The labor cost formula
Labor cost percentage tells you how much of every dollar of sales goes to the people who make and serve the food. Use the same period for both numbers: a day, a week or a pay period.
Labor cost % = Total labor cost ÷ Total sales × 100
What counts as labor cost
The most common mistake is counting hourly wages and nothing else. The true cost of a shift is higher than the wage on the schedule.
- Hourly wages for front and back of house, including overtime premiums.
- Salaries for managers and chefs, spread across the period.
- Employer payroll taxes: Social Security and Medicare, plus federal and state unemployment taxes.
- Benefits you pay for, such as health insurance contributions and paid time off.
- Workers’ compensation insurance.
What about tips?
Tips that guests leave pass through to your staff; they are not your labor cost. What does count is the employer’s share of payroll taxes on reported tips. Mandatory service charges are different: they count as wages.
Many restaurants can claim a federal income tax credit for part of that tax, often called the FICA tip credit. Ask your accountant how it applies to you before you count it in your numbers.
A worked example
A restaurant does $42,000 in sales in a week. Its labor for the same week looks like this:
| Hourly wages, including overtime | $9,800 |
|---|---|
| Salaried managers (one week’s share) | $2,300 |
| Employer payroll taxes, benefits and workers’ comp | $1,600 |
| Total labor cost | $13,700 |
| Total sales | $42,000 |
| Labor cost percentage | 32.6% |
$13,700 ÷ $42,000 = 0.326. Counting hourly wages alone would have shown 23.3% and missed more than a quarter of the real cost.
What a good labor cost percentage looks like
There is no single right number. Quick-service restaurants with counter ordering often run lower; full-service restaurants with servers, bartenders and a scratch kitchen run higher. Many full-service operators aim for somewhere around 25–35% of sales.
Your own trend is more useful than any benchmark, and so is reading labor alongside food cost. A high labor percentage can be fine when food cost is low, because what matters is the total: see the guide to prime cost.
Sales per labor hour
A percentage swings with sales. Sales per labor hour (SPLH) shows how productive each hour worked is, and it is the number to build a schedule from.
Sales per labor hour = Sales ÷ Hourly labor hours worked
| Sales | $42,000 |
|---|---|
| Hourly labor hours worked | 560 |
| Sales per labor hour | $75 |
How to keep labor in range during the week
Labor is easiest to control before the shift starts, not after payroll runs.
- Schedule from a sales forecast for each day and day-part, not from last week’s schedule.
- Compare scheduled hours with forecast sales before you publish the schedule.
- Watch hours worked against hours scheduled during the day, and cut early when sales come in light.
- Look for overtime before it happens: anyone close to 40 hours by Thursday.
- Review the actual percentage every day, by day-part if you can.