Labor generally accounts for some of the biggest expenses of restaurant owners, along with rent. With most establishments, the cost of maintaining the workforce can be 30% to 35% of the restaurant’s total revenue. And with salaries and restaurant insurance increasing all the time, labor costs are constantly on the rise as well. This is why it is so important for restaurant owners to learn how to calculate how much they are spending on labor.

## Labor cost definition

Labor costs are more than just employee wages. In a restaurant, they typically include the following:

- Wages of salaried employees
- Wages of hourly employees
- Overtime pay
- Bonuses
- Payroll tax
- Health care insurance
- Vacation and sick leaves

All these factors should be included when calculating the cost of labor. In general, every expense related to labor should be considered in the labor cost calculation.

## Calculating labor costs by the hours worked

Many restaurant owners calculate costs by the hours worked or labor hours. Historical data obtained from POS systems is crucial for making labor and scheduling projections. Here are the basic steps for calculating costs using this method:

- Group all your employees according to salary. Groupings may vary depending on your establishment, but this is typically done according to station such as reception, kitchen, and so on. Others group workers according to specific roles, such as servers, line cooks, etc.
- For hourly employees, add up the number of hours worked for each group. For this example, let’s assume your servers have put in a total of 400 hours for the week.
- Multiply your servers’ hourly rate by the number of hours they worked. With an hourly rate of $7.25 multiplied by 400, the total would be 2900.
- Divide that figure by the number of weeks per year. In this example, that would be 2900 / 52 = 56. That means you’re paying $56 per hour that your servers work.
- Finally, add up the wages of your workers in each group to determine find out your total labor expenses based on the hours your employees worked.

## Calculating the labor cost percentage

Another way is to calculate the labor cost percentage. For this, you could use one of two methods: 1) labor as a percentage of sales and 2) labor as a percentage of total operating costs.

### Labor as a percentage of sales

Most restaurant owners calculate their labor costs as a percentage of their total sales. Here is the procedure for doing so:

- Calculate the total labor cost of your restaurant. This should include all the money you’ve paid your employees throughout the entire year.
- Calculate how much your restaurant earned throughout the year. This represents your bottom line, which is the amount you earned before taxes or other deductions. This figure should be found in the dashboard of your POS system.
- Divide your labor cost by the annual revenue. If you paid your workers a total of $300,000 for the entire year and have an income of $1,000,000, the formula would be 300,000 / 1,000,000 = 0.3.
- Multiply the total by 100. In this case, the result would be 30%, which is the percentage of your labor cost versus your sales.

### Labor as a percentage of total operating costs

The other method involves calculating labor cost as a percentage of your restaurant’s total operating costs. The procedure is similar to calculating the labor cost percentage with some slight differences.

- Find out the total cost of your labor for the entire year. This should cover all the money you paid your workers throughout the year.
- Figure out your total operating costs. Operating costs include everything necessary to operate your restaurant. This includes rent, marketing, food, beverages, and other expenditures.
- Divide the cost of labor by your total operating costs. If you spend $9,000 per month on labor and $15,000 per month running your business, the formula would be: 9,000 / 15,000 = 0.6.
- Multiply the result by 100. In this case, the total would be 60%, which represents the cost of labor versus the total cost of running your business.

These are the basic steps for figuring out how much it costs to maintain your workforce. Calculating your labor costs can be confusing at first, but it does get easier over time. Knowing how to calculate these expenses accurately will give you a clearer picture of how your restaurant is performing.

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