How To Calculate And Lower Labor Costs

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.

1) Plan Your Schedule A Month In Advance

Planning your schedule well in advance is one of the best ways to lower your labor costs over the long term.

We recommend creating your employees’ work schedule at least a month in advance. This gives you plenty of time to review, tweak, and perfect the hours worked in order to minimize labor costs while still covering all shifts.

It also gives your employees time to find substitutes for days they can’t work so you’re not left short-staffed.

2) Tabulate Labor Costs As You Schedule

Calculating labor costs can be a laborious task. There are so many moving parts — who can work when, part-time vs. full-time, pay rates, overtime — it’s easy to get lost in all the numbers and become overwhelmed.

Plus, there’s the fact that once you have a schedule that works, something inevitably comes up that requires changing one or more pieces. And once you alter one variable, all the other variables and calculations usually change as well.

You can avoid the need to recalculate all your numbers every time you change the schedule by tabulating labor costs as you schedule.

Scheduling software like Sling lets you see how much you’re spending on labor in real time. It all but eliminates the extra step of creating your own labor cost report for each month and streamlines the entire scheduling process.

3) Incorporate A Rotating Shift

A rotating shift is a scheduling system in which employees move through a cycle of working the day shift, the night shift, and any swing shifts that may be necessary.

For some businesses, the rotating schedule may be first shift, second shift, third shift. For restaurants, the rotating schedule may be opening shift, lunch shift, and dinner/closing shift.

It doesn’t matter what you call them, the concept is still the same. One week, team A (or employee A) works the opening shift, team B works the lunch shift, and team C works the closing shift.

The following week, team A works the lunch shift, team B works the dinner shift, and team C works the opening shift.

Incorporating a rotating shift into your scheduling has several advantages:

  • Cycling the most senior and skilled employees through each shift means that one set of work hours isn’t weaker (in terms of performance) than another.
  • Rotating shifts give you time to train all your employees without cutting into the high-income hours when your business is busiest.

For more information on shift work and how it can help you control labor costs, take a moment to read our article, Shift Work: What It Is And the Industries That Use It.

4) Train Employees To Fill In At Other Positions

Training your employees to be proficient at their jobs is essential for the success of your business. Training them to be proficient at another job as well can help reduce your stress and keep labor costs low.

For example, imagine that you have two employees who can work the hostess position — employee A and employee B. Employee A gets sick and can’t work on Thursday, but employee B is very near overtime hours.

You want to keep labor costs low, so instead of asking employee B to work extra hours, you bring in a part-time employee (employee C). You train them to work as hostess and then schedule them to fill in for A and B when their hours get too high.

5) Monitor Overtime Hours

Monitoring overtime hours is another essential way to keep labor costs low. If left unchecked, overtime hours can quickly become a huge drain on your budget and affect your bottom line for the worse.

It’s imperative to keep your employees’ overtime hours as low as possible so they don’t get out of control. The best way to do this is with software like Sling.

Sling lets you view total time worked as you schedule and gives you reminders when an employee’s hours stray into overtime territory.

6) Establish Clock-In Regulations

calculate overtime costs to reduce labor costs

Another way to keep labor costs low is to establish and reinforce clock-in rules and regulations.

One such regulation should state that an employee’s shift will begin at the scheduled time (e.g., 9 a.m.) rather than when they clock in (e.g., 8:45 a.m.). Fifteen minutes may not seem like much, but, over a two-week period, it can add up to significant overtime hours.

Of course, employees are allowed to clock in early for work — and get paid for that time — but only if they have your permission first.

7) Reduce Absenteeism

Everyone has emergencies that lead to absenteeism at one time or another.

But if allowed to get out of hand, absenteeism can become a bad habit for your employees that affects employee engagement, company culture, labor costs, and, eventually, your bottom line.

You can reduce absenteeism by instituting strategies that promote good attendance. Here are a few ideas:

  • Offer a bonus for a spotless work record over a certain period of time
  • Enforce the absenteeism policy put forth in your employee handbook
  • Be realistic about when to permit absences
  • Deal with no call, no show absences immediately (and strictly)

The best way to combat out-of-control absenteeism is to get to the root of the problem. Is your employee having trouble finding a babysitter? Are medical appointments monopolizing their time? Is school getting in the way of their work schedule?

When you solve the core issue that causes absenteeism, both you and your employee will be happy.

8) Decrease Employee Turnover

All managers, regardless of industry, must deal with employee retention and turnover. It’s just a fact of business life. But when employee turnover becomes a habit in your business, it can seriously affect your labor costs.

To improve employee retention, deal with turnover head-on and make it a cornerstone of your business strategy. Here are several suggestions to get you started:

By incorporating these tips into the way your team works, you’ll be able to retain the skilled employees you need and keep your labor costs under control.

9) Analyze Labor Trends In Your Business

Analyzing labor trends in your business isn’t as difficult as it may sound. With the right record-keeping, it just means reviewing past schedules to see what worked and what didn’t.

Perhaps one week last year you scheduled three employees but customer traffic demanded that you call in a fourth (who was already close to overtime hours) to help out. Could that amount of customer traffic repeat itself? It’s possible.

Armed with this information, you can create a schedule that addresses the issue without asking someone to work overtime or going over your labor budget.

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 GetSling.com today.

Get started today

Schedule faster, communicate better, get things done.