Food Service Industry: Labor Cost Standards

As a restaurant owner, you depend on your staff to cook and serve food, greet customers and wash dishes. The cost of labor to perform all these functions can easily be your biggest operating expense. It's useful to have benchmarks for labor cost standards, and it's also important to be flexible when evaluating payroll information, especially when looking at short term numbers. Many variables factor into your labor costs, and temporary spikes often even out over time.

Sustainable Labor Cost Percentages

Acceptable labor cost percentages can run anywhere from 25 to 40 percent of a restaurant's gross revenue. High-end restaurants that devote considerable attention to creating a fine dining experience and making all menu items from scratch will land on the high end of this spectrum. Fast casual restaurants with simple menus and items purchased from food service warehouses and reheated, usually land on the lower end.

To understand your payroll numbers and assess where there is room for improvement, track hours relative to labor functions such as front of house and back of house. This information can tell you whether parts of your restaurant are inefficient or overstaffed, and show you where payroll costs can be trimmed.

Prime Cost Percentages

Many restaurant owners find it more useful to assess their margins by looking at prime costs, or ingredients and labor combined, rather than looking at labor costs in isolation. It may be sustainable to have higher labor costs if your food costs are lower or vice versa. Food and labor costs together should equal about 66 percent, or two thirds of your gross revenue. You may have higher labor costs because you make all of the elements on your menu in house, balancing the labor expense by saving money on ingredients.

Alternatively, you may buy prepared items from another business or from a food service warehouse. This strategy may reduce your labor costs but may increase your food costs.

Fixed Labor Costs

Although labor is typically regarded as a variable cost, one that fluctuates relative to the amount of business you transact, your restaurant incurs fixed labor costs to maintain a skeleton staff, even if no customers walk in your door. Restaurant business volume can be notoriously unpredictable, and your staff needs to be ready to handle a rush,even when business has been slow. You'll have more flexibility and better odds at improving your labor cost percentage, once your restaurant builds enough volume to consistently cover the costs of the minimum staffing necessary to keep your doors open.