Restaurant Labor Costs: Benchmarks and How to Control Them
- Aug 17
- 7 min read
Restaurant labor costs can eat into your margins quickly, especially when sales fluctuate but payroll keeps moving in one direction: up. The challenge is knowing how much labor is reasonable, where you're overspending, and how to cut costs without leaving your staff or customers frustrated.
For restaurant owners, understanding restaurant labor costs is one of the most important parts of running a financially healthy operation.
What Are Restaurant Labor Costs?
Restaurant labor costs include more than the hourly wages you pay employees.
Your total labor expense may include:
Employee wages and salaries
Overtime pay
Payroll taxes
Workers' compensation costs
Employee benefits
Paid time off
Bonuses and incentives
Training time
Other employee-related expenses
Some owners look only at wages when reviewing payroll. That can make labor appear cheaper than it really is.
A better approach is to look at your fully loaded labor cost, meaning the total cost of employing your staff after wages and related expenses are included.
The U.S. Small Business Administration recommends keeping accurate records of expenses such as employee costs and using financial information to understand how different parts of a business are performing. (Small Business Administration)
What Is a Good Restaurant Labor Cost Percentage?
There is no single labor cost percentage that works for every restaurant.
A full-service restaurant, quick-service restaurant, food truck, bakery, and catering business can have very different staffing needs. Location, hours, menu complexity, service style, sales volume, and local wage requirements all affect the number.
Instead of treating one percentage as a universal rule, use benchmarks as a starting point and compare your results over time.
A useful calculation is:
Labor Cost Percentage = Total Labor Costs ÷ Total Sales × 100
For example, if a restaurant spends $25,000 on total labor costs during a month and generates $100,000 in sales:
$25,000 ÷ $100,000 × 100 = 25%
That means labor represents 25% of sales for that period.
The important part is consistency. Tracking this number each week or month can help you spot changes before they become major problems.
Restaurant Labor Cost Benchmarks: What Should You Track?
Restaurant owners often search for an ideal restaurant labor cost percentage. The problem is that a benchmark without context can be misleading.
A restaurant with unusually high sales per employee may have a different labor structure than one that requires more hands-on service.
Instead of focusing on one industry-wide target, track several measures.
Labor Cost as a Percentage of Sales
This is the basic number described above.
Watch for sudden increases. If sales remain steady but labor costs rise, investigate whether you're scheduling too many hours, paying more overtime, dealing with lower productivity, or experiencing other changes.
Sales Per Labor Hour
This measures how much revenue your restaurant generates for each hour of labor.
It can help you compare busy and slow periods.
For example, if Tuesday afternoon requires almost as many employees as Friday evening but produces far less revenue, your schedule may need adjustment.
Overtime Hours
Overtime can become expensive quickly.
Under federal law, covered nonexempt employees generally must receive overtime pay at no less than one and one-half times their regular rate for hours worked over 40 in a workweek. State and local rules may add additional requirements. (Department of Labor)
Track overtime by employee and by department. One employee repeatedly working extra shifts may signal a staffing shortage or scheduling problem.
What Causes Restaurant Labor Costs to Rise?
Payroll rarely gets out of control because of one dramatic event. More often, several small problems pile up.
Common causes include:
Overstaffing during slow periods
Too much overtime
Employee turnover
Poor scheduling
Excessive training time
Low productivity
Unexpected call-outs
Long opening or closing shifts
Managers performing tasks that could be handled more efficiently
Scheduling employees based on habit instead of actual sales patterns
The good news is that many of these problems can be measured.
How to Control Restaurant Labor Costs
Cutting labor costs does not mean simply sending employees home early or reducing everyone's hours.
Those strategies can backfire if service quality drops, employees become frustrated, or customers have longer waits.
The goal is better labor efficiency, not simply fewer employees.
Schedule Based on Sales Patterns
Review your sales by day and hour.
You may discover that your restaurant is packed between 6 p.m. and 8 p.m. but much quieter earlier in the afternoon.
Your staffing should reflect those patterns.
Use historical sales data when building schedules, but leave enough flexibility for unexpected changes. Weather, holidays, local events, and seasonal demand can all affect customer traffic.
Cross-Train Employees
Cross-training means teaching employees to handle more than one type of task.
A server who can help with host duties during a rush or a kitchen employee who can assist with basic prep can give you more flexibility.
Cross-training does not mean expecting everyone to do everything. Employees still need proper training and clear responsibilities.
Reduce Unnecessary Overtime
Review overtime before the end of the workweek instead of discovering it when payroll is already finished.
If someone is approaching overtime, look at whether another qualified employee can cover the remaining hours.
Remember that employers generally cannot avoid overtime obligations simply by telling employees not to work extra hours.
Improve Employee Retention
High turnover can create hidden labor expenses.
When employees leave, you may spend time and money recruiting, interviewing, onboarding, and training replacements. New employees may also take longer to reach full productivity.
Better communication, predictable scheduling, reasonable expectations, and opportunities to learn new skills can support retention.
You do not have to offer every perk under the sun. Sometimes employees mostly want to know when they are working and what is expected of them, a surprisingly revolutionary concept in the workplace.
Track Labor by Shift
Do not look only at monthly payroll.
Break your numbers down by:
Day of the week
Shift
Department
Employee role
Sales period
This can show exactly where labor is becoming inefficient.
If lunch service consistently requires more labor than the sales justify, you have a specific problem to investigate rather than a vague feeling that payroll is too high.
Don't Cut Labor at the Expense of Safety
Labor control should never mean eliminating positions or training simply because they cost money.
Restaurants involve knives, hot surfaces, commercial cooking equipment, slippery floors, heavy items, and fast-paced work.
Employees need appropriate training and enough staffing to perform their jobs safely.
Cutting staffing too far can also increase mistakes and injuries, which can create additional business costs.
Your workers' compensation requirements will depend on your state and business circumstances. Restaurant owners should understand their state requirements and discuss their insurance program with a licensed agent.
Understand Wage and Hour Requirements
Restaurant owners also need to follow federal, state, and local employment rules.
The Fair Labor Standards Act, or FLSA, establishes federal requirements involving minimum wage, overtime, recordkeeping, and other employment matters for covered workers. State and local requirements can be different or more protective.
Tipped employees can add another layer of complexity. Federal rules include specific requirements involving tip credits and tip pools, while state laws may differ.
Because employment laws can change and requirements vary by location, speak with an employment professional or qualified attorney when you need legal advice.
How Labor Costs Affect Restaurant Insurance
Labor expenses and insurance costs are separate line items, but they can still affect how you think about your overall operating risk.
Restaurants may face risks involving employees, customers, property, equipment, vehicles, and business interruption.
Depending on the operation and policy, restaurant insurance may include coverage such as:
General liability insurance, which may help address certain third-party injury or property damage claims.
Commercial property insurance, which may cover certain damage to eligible business property.
Workers' compensation insurance, which may cover certain job-related employee injuries or illnesses, subject to applicable law and policy terms.
Business interruption insurance, which may help with certain lost income or continuing expenses after a covered loss.
Commercial auto insurance, which may be important when vehicles are owned or used for restaurant business.
Equipment breakdown coverage, which may address certain covered mechanical or electrical failures.
Coverage varies by policy. Limits, exclusions, deductibles, conditions, and state requirements all matter.
An insurance program should fit the actual way your restaurant operates, including how many employees you have, what they do, whether you make deliveries, and what property and equipment you own.
Restaurant Labor Costs: The Bottom Line
Restaurant labor costs should be measured against sales and reviewed by shift, department, and employee role. There is no universal labor cost percentage that guarantees a restaurant is profitable.
The most effective way to control labor is to:
Track total labor costs accurately.
Calculate labor cost percentage regularly.
Compare staffing with actual sales patterns.
Monitor overtime.
Cross-train employees where appropriate.
Improve retention and reduce unnecessary turnover.
Review labor performance by shift.
Follow federal, state, and local wage requirements.
Protect employees and customers with appropriate safety practices.
Review insurance coverage as your business changes.
The objective is not to have the smallest payroll possible.
It is to have the right payroll for the amount of business you're doing.
A restaurant needs enough people to serve customers well, prepare food safely, clean properly, and keep operations moving. Cutting too deeply can create a different set of problems that cost more than the savings.
Frequently Asked Questions
What percentage of sales should restaurant labor cost be?
There is no universal percentage that fits every restaurant. Labor needs vary by concept, location, service model, hours, staffing structure, and sales volume. Use industry benchmarks as a reference, then compare your results with your own historical performance.
How do you calculate restaurant labor cost percentage?
Divide total labor costs by total sales and multiply by 100. Include the labor expenses that are relevant to your chosen measurement, such as wages and related payroll costs, so you are comparing consistent numbers.
How can restaurants reduce labor costs?
Restaurants can improve labor efficiency by scheduling around sales patterns, reducing unnecessary overtime, cross-training employees, improving retention, and tracking labor performance by shift.
Does overtime affect restaurant labor costs?
Yes. Overtime can increase payroll expenses significantly. Covered nonexempt employees generally must receive overtime pay at no less than one and one-half times their regular rate for hours over 40 in a workweek under federal law, subject to applicable exemptions and other requirements.
Does restaurant insurance cover employee injuries?
Workers' compensation insurance may provide benefits for covered work-related injuries or illnesses, depending on applicable state law and the policy. Requirements and coverage vary, so restaurant owners should work with a licensed insurance agent to review their situation.
Request a Free Restaurant Insurance Quote
Controlling labor costs is an important part of running a healthy restaurant, but managing risk matters too. Wexford Insurance helps small business owners evaluate commercial insurance based on their operations, employees, property, and other exposures.
Request a free quote from Wexford Insurance and speak with a licensed insurance professional about your restaurant's coverage needs.
