How do you calculate labor cost for a restaurant?
What Counts as Labor Cost
Labor cost includes all expenses related to employees: hourly wages, salaries, overtime, payroll taxes (Social Security, Medicare, unemployment insurance), workers' compensation, health insurance, paid time off, and sometimes tips if they are reported and taxed. For tipped employees, the tipped minimum wage is part of labor cost, but tips themselves are usually not included because they are paid by guests.
Some restaurants also include costs for uniforms, meals, or training, but these are often tracked separately. For a basic calculation, focus on wages, taxes, and benefits.
- Hourly wages and salaries
- Overtime pay
- Payroll taxes (FICA, FUTA, SUTA)
- Health insurance and other benefits
- Workers' compensation
The Calculation
To calculate labor cost percentage, use this formula: (Total Labor Cost ÷ Total Sales) × 100. For example, if your labor cost for a week is $5,000 and sales are $20,000, your labor cost percentage is 25%.
You can calculate this for different periods—weekly, monthly, or annually. Many restaurants track it daily or weekly to catch problems early. Use your POS system to pull sales data and your payroll system for labor costs.
Prime Cost and Labor
Labor cost is part of your prime cost, which is labor plus food and beverage cost. Prime cost is a key metric for restaurant profitability. A healthy prime cost is typically around 60–65% of sales, with labor making up about 25–35% of that.
Keep in mind that labor cost varies by restaurant type. Quick-service restaurants often have lower labor costs (20–25%) than full-service restaurants (30–35%).
Common mistakes
- Forgetting to include payroll taxes and benefits, which can add 10–20% to wage costs.
- Calculating labor cost only on hourly wages and ignoring salaried managers or overtime.
- Using a single week's data to judge labor cost—seasonality and events can skew results.
