How to Calculate and Reduce Restaurant Labor Costs in 2026

Calculating and reducing restaurant labor costs requires that you understand what actually goes into paying your team members. (Hint: It’s more than just their base rate.) And, with rising wages and the ever-changing economic landscape, doing so is more important than ever!

The better you understand where your money is going, the better you can balance your profits with a happy, healthy workforce.

In this guide, we’ll break down everything you need to know about restaurant labor costs, how to calculate them, and, perhaps most importantly, how to reduce them without sacrificing the quality of your service.

Key takeaways

Restaurant labor costs encompass a wide range of expenses, including base hourly wages, payroll taxes, insurance, and employee benefits.
Understanding the difference between fixed and variable costs can help you build a more predictable and flexible budget.
To calculate restaurant labor costs, add together an employee’s gross wages, benefits, taxes, and labor burden (other labor expenses). Then divide by their total hours worked for the year to find their real base pay.
To reduce restaurant labor costs, find ways to control employee turnover, invest in training, optimize your schedule, cross-train your team, and monitor overtime.

What are restaurant labor costs?
The different types of labor costs
How to calculate restaurant labor costs
Strategies to reduce restaurant labor costs

What are restaurant labor costs?

At their most basic, restaurant labor costs are the sum total of everything your business pays your employees for their services.

Most people think of labor costs as just the wage printed on a paycheck. But, in reality, it goes much deeper than that.

In fact, total labor cost includes everything from hourly wages (and/or annual salaries), employee benefits (e.g., health insurance and PTO), and payroll taxes, to bonuses, training expenses, and uniforms and equipment.

When you add all of that up, the true labor cost for an employee is often significantly higher than their base pay.

That’s why learning about all the different types of labor costs and how to control (i.e., reduce) them is so very important.

The different types of labor costs

Direct labor costs

Direct labor refers to the employees who create your product. In a restaurant, direct labor includes everyone from chefs and line cooks to servers, hosts, and bussers.

These team members are directly involved in making the food and taking care of the guests. Because of that, tracking these costs is the foundation of understanding your labor costs.

Indirect labor costs

Indirect labor supports your direct labor but isn’t part of the production. In a restaurant, this includes such positions as your bookkeeper, HR manager, maintenance crew, and even (to some extent) yourself.

While they aren’t preparing dishes or serving guests, your restaurant couldn’t run smoothly without them. In a very real way, they are the backbone that allows your direct labor to provide the best service possible.

Variable labor costs

Variable labor costs change based on how much work is being done. For most restaurants, this means hourly wages for out-of-the-ordinary situations.

For example, if you have an unexpectedly busy dinner service and call in extra part-time help, your variable labor costs will go up. On the other hand, if things are slow and you send people home early, your variable labor cost will go down.

Since these expenses fluctuate, they often require the most attention when you’re analyzing your restaurant labor costs.

Fixed labor costs

Fixed labor costs are the “set it and forget it” part of your budget. For a restaurant, these are typically salaries for managers, head chefs, or administrative staff.

In most cases, whether you serve one table or one hundred, these costs stay the same and are one of the easiest parts of your labor budget to predict and manage throughout the year.

How to calculate restaurant labor costs

Necessary components

The first step in calculating your restaurant labor cost is to focus on a single employee and assemble all the expenses that go into paying them.

This includes gross wages (before taxes), benefits, payroll taxes, and general labor burden (which includes things like equipment, uniforms, insurance, and/or training costs).

Your business may have more components than this, so be sure to examine all the numbers associated with your direct labor.

The calculation

When you have all of that information, use this formula to calculate your restaurant labor cost for a single employee:

Restaurant Labor Cost = Gross Wages + Benefits + Taxes + Labor Burden

Here’s how it works for a hypothetical employee whose base pay is $17.50 per hour and who works 2000 hours (full-time) per year:

Employee A Restaurant Labor Cost = Gross Wages + Benefits + Taxes + Labor Burden
Employee A Restaurant Labor Cost = $35,000 +$3,000 + $3,500 + $2,000
Employee A Restaurant Labor Cost = $43,500

Divide that number by the hours worked (2000) and you’ll see that their true labor cost is $21.75 per hour.

Knowing this true number can help you price your menu so that the business is covering these additional costs and not losing money at every service.

Strategies to reduce restaurant labor costs

1) Reduce employee turnover

You may not realize it, but hiring and training new team members is expensive. You can minimize this expense by reducing employee turnover as much as possible.

To do this, focus on building a great company culture and providing fair pay to everyone on your team. When people feel valued, they’ll stay longer, which leads to a more stable kitchen and better service.

2) Invest in high-quality training

Training your existing staff may seem like a waste of money, but a team with strong skills works faster, provides better service, makes fewer mistakes, and wastes less food.

High-quality training also helps employees feel confident in themselves and their ability to do their jobs, which makes them less likely to quit.

So, when your team has better skills and higher confidence, your whole operation will run more efficiently. All of that comes from training.

3) Optimize your scheduling

In a restaurant, a bad schedule can lead to overstaffing (which wastes money) or understaffing (which hurts service).

The solution to this is to optimize your schedule with smart tools like the Sling app. Sling gives you the ability to look at past sales data to predict when you’ll need extra staff on hand and when you can scale back.

With more accurate scheduling, you’ll be able to have the right people on the job exactly when you need them.

4) Cross-train your staff

Cross-training your staff means teaching them how to handle different roles. So, for example, maybe you train your host to help clear tables, or you train your prep cook to help on the line.

Whatever form it takes, cross-training prevents bottlenecks during a rush and gives your employees the ability to jump in wherever they are most needed. With a cross-trained staff like this, you can run a smaller, more effective crew without sacrificing quality.

5) Monitor overtime closely

Overtime pay can sneak up on you and wreck even the best-laid plans for reducing restaurant labor costs.

Too often, overtime accumulates when you’re forced to deal with a last-minute no call, no show absence. To keep these situations under control, use a system that alerts you when an employee is about to reach 40 hours and allows your team to communicate with each other to find a sub.

When you catch these moments early and allow your employees to do some of the work for you, you can avoid paying costly overtime.

Turn knowledge into profit

Contrary to popular belief, managing restaurant labor costs isn’t about just paying people less. In point of fact, it’s about understanding the difference between direct and indirect labor, crunching the numbers, and tweaking your business to reduce expenses.

You can do this by reducing turnover, training your team well, optimizing your schedule, and keeping your overtime numbers in check. That’s where the Sling app comes in.

Sling offers advanced scheduling and labor cost tracking that helps you see exactly where your money is going. It even comes with communication, time clock, and employee self-scheduling tools so that your team can continue to operate efficiently.

To learn more about how to grow your business and save hours every week on management, visit GetSling.com today.

Frequently asked questions

How can I control the labor associated with making certain dishes?

Try the Labor Minute method. This tracks the exact number of minutes your team needs to produce one specific menu item.

By timing the process from start to finish, you can identify hidden efficiencies in your kitchen, such as layout or workflow, and reduce the time spent on low-profit dishes.

How can I focus more on culinary talent and faster production?

Consider transitioning to a Ghost Kitchen (delivery only) or a pick-up only model. These types of locations don’t need the large front-of-house staff that is necessary for dine-in restaurants.

Eliminating the hosts, servers, and bussers, you can focus all your energy and efforts (and 100% of your labor budget) on culinary talent and high-speed production for delivery and pick-up.

Can I use AI to reduce restaurant labor costs?

Use AI to factor in weather, past schedules, holidays, and even local events to predict when your next busy shifts might occur.

Armed with that data, you can plan ahead to reduce the need to call in expensive, last-minute overtime.

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