Restaurant Labor Cost 101

Restaurant labor cost 101 is a plan for any restaurant owner who wants to solve the end-of-the-week panic when you check your labor cost on your POS system and see that it’s too high, so you whip yourself into a panic and start cutting staff on your two busiest days. The problem with this reactive approach is you’re setting yourself up for long ticket times and bad service, two of any restaurant’s biggest fears. To avoid this or stop this result, click below to watch the video or keep scrolling to read the tips.

To get started, here is a list of common mistakes restaurant owners make when it comes to labor cost.

1. Using the wrong labor targets. Maybe you chose your restaurant labor target after reading some article in a magazine or watching a video. There is this myth the average full-service restaurant should run at a 34% labor cost. The problem is, who said you were average?

You have to understand where your labor target needs to be, not use one that was arbitrarily pulled out of the air. If you don’t find your restaurant’s specific labor target, you're setting yourself up for mistakes, lost money, or really not having enough labor to handle the business coming in.

2. Scheduling like you always do. If you schedule like you always do, and do what you always did, you always get what you always got. If you’re happy with your results, then keep doing it. But the truth is you don't like them. If you schedule like you’re busy for when you’re slow, you're bleeding labor like no tomorrow. If you schedule like you’re slow and then get busy, you can't handle it. Then you give crappy service, get terrible Yelp reviews, long ticket times, etc., you get the picture.
3. Looking at your labor cost after it's too late. If you’re measuring your labor on a Friday afternoon, and you're working on a Monday through Sunday work week, it is far too late. More often than not, your rookie manager was playing solitaire on a Monday and left everybody to close together when you had no business instead of managing the labor hours. This stacks up throughout the week and by Friday it’s much, much too late. So, there you are on your two busiest days making adjustments, but it’s past time.

To fix this all you need to do is follow restaurant labor cost 101.

First, you have to use a budget and understand prime cost. If you need to learn about budgeting or prime cost, you're in the right place. Make sure you check out my channel and search for the many videos on prime cost and budgeting because it's critical.

Your budget is your plan up for success. You set your labor targets understanding where your cost of goods sold and labor is going to be based on where you're located and more. To schedule properly, to grab the right labor target, you have to have a budget.

One quick note is when you're busy, your labor target will be lower than when you're slow. It will be higher because your salaried managers chew up so much money, and you have these things called minimum staffing levels versus maximum staffing levels, or efficiencies, when all of a sudden you couldn't add another cook to the line, and your customers are managing your efficiencies because your customers are on an hour wait. So understanding budget, understanding where your prime cost should be, is number one.

Number two, schedule based on that budget. All too often you bring people to meet this idea that to offer great service you have to have a lot of people around to offer that service. I’m sure you’ve noticed when you have more staff than you have customers, they’re too busy playing grab ass with each other to pay attention to the guests. That's when your bad Yelp reviews happen. To solve this I teach my members to use a system called the Restaurant Payroll Guardian, which tells your managers how many hours and dollars they have to spend to go into the week on budget instead of bringing people in praying you’re busy and then sending them home when you’re slow but it's already too late.

If you already had three slow hours and then start cutting people, you’ve already blown your labor budget. Instead, you’re going to tell your chef they have 350 hours to can schedule in the kitchen. If you’ve been doing that thing where you just copy last week’s schedule, let’s say you have 364 hours scheduled. If you follow the budget, that means you have to cut those extra 14 hours. Your chef or kitchen manager is going to freak out on you when you tell them that. But little by little, if you cut a team by 15 minutes each day rather than two whole shifts, you can get there. For example, bring in four cooks 15 minutes later in the morning and the evening for seven days, and that gets you there.  

And last but not least, number three, track your running labor cost percentage and your daily hours. You know track your labor cost by day and running total. In fact, most of your POS systems will tell you that story. But remember step one when I said, hey, you’re going to have a labor budget? Labor cost percentage for the month may be higher or lower depending on that month. That translates to scheduling the hours you have in step two, which means you’re going to set up your schedule based on the needs of the business.

This may mean you may have a higher labor cost on a Monday versus a Friday because over the weekend you had your butt handed to you and now you have all this prep to do going into the week.  Based on production, you’re going to have a higher labor cost because of lower sales. But the production needs to happen, whereas on a Friday you have no prep and your sales are through the roof, which makes your labor efficiency lower. If you use those hours that have been allocated in step two, no more, no less, you will end the week on budget. If you schedule that way, it means you have a different labor cost percentage and a trailing budget that I'm going to be following.

Well, there's one more piece and that's hours. All too often we have these sales forecast. We expect the $5,000 day and scheduled 300 hours. What if the next morning you walk in and you see 310 hours were worked. What would your expectation be? Sales to be higher, on forecast, or lower? Higher, right? What if when you come in you find out it was either dead, on forecast, or it was actually $500 less.

Why were 10 more hours needed? When this happens, you now know which manager you need to coach to make sure they get people out of there so that they're not wasting your money.

These three steps are critical. When you get the hang of it, not only will you drop your labor cost, but you're going to get yourself ready for advanced labor controls. That puts you 100% in control of your time clock and your profitability.

f you would like to learn how to own a restaurant that doesn't depend on you to be successful, watch this free video course that teaches you three key principles to running a successful restaurant.

Be sure to visit my YouTube channel for more helpful restaurant management video tips.