the chef. It has helped eliminate the need for separate staff to manually take orders and run to the kitchen to process orders in time.

There are many ways a restaurant can scale down its labor expenses and cut its overall operating costs. One of these is by making sure the technology it adopts meet its business needs. The right technology will keep your employees happy, have them willing to work harder without requiring higher wages, and nudge up your profits noticeably.