How to Reduce Labor Costs in a Restaurant
How Can You Reduce Your Restaurant's Labor Costs?
Running a restaurant isn’t easy, and it certainly isn’t cheap. Among all the expenses you have to track, labor costs are the most significant, and the most challenging to keep under control. You may think there’s no way to reduce the amount of money your restaurant spends on labor without laying off staff, but there are several other steps you can take to manage your labor costs.
What Do We Mean By Labor Costs?
Employee salaries and wages are an obvious part of a restaurant’s labor costs, but it’s more than just those two factors.
Labor costs cover everything related to paying employees for their work, including:
- Health care
- Vacation and sick pay
- Overtime pay
- Payroll taxes
Calculating Your Total Labor Costs
- First, find the Gross Pay = Pay Rate/Hour x Gross Hours.
- Then, calculate Hours Not Worked = Days Missed x # of Hours in Shift.
- Next, find Net Hours Worked = Gross Hours – Hours Not Worked.
- Now, you’ll need to find the sum of everything related to paying employees listed above (i.e. bonuses, health care, vacation, etc.).
- Next, find Annual Payroll Labor Cost = Gross Pay + Additional Expenses.
- Lastly, find the Actual Hourly Labor Cost = Annual Payroll Labor Cost / Net Hours Worked.
You’d then divide the resulting number by your total sales for the year to get a percentage.
The average labor cost percentage for restaurants depends on the niche they fill within the industry, however, most fall between 30%-35%. Quick service establishments have the lowest average at 29.4%, and casual restaurants have the highest average at 33.2%. If you’re not sure where your restaurant stands on the labor cost scale, it can be helpful to check out your competitors and see how you compare. If you need to reduce labor costs in your establishment, try a few of these tips.
10 Tips for Reducing Labor Costs in Restaurants
1. Invest in Automation
It’s not just POS systems that offer the advantage of automation. You can provide your customers with a brand-new, refreshingly convenient experience while cutting down on labor costs by installing a self-pour beverage tap system like PourMyBeer. When guests can walk up to a tap and serve themselves, it eliminates the inefficient process of chasing down the bartender for every order.
Even better, self-serve beer walls typically generate between 30%-40% more revenue than a traditional dispense model. Although those numbers are certainly not a limit, we have seen cases when the beverage sales in locations with the self-pour wall were doubled compared to traditional bar setups.
A self-pour system will give your bartenders an unparalleled productivity advantage. Instead of rushing around pulling drafts in between orders, they can focus on making your signature drinks sing and providing exceptional customer service.
From a labor cost standpoint, the PourMyBeer system is ideal. When you have a packed house, self-serve allows the beer to keep flowing without the need for extra employees to facilitate it. Customers can grab a glass and fill it themselves, removing the need for another bartender, as well as an additional server to ferry drinks around. You end up selling more drinks at a much lower labor cost. The system essentially functions like another employee you don’t have to pay. What could be better?
Below, you will hear from Beer Wall On Penn’s operators firsthand on how to reduce your labor costs and how self-pour beverage walls are an efficient way to do this!
2. Watch the Clock
It’s not fun to hound employees about clocking in and out, but doing so can end up saving you a significant amount of money. If employees are clocking in a few minutes before their shift starts and hanging around in the bathroom for a few minutes after their shift ends, you may need to have a conversation about being more precise. Developing an expectation for punctual clock-ins and clock-outs can be instrumental in changing employee mindsets on the subject.
One problem to watch out for is “buddy punching,” where one employee punches the clock on behalf of another, usually as a favor to cover up lateness or absence. What may seem like camaraderie to employees ends up being a budget drain for your restaurant. Buddy punching inflates your payroll by an average of 2.2%.
The best way to beat buddy punching is to upgrade to a biometric time clock system. Employees can trade PINs for clocking in, but they can’t swap fingerprints. One of these systems pays for itself shockingly fast.
3. Reduce Time-Consuming Side Work
There’s a lot of back-and-forth activity in any restaurant at any given time, but if you look closely, you may find not all of it is necessary. Observe how employees with different roles interact with the layout of your restaurant. Are servers going all the way to the back of the house just to fill pitchers with ice? Are bartenders constantly going to the laundry room for fresh towels?
Side work is a necessary element of any restaurant job, so making it as easy as possible benefits your employees as well as your bottom line. Anything you can do to reduce the time it takes to complete side work will also reduce your labor costs.
4. Schedule Smarter
Scheduling is one of the most time-consuming and tedious functions in a restaurant, yet it’s one of the most critical for keeping labor costs down. It’s tempting to fall into the copy-and-paste routine week after week, especially when the schedule is working pretty well. But if you want to decrease labor and increase revenue in your restaurant, you need to spend some quality time with the schedule.
Coordinating your schedule with anticipated activity is the best way to cut costs. If you know there’s a big holiday bash across town this week, you can guess with some confidence that your staffing needs for that night will be lower. Or, if you’re a fast-casual restaurant and know there’s a high school sporting event next week, you can plan to have extra staff on hand to feed those hungry athletes in the hours following the event.
Of course, human observation can only take you so far. To schedule most effectively, take advantage of whatever metrics your point-of-sale (POS) system offers. Analyzing patterns in traffic over time can help you spot when you’re overstaffing, and prevent you from paying out overtime on a busy understaffed night.
5. Hire Carefully
You will inevitably have to hire staff even if you do everything possible to reduce turnover. In the fast-paced restaurant industry, every time feels like the wrong time to have to hire and train a new employee, but don’t let that feeling push you to make snap decisions in the hiring process.
It may seem tempting to say yes to the first semi-competent pair of hands you find, especially if it’s for a low-skilled position like a dishwasher. However, if you choose someone hastily and without consulting any of the people already on the team, you’re setting yourself up for potential disaster.
Hire the best people by considering a broader pool of candidates and arrange interviews so potential employees can show how they interact with your chefs, cooks, and servers. A good team fit will promote productivity and decrease the likelihood of quick turnover.
6. Cross-Train Staff
Good employees are open to learning new skills that will benefit their co-workers and themselves. If staff are not cross-trained and can only perform in one capacity, your restaurant’s overall efficiency will suffer. On a slow night with only a few tables occupied, it doesn’t make sense to have a bartender, server, host, and busser out on the floor all at once. If your bartender knows how to serve tables, your server knows how to step in as a host and your busser can expedite food, you can eliminate one of those roles for the shift.
Likewise, versatility in the back of the house contributes to greater efficiency. If a prep cook knows how to work the grill station and your dishwasher can make a decent salad, the team can better adapt to unexpected changes, and service is going to go much more smoothly.
7. Evaluate Operating Hours
Sometimes it helps to take a step back and determine whether your hours of operation are inflating your labor costs. It’s natural to want to stay open as long as possible to increase the chances of more customers coming in, but in some cases, that approach can do more harm than good.
If you run a family restaurant, for example, you may find business dies down after 8 or 9 p.m. If you notice a trend of sending staff home early, it may be a good idea to consider altering the schedule to close early on some mid-week nights. Adaptability in this realm may help you reduce labor costs by minimizing the time your staff spends doing nothing during slow periods at the beginning or end of service.
8. Prep Smarter
There’s no doubt savvy chefs usually have a good handle on best food prep practices. However, it may be worth it to investigate the way your kitchen staff are handling prep, and find out if there are any items you can optimize to reduce labor. In a fast-casual restaurant, there’s not usually much you can do to increase efficiency, because you should have already streamlined the whole operation to work as quickly as possible.
The closer you get to fine dining, however, the more complicated prep can get. When your kitchen staff make every soup, sauce, marinade, and seasoning mix in-house, there’s usually ample room for improving prep processes. While the freshness of fruits, veggies, and meat is non-negotiable, you may be able to save some time by making large batches of specific accompaniments. For example, make soup base in one big batch, use what you need, then freeze the rest until the next time that soup hits the menu rotation.
Prepping as far ahead as possible does require one thing restaurant kitchens are often short on, space. Is there room in a freezer for a full week’s worth of soup base? If not, how can you make space? Auditing the prep process can be an intensive experience, but you may be able to identify changes that could decrease redundancies and lower your labor costs.
9. Choose the Right POS
If your restaurant is using a POS released in the past few years, it might have features you’re unaware of or haven’t bothered to try out yet. Good POS systems have at least some fundamental reports and analytics features that can help you schedule employees most efficiently. You may be able to access statistics gathered from past transactions to help forecast your labor costs versus revenue for specific days. Some of the cost-reducing features available in POS systems today include:
- Hourly sales reports
- Shift reports and employee time clock
- Employee scheduling and remote access
- Productivity reports
Some POS systems can even automatically calculate your labor to revenue ratio and adjust schedules to keep your costs under 30%. Spend some time getting to know your POS better, and you may find it’s time to invest in a new one with more robust analytical features. The partial automation a top-of-the-line POS frees up management from mundane tasks that lower their overall productivity.
10. Decrease Turnover
It’s no secret turnover is an immense issue in the restaurant industry. In 2016, the turnover rate for the hospitality industry overall was more than 70%. For quick-service and fast-food restaurants, the rate can spike up to 150%. In addition to being highly inconvenient, turnover massively inflates labor costs due to loss of productivity and the price tag associated with training. One 2016 study estimated the cost of turnover can be as high as $146,600 per year for the average full-service restaurant.
So, how can labor costs be reduced through better employee retention? Here are three tips to keep your best employees and avoid having to hire constantly.
- Recognize excellence: No one likes to work a thankless job, and developing a recognition program prevents this issue. Employees like to know they’re working toward something, and that they’ll receive rewards for excellent performance.
- Offer incentives: Cash or gift card incentives are a simple way to keep staff engaged and working toward your restaurant’s goals. A clear raise and bonus structure also keeps employees around by providing concrete steps for growth and better compensation.
- Conduct exit interviews: When an employee leaves, try to find out why. Sometimes, people just stop showing up, and there’s not much you can do about that, but the ones willing to do an exit interview can give you vital insights into what might be increasing your turnover.
Quality and Capability in Automation With PourMyBeer
Our engineers came up with an incredibly innovative self-serve tap wall solution to help restaurant and bar owners save on labor costs in the long-run of their business investment. Our system has helped hundreds of businesses reduce labor costs by reducing the amount of wait staff needed, providing great analytics and insights, and reducing consumer wait time for beverages. But don’t just take our word for it- check out our recent case studies to see how real restaurants are saving money with our system.