Labor cost percentage: the number is only as good as what you put in the numerator

Labor cost percentage is labor cost divided by sales. The arithmetic takes ten seconds. The reason two operators quoting the same 30% can be running completely different businesses is that almost nobody puts the same things in the numerator.

Wages are not labor cost

A percentage built on gross wages alone understates the real cost of employing people by a wide margin. A fully burdened labor cost includes:

• Gross wages, hourly and salaried.
• Employer payroll taxes — Social Security, Medicare, FUTA and state unemployment. See restaurant payroll taxes for how those build up.
• Workers’ compensation premium.
• Health and other benefits, where offered.
• Bonuses, and any service charge distributions, which are wages rather than tips.
• Paid leave where state or local law requires it.

The burden on top of gross wages is typically a meaningful double-digit percentage, and it varies by state because unemployment rates and workers’ compensation classifications do. An operator comparing his unburdened 28% against an industry figure quoted on a burdened basis is not making a comparison at all.

Pick one basis, write it down, and use it in every report. Which basis matters far less than using the same one every period.

One number hides two different problems

Split the percentage before you try to manage it:

• Variable labor — hourly staff whose hours should move with volume. If this line does not fall in a slow week, the schedule is not being written against a forecast.
• Fixed labor — salaried management, which does not move with volume. In a slow period this percentage rises no matter what anyone does on the floor, and pushing hourly hours down to compensate is how service quality gets sacrificed for a ratio.

Split further by department — kitchen against front of house — and the number starts pointing at a cause rather than a mood. A rising total driven by kitchen hours in a week when covers were flat is a prep or production problem. The same rise driven by front of house is a scheduling problem.

The denominator has its own traps

Sales should be net sales, consistently defined. Three things distort it:

1. Sales tax left in. Inflates sales, flatters the percentage, and does so unevenly across a multi-state group.
2. Delivery treated inconsistently. Booking gross order value as sales while commission sits in another line makes labor look more efficient than it is. Delivery volume also carries a different labor profile from dine-in, so a shift in channel mix moves the percentage with no change in performance.
3. Comps and discounts netted differently period to period. Whichever convention you use, the labor was still paid.

It only means something next to food cost

Labor and food move against each other. Cheaper, less prepared product costs more labor to finish; buying prepared product raises food cost and cuts labor. Managing one in isolation reliably pushes the other in the opposite direction, which is why prime cost — labor plus cost of goods as a share of sales — is the number that actually constrains the business.

A labor percentage that fell two points while food cost rose two and a half is not an improvement. It is only visible as a decline if you look at both together.

Weekly, or it is history

Labor is the one major cost an operator can still change after the period starts. A percentage delivered on day 15 of the following month describes a schedule that was written six weeks ago. The same number delivered every Tuesday for the week just closed, alongside the food cost, is the input to next week’s schedule.

That requires payroll data flowing into a weekly flash rather than sitting in the payroll system until the close. It is not a difficult build. It is simply one that nobody does until someone asks for the number on a Tuesday.

Two errors that show up as a labor problem

Before treating a rise as an operational issue, rule out two accounting causes. First, overtime calculated on the wrong base: overtime for tipped staff is owed on the full minimum wage rather than the reduced cash wage, and service charge distributions must be folded into the regular rate. Systems configured by someone who has not run a restaurant get both wrong, and the error inflates labor cost genuinely and permanently. Second, salaried management coded to the wrong unit in a group, which moves cost between locations and makes one site look inefficient and another look excellent.

Neither is fixed on the floor.

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Related: Prime cost · Food cost percentage · Restaurant payroll taxes · Restaurant bookkeeping

Common questions

How do you calculate restaurant labor cost percentage?

Total labor cost divided by net sales for the same period. Labor cost should be fully burdened — gross wages plus employer payroll taxes, workers' compensation, benefits, bonuses, service charge distributions and any required paid leave — not gross wages alone.

What is a good labor cost percentage for a restaurant?

It depends entirely on service model, wage rates in your state and how the figure is built, so a single benchmark is misleading. The useful comparison is your own trend on a consistent basis, and labor read together with cost of goods as prime cost rather than in isolation.

Should labor cost percentage include payroll taxes and benefits?

It should, if the figure is meant to represent the cost of employing people. Wages alone understate it materially. What matters most is defining the basis once and using the same one in every period so movement is comparable.

Why split fixed and variable labor?

Hourly labor should move with volume and salaried management does not. In a slow period the fixed portion raises the percentage regardless of performance, and cutting hourly hours to defend the ratio sacrifices service for a number that was never controllable.

How often should labor cost be measured?

Weekly. Labor is the major cost that can still be changed after the period starts, so a percentage arriving mid-way through the following month describes decisions made weeks earlier. A weekly figure alongside food cost is what informs the next schedule.