# What is Labor Cost Percentage? Definition, Formula & Applicability

The total amount spent on employees by your company includes salary for hourly and salaried workers, as well as employee perks and taxes. For example, imagine that you have two employees who can work the hostess position — employee A and employee B. Employee A gets sick and can’t work on Thursday, but employee B is very near overtime hours. If you have more personnel than you need, your labor costs will be too high, and the company will lose money.

When calculated as a percentage of sales, restaurant labor cost percentage can decrease when you sell more food. Calculate your total labor costs by adding all applicable cost categories like wages, salaries, bonuses, and overtime. For this example, we’ll assume your total labor costs for the year were \$240,000. Different restaurant types have different costs, but lowering costs should always be a goal. If you combine it with food costs, the ideal total percentage for food and labor costs should be less than 60%.

One way to regulate overall costs in a restaurant is to understand prime costs. High labor costs could be an underlying driver of high prime costs. There may be costs of goods that could be more efficiently used in the process to lower prime costs, without sacrificing shifts or hours for employees.

Sometimes, it is useful to calculate employee labor percentages for specific groups of workers. For example, manufacturers need to figure the cost of production, and calculating this metric can help analyze and control these direct labor costs. You figure the employee labor percentage the same way, except that you include the labor cost only for the specific group of employees you are interested in. For instance, different job categories may have completely different labor metrics, or a holiday or special event may skew your labor reporting. Knowing a number without understanding the big picture behind it can make it difficult to make improvements in the long-term. High labor costs can be the symptom of many different issues, and a quick fix of just cutting hours or paying low wages may only be a bandage on a deeper problem.

The amount you spend on labour has an impact on your prime cost, which is the metric that many restaurateurs use to assess their restaurant’s efficiency. Anything that has anything to do with employee compensation can be considered a labor cost calculations. In small-business operations, labor cost calculations are a crucial component. But if allowed to get out of hand, absenteeism can become a bad habit for your employees that affects employee engagement, company culture, labor costs, and, eventually, your bottom line. It’s imperative to keep your employees’ overtime hours as low as possible so they don’t get out of control. You can avoid the need to recalculate all your numbers every time you change the schedule by tabulating labor costs as you schedule.

This allows restaurant owners to find the problem areas that are leading to the increase in labor cost and immediately take informed decisions to optimize and reduce them. Labor costs can also be calculated as a percentage of your restaurant’s total operation costs by following the same steps but replacing heidelberg university acceptance rate the total revenue with total operating costs. Bonuses, commissions, and other forms of payment should be included. Remember to factor in payroll taxes and employee perks of labor cost calculations. For small enterprises and small business owners, total labor costs have numerous advantages.

Across all venue types, the average labor cost percentage is 31.6%. This spreadsheet template will help you calculate your labor costs so you can have a clear picture of where your restaurant stands. Monitoring Labor Cost Revenue Percent along with Labour Cost per FTE helps you determine whether labor cost or reduced revenues is the actual factor affecting it. It also induces the financial burden on the company to recruit and retain productive employees.

Restaurants should focus on employee retention by providing them with fair wages, competitive benefits, and a good working environment. A portion of your salary may go toward employee benefits, depending on your firm. Deposit into the appropriate accounts on behalf of your employees if you offer any employee benefits programs. You’ve calculated your employees’ gross salary and the amount of tax withheld from their paycheck. Subtract the amount deducted from their gross salary to arrive at their net pay.