How To Calculate Labor Costs In 4 Easy Steps

Restaurant workers included in labor costs

Labor costs are one of the highest expenses that most businesses contend with. Only rent and mortgage payments rank higher.

In fact, in the restaurant business, labor costs can average 30-35 percent of total revenue. That’s a large sum of money leaving your business each year. In addition, labor costs count heavily when determining your prime cost (cost of goods sold plus labor costs), which is a key metric for efficiency.

But what are labor costs, exactly? How do you calculate them? And how can you streamline the management of your labor costs so you have time to grow your business?

The experts at Sling will answer those questions and show you an easy way to lower your labor costs so you can keep your business on the road to success.

What Are Labor Costs?

At first glance, labor costs may seem like just hourly or salaried wages. But in actual fact, labor costs include such expenses as:

  • Payroll taxes
  • Overtime
  • Health care
  • Bonuses
  • Sick days
  • Vacation days
  • Insurance
  • Benefits
  • Meals
  • Supplies
  • Training costs

Basically, consider anything even remotely related to employee wages as a labor cost.

What that means for you, then, is that while you may pay your servers $15 per hour, your actual labor costs are much higher because you have to factor in all the other expenses. Here’s how to calculate your fully burdened labor cost.

Calculating Labor Costs

Labor costs at a restaurant

For this explanation, we’ll set up a hypothetical employee with the following details:

This example only deals with one employee, but you can scale it up to accommodate as many employees as you have.

Now we’ll use the above information to calculate labor costs.

1) Determine Gross Pay

When an employee works full time, they will potentially work 2,080 hours in one year (40 hours x 52 weeks).

So you’ll start with this equation:

Gross Pay = Pay Rate x Gross Hours

Gross Pay = $15/hour x 2,080 hours

Gross Pay = $31,200

2) Calculate Hours Not Worked And Net Hours Worked

You’ll never know exactly how many times an employee will be absent, but you can hazard a pretty good guess. If you have past records for other employees, average their absentee numbers together and apply that number to a new employee.

Let’s say you come up with an average of 10 days lost because of holidays, vacation, and illness. Convert that estimate to hours with the following equation:

Hours Not Worked = 10 days x 8 hours

Hours Not Worked = 80

Now subtract those hours not worked from the total hours worked from the first step (2,080).

Net Hours Worked = Gross Hours – Hours Not Worked

Net Hours Worked = 2,080 – 80

Net Hours Worked = 2,000

3) Add Other Annual Costs

Table at a restaurant

Remember, labor costs include expenses other than just wages. Insurance, bonuses, taxes — all of these items have an impact on what you pay your employees. Here’s how we’ll break it down for this example:

  • Insurance           $500
  • Taxes                   $500
  • Overtime            $1,000
  • Benefits              $1,500
  • Supplies             $500

Add those numbers together and you get $4,000 in additional expenses associated with your employee’s labor. Take that number and add it to your employee’s gross pay to determine annual payroll labor cost.

Annual Payroll Labor Cost = Gross Pay + Other Annual Costs

Annual Payroll Labor Cost = $31,200 + $4,000

Annual Payroll Labor Cost = $35,200

That’s how much you’re actually paying out for your employee to work every year.

4) Calculate Actual Hourly Labor Cost

You know your employee’s base pay rate ($15 per hour in this example), but it’s essential that you calculate their actual hourly labor cost using this formula:

Actual Hourly Labor Cost = Annual Payroll Labor Cost / Net Hours Worked

Actual Hourly Labor Cost = $35,200 / 2,000

Actual Hourly Labor Cost = $17.60 per hour

That number tells you that when all the other variables are factored in, you’re paying your employee $17.60 per hour of actual work.

Lowering Labor Costs

Restaurant workers

Lowering your labor costs doesn’t mean you have to pay your employees less. In fact, there are better ways to decrease one of the biggest expenses your business deals with. Here are a few tips to help you get control of your labor costs.

  • Plan your schedule a month in advance
  • Tabulate your labor costs as you schedule
  • Incorporate a rotating shift into your scheduling
  • Train your employees to fill in at other positions
  • Monitor overtime hours
  • Establish clock-in reinforcement (paying for when they are supposed to start, not when they clock in)
  • Track hours worked vs. hours scheduled so you can keep ahead of overtime
  • Reduce absenteeism by offering a bonus for good attendance

So how do you go about implementing these tips without cutting into the time you spend on other tasks? The answer might surprise you.

Use Software To Manage Your Labor Costs

The best way to manage and lower your labor costs is to use a suite of software tools like Sling.

Sling app

Sling gives you incredible control over your schedule so you can quickly and easily create schedules one month, two months, even six months or more in advance. And the built-in artificial intelligence automatically reminds you of requested time off, double bookings, and overtime hours so there’s less back-and-forth once you’ve completed the schedule.

Sling time clock feature

Sling also acts as a time clock for your business. You can set up a central terminal or allow your employees to clock in and out right from their mobile devices. And with Sling’s powerful geofencing feature, you can prevent early clock-ins and missed clock-outs with the touch of a button.

Sling app

Sling even lets you optimize labor costs by setting wages per employee or position so you can see how much each shift will cost you. You can keep track of your labor budget and receive alerts when you’re about to exceed those numbers. This will help you save money and increase profits.

Sling is the go-to solution for all your scheduling and labor-costs-management needs.

For more free resources to help you manage your business better, organize and schedule your team, and track and calculate labor costs, visit today.

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