What is the cost of labor in a restaurant?
The cost of labor in a restaurant includes all expenses related to employee compensation, such as wages, salaries, payroll taxes, and benefits. It's typically expressed as a percentage of total sales to measure efficiency and profitability.
How to Calculate the Cost of Labor in a Restaurant
Explanation of Labor Cost
Running a restaurant means keeping a close eye on all your expenses, and one of the biggest is labor. Every hour your staff works - whether they're taking orders, cooking meals, or cleaning up - adds to your total labor cost. If you're not tracking this carefully, it's easy for labor costs to get out of control. That can lead to smaller profits or even make it hard to pay your team on time.
Knowing how to calculate your labor cost helps you stay on top of your payroll and plan ahead. It gives you a clear picture of how much you're spending on employees compared to how much money your restaurant is bringing in. This way, you can make smarter choices about scheduling, avoid unnecessary overtime, and keep your team working efficiently.
Labor cost isn't just about wages. It also includes payroll taxes, overtime pay, and any benefits you offer. When you understand the full picture, you can set better goals, make your budget work for you, and make sure your staff gets paid correctly and on time.
Knowing how to calculate your labor cost helps you stay on top of your payroll and plan ahead. It gives you a clear picture of how much you're spending on employees compared to how much money your restaurant is bringing in. This way, you can make smarter choices about scheduling, avoid unnecessary overtime, and keep your team working efficiently.
Labor cost isn't just about wages. It also includes payroll taxes, overtime pay, and any benefits you offer. When you understand the full picture, you can set better goals, make your budget work for you, and make sure your staff gets paid correctly and on time.
Defining Labor Cost in a Restaurant Setting

Before you can calculate your labor cost, it's important to understand what's included - and what's not. Labor cost isn't just the hourly wages you pay your employees. It includes everything your restaurant spends to keep your team working.
First, there's regular pay, which is the hourly rate or salary you give employees for the time they work. Then, there's overtime pay - extra pay for hours worked beyond the standard workweek, usually more than 40 hours. You also need to count payroll taxes, which include Social Security, Medicare, and unemployment taxes that you're required to pay as an employer.
If you offer benefits like health insurance, paid time off, or bonuses, these should also be included in your total labor cost. Even small perks like free meals or uniforms can be counted if they're part of employee compensation.
It's also helpful to understand the difference between direct labor and indirect labor. Direct labor refers to employees who are directly involved in food prep, service, or cooking - like chefs, servers, and bartenders. Indirect labor includes roles like managers, janitorial staff, or bookkeepers who help run the business but aren't customer-facing.
What should you leave out? Payments to contractors, outside vendors, or repair services don't count as labor costs. These fall under different expense categories.
By understanding all the parts that make up labor cost, you'll get a more accurate picture of how much your team really costs your business - and that's the first step toward better budgeting and payroll planning.
First, there's regular pay, which is the hourly rate or salary you give employees for the time they work. Then, there's overtime pay - extra pay for hours worked beyond the standard workweek, usually more than 40 hours. You also need to count payroll taxes, which include Social Security, Medicare, and unemployment taxes that you're required to pay as an employer.
If you offer benefits like health insurance, paid time off, or bonuses, these should also be included in your total labor cost. Even small perks like free meals or uniforms can be counted if they're part of employee compensation.
It's also helpful to understand the difference between direct labor and indirect labor. Direct labor refers to employees who are directly involved in food prep, service, or cooking - like chefs, servers, and bartenders. Indirect labor includes roles like managers, janitorial staff, or bookkeepers who help run the business but aren't customer-facing.
What should you leave out? Payments to contractors, outside vendors, or repair services don't count as labor costs. These fall under different expense categories.
By understanding all the parts that make up labor cost, you'll get a more accurate picture of how much your team really costs your business - and that's the first step toward better budgeting and payroll planning.
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The Labor Cost Percentage Formula
Now that you know what labor cost includes, let's look at how to calculate it. One of the easiest ways to understand your labor expenses is by using a simple formula called the labor cost percentage. This helps you see how much of your sales are being spent on paying employees.
Here's the formula -
Labor Cost Percentage = (Total Labor Cost - Total Sales) x 100
Let's break that down -
-Total Labor Cost is everything you spend on employee wages, overtime, payroll taxes, and benefits during a specific time period (like a week or a month).
-Total Sales is how much money your restaurant made in that same time period, before taking out any expenses.
-You divide your labor cost by your sales, then multiply by 100 to get a percentage.
This number tells you what portion of your income is going toward labor. For example, if you spent $5,000 on labor and made $20,000 in sales, your labor cost percentage would be-
($5,000 / $20,000) x 100 = 25%
That means 25 cents of every dollar you earn goes to labor.
Using this formula regularly - weekly or biweekly - helps you spot trends early. If the percentage starts creeping up, it could mean you're overstaffed, paying too much overtime, or not bringing in enough sales. On the other hand, if it's too low, you might be understaffed and risking poor service.
Keeping an eye on this number is key to staying in control of your payroll and your profits.
Here's the formula -
Labor Cost Percentage = (Total Labor Cost - Total Sales) x 100
Let's break that down -
-Total Labor Cost is everything you spend on employee wages, overtime, payroll taxes, and benefits during a specific time period (like a week or a month).
-Total Sales is how much money your restaurant made in that same time period, before taking out any expenses.
-You divide your labor cost by your sales, then multiply by 100 to get a percentage.
This number tells you what portion of your income is going toward labor. For example, if you spent $5,000 on labor and made $20,000 in sales, your labor cost percentage would be-
($5,000 / $20,000) x 100 = 25%
That means 25 cents of every dollar you earn goes to labor.
Using this formula regularly - weekly or biweekly - helps you spot trends early. If the percentage starts creeping up, it could mean you're overstaffed, paying too much overtime, or not bringing in enough sales. On the other hand, if it's too low, you might be understaffed and risking poor service.
Keeping an eye on this number is key to staying in control of your payroll and your profits.
Example Calculations
Understanding a formula is one thing - seeing it in action makes it much easier. In this section, we'll walk through a few example calculations to show how labor cost percentage works in real-life situations.
Example 1 - A Simple Weekly Calculation
Let's say your restaurant brings in $12,000 in total sales during one week. During that same week, you spend the following on labor-
-Wages - $3,000
-Overtime - $300
-Payroll taxes - $400
-Benefits - $200
Total Labor Cost = $3,000 + $300 + $400 + $200 = $3,900
Now plug it into the formula -
($3,900 / $12,000) x 100 = 32.5%
This means 32.5% of your weekly revenue went to labor costs.
Example 2 - Monthly View
Your total labor cost for the month is $16,000, and your total sales are $50,000.
($16,000 / $50,000) x 100 = 32%
Even over a longer period, the math stays the same. You just need to use matching time frames for sales and labor costs.
Why These Numbers Matter
By running these numbers regularly, you'll be able to spot changes. If your labor cost percentage jumps from 28% one week to 35% the next, something likely changed - maybe you had too many staff scheduled or slower sales.
You can also use a simple spreadsheet to track labor costs and sales side by side. This gives you a quick snapshot of where your money's going and helps you stay on top of payroll planning.
Practicing with real numbers builds confidence and helps you stay in control of your labor expenses.
Example 1 - A Simple Weekly Calculation
Let's say your restaurant brings in $12,000 in total sales during one week. During that same week, you spend the following on labor-
-Wages - $3,000
-Overtime - $300
-Payroll taxes - $400
-Benefits - $200
Total Labor Cost = $3,000 + $300 + $400 + $200 = $3,900
Now plug it into the formula -
($3,900 / $12,000) x 100 = 32.5%
This means 32.5% of your weekly revenue went to labor costs.
Example 2 - Monthly View
Your total labor cost for the month is $16,000, and your total sales are $50,000.
($16,000 / $50,000) x 100 = 32%
Even over a longer period, the math stays the same. You just need to use matching time frames for sales and labor costs.
Why These Numbers Matter
By running these numbers regularly, you'll be able to spot changes. If your labor cost percentage jumps from 28% one week to 35% the next, something likely changed - maybe you had too many staff scheduled or slower sales.
You can also use a simple spreadsheet to track labor costs and sales side by side. This gives you a quick snapshot of where your money's going and helps you stay on top of payroll planning.
Practicing with real numbers builds confidence and helps you stay in control of your labor expenses.
Ideal Labor Cost Benchmarks by Restaurant Type

Once you know how to calculate labor cost percentage, the next step is to understand what's considered normal for your type of restaurant. Labor cost benchmarks can vary depending on the kind of service you offer, your location, and how your team is structured. But having a general target range can help you stay on track.
Quick Service Restaurants (QSRs)
Fast food or counter-service restaurants usually aim for 25% to 30% labor cost. These restaurants tend to have simpler menus, faster prep times, and lower prices, which means more focus on speed and efficiency with smaller teams.
Casual Dining
Sit-down restaurants with table service typically fall in the 30% to 35% range. These operations require more staff for front-of-house and back-of-house roles. You'll have servers, cooks, hosts, and managers all contributing to the overall labor cost.
Fine Dining
Fine dining restaurants often have higher labor costs, ranging from 35% to 40% or more. This is due to the level of service, skill, and attention required - from chefs and sommeliers to servers and support staff. Higher menu prices can help offset this.
Keep in Mind
These benchmarks are just starting points. Your ideal number depends on your specific situation - like how many staff members you need during peak hours or how seasonal your business is. If your labor cost is above the average, it doesn't always mean you're doing something wrong, but it's worth looking into your staffing levels and sales numbers.
Monitoring your labor cost percentage against industry norms helps you spot issues early and make adjustments that protect your bottom line.
Quick Service Restaurants (QSRs)
Fast food or counter-service restaurants usually aim for 25% to 30% labor cost. These restaurants tend to have simpler menus, faster prep times, and lower prices, which means more focus on speed and efficiency with smaller teams.
Casual Dining
Sit-down restaurants with table service typically fall in the 30% to 35% range. These operations require more staff for front-of-house and back-of-house roles. You'll have servers, cooks, hosts, and managers all contributing to the overall labor cost.
Fine Dining
Fine dining restaurants often have higher labor costs, ranging from 35% to 40% or more. This is due to the level of service, skill, and attention required - from chefs and sommeliers to servers and support staff. Higher menu prices can help offset this.
Keep in Mind
These benchmarks are just starting points. Your ideal number depends on your specific situation - like how many staff members you need during peak hours or how seasonal your business is. If your labor cost is above the average, it doesn't always mean you're doing something wrong, but it's worth looking into your staffing levels and sales numbers.
Monitoring your labor cost percentage against industry norms helps you spot issues early and make adjustments that protect your bottom line.
Common Mistakes When Calculating Labor Cost
Even when restaurant owners understand the formula for labor cost, a few common mistakes can lead to inaccurate numbers. These errors may seem small, but they can cause big problems with budgeting, payroll planning, and even compliance. Let's go over the most frequent ones so you can avoid them.
1. Leaving Out Payroll Taxes and Benefits
One of the biggest mistakes is only counting hourly wages or salaries. Labor cost includes more than just what's on a paycheck. Taxes, health insurance, paid time off, bonuses, and other benefits are all part of your actual labor expenses. Forgetting to include them will make your labor cost percentage look lower than it really is.
2. Using Net Sales Instead of Gross Sales
The formula calls for total (gross) sales, not sales after expenses. If you use net sales, you'll end up with a higher labor cost percentage than you should. Always use the total amount your restaurant made before deducting anything.
3. Mixing Time Periods
To get an accurate result, your labor cost and sales must come from the same time period. Don't compare monthly labor costs to weekly sales - it'll throw off your numbers. Always match the data (weekly with weekly, monthly with monthly).
4. Not Including Salaried Employees
Some restaurant owners forget to include salaried managers or chefs in their labor cost. These roles might not clock in and out, but their pay still impacts your overall labor expense.
Avoiding these mistakes helps you get a clear, accurate view of your labor cost - and make smarter business decisions based on real numbers.
1. Leaving Out Payroll Taxes and Benefits
One of the biggest mistakes is only counting hourly wages or salaries. Labor cost includes more than just what's on a paycheck. Taxes, health insurance, paid time off, bonuses, and other benefits are all part of your actual labor expenses. Forgetting to include them will make your labor cost percentage look lower than it really is.
2. Using Net Sales Instead of Gross Sales
The formula calls for total (gross) sales, not sales after expenses. If you use net sales, you'll end up with a higher labor cost percentage than you should. Always use the total amount your restaurant made before deducting anything.
3. Mixing Time Periods
To get an accurate result, your labor cost and sales must come from the same time period. Don't compare monthly labor costs to weekly sales - it'll throw off your numbers. Always match the data (weekly with weekly, monthly with monthly).
4. Not Including Salaried Employees
Some restaurant owners forget to include salaried managers or chefs in their labor cost. These roles might not clock in and out, but their pay still impacts your overall labor expense.
Avoiding these mistakes helps you get a clear, accurate view of your labor cost - and make smarter business decisions based on real numbers.
How Accurate Payroll Supports Labor Cost Control
Accurate payroll is more than just paying employees the right amount on time - it's also a key part of keeping your labor costs under control. If your payroll records are messy, delayed, or full of errors, it becomes harder to know what you're actually spending on labor each week. That can lead to surprises, like overtime you didn't plan for or budget shortfalls at the end of the month.
When payroll is done right, you have a clear picture of how much every employee is earning. This includes regular hours, overtime, tips (if applicable), and any bonuses or benefits. With accurate data, you can see patterns in your spending - like which shifts are costing the most or which employees are regularly hitting overtime. This helps you make better scheduling decisions and stay within your labor budget.
Accurate payroll also helps build trust with your team. When employees know they're being paid fairly and on time, morale stays high and turnover stays low. That reduces the cost of hiring and training new staff, which can quietly eat into your labor budget.
Plus, having reliable payroll records is important for tax reporting and staying compliant with labor laws. Mistakes here can lead to costly fines or penalties.
In short, accurate payroll gives you the information you need to track labor costs in real time, avoid unexpected spikes, and keep your restaurant running smoothly. It's not just about writing checks - it's about managing one of your biggest business expenses with confidence.
When payroll is done right, you have a clear picture of how much every employee is earning. This includes regular hours, overtime, tips (if applicable), and any bonuses or benefits. With accurate data, you can see patterns in your spending - like which shifts are costing the most or which employees are regularly hitting overtime. This helps you make better scheduling decisions and stay within your labor budget.
Accurate payroll also helps build trust with your team. When employees know they're being paid fairly and on time, morale stays high and turnover stays low. That reduces the cost of hiring and training new staff, which can quietly eat into your labor budget.
Plus, having reliable payroll records is important for tax reporting and staying compliant with labor laws. Mistakes here can lead to costly fines or penalties.
In short, accurate payroll gives you the information you need to track labor costs in real time, avoid unexpected spikes, and keep your restaurant running smoothly. It's not just about writing checks - it's about managing one of your biggest business expenses with confidence.
Making Labor Cost Part of Your Routine
Calculating labor cost isn't something you do once and forget about. To truly stay in control of your restaurant's finances, it should become a regular part of your routine - just like taking inventory or reviewing sales reports. Checking your labor cost percentage weekly or biweekly helps you catch small issues before they turn into bigger problems.
When you make labor cost tracking a habit, you'll start to notice trends. Maybe sales are slower on Tuesdays, but your staffing levels haven't changed. Or maybe one location consistently has a higher labor cost percentage than another. These are things you might miss if you're only reviewing numbers once a month or less.
You don't need fancy software or an accountant to keep track. A basic spreadsheet that compares your total labor costs to your total sales over time can be incredibly helpful. You can even break it down by daypart or shift to see which times are the most efficient.
Also, don't forget to involve your managers. When your shift leaders understand how labor cost works, they can help control it by scheduling smarter and avoiding unplanned overtime.
The more familiar you are with your numbers, the more confident you'll feel in running your restaurant. And when payroll time comes around, you'll already know exactly where your labor spending stands - no surprises, no stress.
By making labor cost tracking part of your routine, you're not just crunching numbers. You're making smarter decisions that help your restaurant stay profitable and your team stay paid on time.
When you make labor cost tracking a habit, you'll start to notice trends. Maybe sales are slower on Tuesdays, but your staffing levels haven't changed. Or maybe one location consistently has a higher labor cost percentage than another. These are things you might miss if you're only reviewing numbers once a month or less.
You don't need fancy software or an accountant to keep track. A basic spreadsheet that compares your total labor costs to your total sales over time can be incredibly helpful. You can even break it down by daypart or shift to see which times are the most efficient.
Also, don't forget to involve your managers. When your shift leaders understand how labor cost works, they can help control it by scheduling smarter and avoiding unplanned overtime.
The more familiar you are with your numbers, the more confident you'll feel in running your restaurant. And when payroll time comes around, you'll already know exactly where your labor spending stands - no surprises, no stress.
By making labor cost tracking part of your routine, you're not just crunching numbers. You're making smarter decisions that help your restaurant stay profitable and your team stay paid on time.
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Frequently Asked Questions
What is a good labor cost percentage for a restaurant?
It varies by restaurant type. Quick service restaurants usually aim for 25-30%, while casual and fine dining may range from 30-40%.
How often should I calculate my restaurant's labor cost?
It's best to calculate labor cost weekly or biweekly to catch trends early and make informed staffing or payroll decisions.
What's the difference between direct and indirect labor?
Direct labor includes staff directly involved in service or food prep (servers, cooks), while indirect labor includes roles like managers or cleaners.
How can I lower my labor cost without cutting hours?
Improve your schedule, reduce overtime, cross-train employees, and adjust staffing levels based on peak and slow times.