Labour cost in a restaurant, counted properly

Labour cost is usually the largest or second-largest cost in a restaurant, alongside the cost of food and drink. It is also one of the most often misunderstood. Ask a manager what the venue spends on labour and the answer is often the wages bill: hours worked multiplied by hourly rates, plus the salaries of the chef and manager. That figure is real, but it is not the whole cost of the people who run the venue, and treating it as the whole cost makes labour look cheaper than it is.

The gap matters. A venue that budgets for wages alone will be surprised by the taxes, contributions, holiday pay, benefits, recruitment and training that come on top. A venue that compares its labour cost percentage with another venue's, without knowing what each includes, is comparing different things. And a venue that decides whether to add a shift or a role based only on the wage will underestimate what the decision costs.

This guide sets out how to count labour cost properly in a restaurant. It explains what belongs in the figure besides wages, the three costs most operators leave out entirely, how to calculate the labour cost percentage, how labour fits into prime cost, how to use covers per labour hour and sales per labour hour, and how the staff rota connects all of it. Rules on pay, taxes and benefits vary by country, so the examples are illustrative; check what applies where you trade.

Labour matters because it is large, partly controllable and changes with every rota. A few extra hours on quiet shifts, a new role, a pay rise, a change in staffing rules: each moves the figure. Counted properly, labour cost shows the true cost of running each service and helps decide where hours are well spent and where they are not.

Counted badly, it misleads. A labour cost that leaves out taxes and benefits looks healthier than it is, so the venue may overstaff, underprice or overestimate its profit. When the full cost arrives in the accounts at the end of the year, it is too late to act.

The aim is a figure that reflects everything the venue spends because it employs people, calculated the same way every week.

The figure includes every cost the venue bears because of the people who work in it. The main parts are:

Not every venue has every item, but most have more of them than their wages bill shows.

Wages and salaries are the core of labour cost. For hourly staff, the cost is hours worked multiplied by the hourly rate, plus any overtime, premiums for nights or holidays and any other pay elements. For salaried staff, it is the salary for the period, whatever hours they work.

Count salaried staff properly. A head chef or manager on a salary is a fixed labour cost that does not change with the rota, and it should be included every week, not only when payroll is run.

Count the owner's own labour honestly too. An owner who works fifty hours a week in the venue without drawing a salary is hiding a real cost. If the venue could not run without that work, it belongs in the picture, at least as a note.

The first cost most operators leave out is employer on-costs: the taxes, contributions and insurance an employer pays on top of wages. In many countries, employers pay social security or national insurance contributions, pension contributions and employer's liability or workers' compensation insurance. These can add a significant percentage to the wages bill.

They are easy to miss because they are often paid separately from wages, sometimes monthly or quarterly, and they do not appear on the rota. A manager looking at the rota sees hours and rates; the on-costs appear later, in the accounts.

Add a percentage for on-costs to every week's figure, based on your actual payroll costs. Your accountant or payroll provider can tell you what it is.

The second cost is leave and end-of-service obligations. Staff earn paid holiday as they work, and the venue must pay for it when they take it, often at busy times when cover is needed too. Sick pay and other paid leave add more. In some countries, including the UAE, employers also owe end-of-service benefits when employment ends, which build up with every month of service; the UAE's Ministry of Human Resources and Emiratisation publishes the rules there.

These costs are often counted only when they are paid, which makes some months look expensive and others cheap. A fairer picture spreads them across the year, adding an amount each week for the leave and end-of-service obligations being earned.

Ask your accountant how to estimate these accruals for your venue, and include them in the weekly figure.

The third cost is the cost of finding, training and replacing people. Advertising roles, agency fees, interviews, trial shifts, uniforms for new starters and the hours spent training them all cost money. While a new member of staff is learning, they are usually slower, and someone else is spending time teaching them.

In hospitality, where turnover can be high, these costs add up. A venue that replaces many staff each year spends a meaningful amount on recruitment and training, much of it invisible in the wages bill.

Track these costs for a few months to see how large they are. Our guide to staff retention and the four reasons people leave covers how to reduce them.

Beyond the three main omissions, several benefits are easy to forget. Staff meals are a real cost, in food and in preparation time. Uniforms, laundry and safety equipment add up. Transport, accommodation and health insurance, common in some markets, can be large. Visas and permits, where required, cost money and time.

List every benefit the venue provides and estimate its cost per month. Include it, because it exists only because the venue employs people.

Agency and temporary staff fill gaps, cover holidays and help on busy nights. Their cost is usually higher per hour than permanent staff, because the agency's fee is included, and they may need more supervision. They belong in the figure in full.

Watch how much agency staff are used. Regular reliance on agency staff for the same shifts may mean the permanent team is too small, and hiring could be cheaper.

Labour cost percentage is labour cost divided by sales for the same period, as a percentage. If a week's full labour cost is 11,000 and sales are 40,000, the labour cost percentage is 27.5 per cent. It shows how much of each unit of sales goes to the people who run the venue.

Use sales excluding tax, and the full labour cost, consistently. A percentage calculated on wages alone looks lower than one calculated on the full cost, so be clear which you are using, especially when comparing with other venues or published figures.

There is no single right percentage. It depends on the format, the location, the level of service and how much of the work is done by people rather than equipment. Our guide to labour cost percentage, by service not by month covers how to read it.

Prime cost is food and drink cost plus labour cost, usually expressed as a share of sales. It combines the two largest and most controllable costs in a restaurant into one number. Many operators watch it weekly because it captures the trade-off between them: a venue that prepares more in-house may spend more on labour and less on bought-in products, and the other way round.

The general idea of prime cost, the direct costs of producing something, applies directly. Our guide to prime cost, the one number to watch weekly covers it in detail.

Count labour fully when calculating prime cost. A prime cost built on wages alone understates the true cost of running the venue.

Covers per labour hour is the number of guests served divided by the number of hours worked by staff, for a service or a week. If a dinner service serves 120 covers and staff work 60 hours between them, it is 2 covers per labour hour. It is a measure of productivity that does not depend on prices, so it can be compared across services and seasons more easily than a percentage.

Sales per labour hour does the same with sales instead of covers. Both help show which services are well staffed and which are not. A quiet lunch with low covers per labour hour may be overstaffed; a busy dinner with very high covers per labour hour may be understaffed and stretched.

Measure them by service, and look for services that stand out.

The staff rota is where labour cost is decided. Every shift on the rota is a cost; every hour added or removed changes the week's labour bill. A rota built from habit, copying last week's, tends to keep hours on quiet shifts and miss the busy ones. A rota built from a forecast of covers and sales puts hours where they are needed.

Our guide to staff scheduling against the trading curve covers how to build a rota from the shape of trade, and our guide to scheduling from forecast, not from memory covers turning the forecast into shifts.

Check the rota against the forecast and the labour cost percentage before publishing it.

Some labour cost is fixed: salaried staff, a minimum team needed to open, managers. Some is variable: hourly staff whose hours can rise and fall with trade. Understanding the split helps. On quiet days, fixed labour makes the labour cost percentage rise sharply, because the fixed cost is spread over fewer sales.

That is not always a problem; a venue needs a minimum team to open safely and serve well. But knowing which part of labour is fixed shows how much flexibility the rota really has, and what level of sales a service needs to cover its fixed labour.

Count it every week, not only at the end of the month or the year. A weekly figure lets the manager see the effect of rota decisions while there is still time to adjust. Use actual hours worked, not scheduled hours, because shifts often run long.

A simple weekly sheet works: wages from actual hours, salaries for the week, a percentage for on-costs, an amount for leave and end-of-service accruals, and an estimate for benefits, agency staff and recruitment. Divide by the week's sales for the labour cost percentage, and by hours for covers per labour hour.

Pay rates change: minimum wages rise, the venue gives a pay rise to keep good people, a new rule changes how overtime or breaks must be paid. Each change moves the whole figure, not only the hourly rate, because on-costs, holiday pay and other items are usually calculated from pay. A rise of a certain percentage in wages often means a slightly larger rise in the full cost.

Plan for known changes in advance. When a minimum wage increase is announced, work out what it will do to each service's costs, and decide whether prices, the rota or the menu need to change. Venues that wait until the new rate arrives often find their margin has already gone.

In many venues, the same person works in several roles: a server who also runs the bar, a cook who covers the pass, a manager who works the floor at the peak. That flexibility is valuable, but it makes it harder to see what each part of the operation costs. Decide how to count shared people, for example by the role they mainly do, and keep it consistent.

The same applies to staff who work across venues in a group. Allocate their hours to the venue where they worked, so each venue's figure reflects its own costs.

If the full figure turns out much higher than the wages bill suggested, do not panic, and do not cut hours straight away. Look first at which parts are largest: on-costs, accruals, benefits, agency staff or recruitment. Some, such as on-costs, are fixed by law; others, such as agency use and turnover, can be reduced over time.

The point of counting properly is to make better decisions, not to find a reason for cuts. A venue that knows its true staff costs can price its menu, plan its rota and judge new roles with confidence.

Published labour cost percentages and other venues' figures are tempting benchmarks, but they are rarely comparable. Some include on-costs and benefits; some do not. Some include the owner's labour; some do not. Formats, locations and service styles differ.

Compare yourself mainly with your own figures over time: this month against last, this year against last, this service against the same service a month ago. That shows whether labour is moving in the right direction.

Labour is not only a cost to cut. Too few staff on a busy service means slow service, stressed teams, mistakes and unhappy guests. A venue that cuts hours to reach a target percentage may lose more in reviews, return visits and staff turnover than it saves.

The aim is the right number of people at the right times: enough to serve guests well and support the team, without paying for hours the service does not need. Watch service measures, such as ticket times and guest feedback, alongside labour cost.

Here is an illustrative week for a venue, comparing wages alone with the full labour cost. The figures are examples.

The wages-only figure understated labour cost by six percentage points, which is the difference between a comfortable margin and a thin one.

servearound does not run your rota, payroll or labour costing. What it provides is the other half of the sums. Payment analytics shows revenue by hour and by day, and reservation analytics shows covers day by day, by meal period and by day and hour across the week, so you can calculate labour cost percentage, sales per labour hour and covers per labour hour by service, and see where trade actually falls when you build the staff rota.

Each member of staff signs in on the point of sale and host stand with their own PIN, and payment analytics shows who collected what and voids and comps by member. See Analytics, or get in touch.

Wages, salaries, employer taxes and contributions, leave and end-of-service accruals, benefits, agency staff, and recruitment and training.

It depends on the format and location. Compare your own figures over time rather than chasing a published average.

If the venue depends on it, yes, at least as a note, so the true cost of running the venue is clear.

Weekly, from actual hours worked, so you can adjust the rota while it matters.

Guests served divided by hours worked, a productivity measure that does not depend on prices.

Because fixed labour, such as salaries and the minimum team, is spread over fewer sales.

Labour cost is more than the wages bill. Count wages and salaries, employer on-costs, leave and end-of-service accruals, benefits, agency staff and recruitment and training. Three costs are most often left out: employer on-costs, leave and end-of-service obligations, and the cost of recruitment, training and turnover.

Calculate the labour cost percentage on the full figure, weekly and by service, alongside covers per labour hour and sales per labour hour. Read labour together with food cost as prime cost, build the staff rota from a forecast rather than habit, compare yourself with your own past figures, and watch service quality as closely as the cost.