Restaurant labour cost percentage: how to work it out and what to do about it
Rent is fixed. Your suppliers set the price of salmon. Wages are the one big cost you can actually steer from week to week, and most venues only look at them once a quarter, when the accountant sends the P&L and the number is already history.
Labour cost percentage is the simplest way to keep an eye on it. It takes about five minutes a week once you're set up.
The formula
Labour cost % = total labour cost ÷ total sales × 100
The division is easy. The mistakes happen in deciding what goes into "total labour cost".
What to include
Wages alone will flatter you. To get a number you can trust, count:
- Gross wages for everyone: kitchen, floor, bar, cleaners, and salaried managers.
- Penalty rates, loadings, overtime and allowances. In hospitality these are a big part of the bill, not a rounding error.
- Superannuation. The super guarantee is 12% on top of ordinary time earnings.
- Workers compensation insurance and payroll tax, if your wages bill is over your state's threshold.
- Leave for permanent staff: annual leave and personal leave as they accrue.
- Yourself. If you work 50 hours a week on the pans and don't draw a wage, your labour percentage is a fiction. Put in what it would cost to replace you.
For sales, use revenue excluding GST, for the same period as the wages.
A worked example
Here's a made-up week for a 60-seat restaurant. The numbers are only there to show the method.
| Sales, excluding GST | $42,000 |
|---|---|
| Gross wages, including penalties | $11,800 |
| Super at 12% | $1,416 |
| Workers comp and other on-costs | $500 |
| Total labour cost | $13,716 |
| Labour cost percentage | 32.7% |
On wages alone, this venue would say it runs at 28%. With on-costs, it's nearly 33%. Same business, same week. You want the number that matches what leaves the bank account.
What's a good number?
You'll see 25% to 35% of sales quoted a lot as a rule of thumb for restaurants. It's a wide range because venues are so different. A counter-service cafe selling takeaway coffee needs far fewer hours per dollar than a fine diner with a sommelier and a brigade of eight. A pub bistro sits somewhere else again.
So don't obsess over someone else's benchmark. Two things matter more:
- Your own trend. Is the number moving, and do you know why?
- Labour and food cost together. Many operators watch the two combined, often called prime cost. If you make everything from scratch your labour is higher and your food cost lower, and that's fine.
Measure it weekly, and by daypart
A monthly figure hides everything interesting. Break it down and the picture changes fast. It is very common for a venue to run a healthy percentage on Friday and Saturday nights and a terrible one on Tuesday lunch, and for the weekly average to look acceptable.
A second number worth tracking is sales per labour hour: sales divided by total hours worked. It isn't affected by who happened to be on at what rate, so it's a cleaner read on whether you rostered the right amount of people.
The weekly average hides the Tuesday lunch that loses money. Split it by service.
Six ways to bring it down without wrecking service
Cutting staff until the floor falls over is not a strategy. Guests notice, good people leave, and sales drop faster than wages. These are the places where hours usually leak instead.
- Roster to a forecast. Write down expected covers for each service before you roster it. We go through the steps in our rostering guide.
- Stagger starts and finishes. Not everyone needs to be there for set-up, and not everyone needs to stay to close.
- Watch early clock-ons and late clock-offs. Ten minutes either side of every shift adds up to a lot over a year. You can only manage this if hours are recorded as they happen.
- Cross-train. A floor person who can jump on the bar for the 6pm rush saves you rostering a second bartender for a 40-minute peak.
- Look hard at your quietest services. Would a shorter menu let you run the kitchen with one less person? Should you be open at all?
- Plan around penalty rates. Sundays and public holidays cost more per hour. That doesn't mean close. It means put your most productive people on, and be honest about whether a surcharge or a set menu is needed to make the day work.
The other side of the fraction
Labour percentage has sales on the bottom. A venue that adds $3,000 a week in sales with the same team has improved its labour percentage more than one that shaved a few shifts. Sometimes the right answer to a high number is better trained staff who sell the second bottle of wine. A thinner roster isn't always it.
Getting the numbers without a spreadsheet marathon
The reason most owners don't do this weekly is that the hours live on a clipboard and the wages live in the accountant's software, and getting them into one place takes a Sunday afternoon.
That is the problem Shiftzen is built to remove. Staff clock on and off at the SignBook kiosk, rosters and hours are organised by venue and department, and pay runs come from approved hours. So the hours and wage figures for the kitchen, floor and bar are already sitting there at the end of the week. Line them up against your sales and the five-minute check really is five minutes.
Figures in this article are illustrative. Super rates, payroll tax thresholds and award rates change, so confirm current rates with your accountant.