Restaurant Labor Costs: Good Percentage & 5 common mistakes

Restaurants have been struggling to survive as they cope with high labor costs post-pandemic.

As per WKBW news, Lisa Riniolo, who runs The Garage Bar and Restaurant, is complaining about workers demanding higher rates of pay. She says, “People are coming in with unrealistic numbers that they want. A dishwasher — $20 an hour — I can’t afford it. If I have to pay a dishwasher $20 an hour, I might as well close the doors.”

Labor costs are important to the ever-evolving equation that is a restaurant business – in fact, they make up 29–33% of costs in the restaurant industry. And there’s plenty of room for error while you manage them. Here are five of the most commonly made mistakes while managing restaurant labor costs:

1. Inaccurately scheduling labor without anticipating sales demand

Failing to predict sales demand prevents managers from scheduling the optimal number of staff on each shift. Restaurants become overstaffed or understaffed, leading to either inflated or overly reduced labor costs with inadequate staff to meet customer needs.

How to avoid this mistake?

Tap into the power of your restaurant employee scheduling software and analyze historical sales data to schedule the right number of employees. If you know you need X number of employees for Y level of sales, you’re more likely to get the scheduling numbers right.

Make notes in your employee scheduling software for every shift. Highlight if you were understaffed, overstaffed, or optimally staffed for the sales figures you’ve recorded. Use these notes to learn from your past scheduling mistakes.

2. Paying overtime wages unnecessarily

Poor planning leads to employees working more than 40 hours a week which means, you guessed it, paying high overtime wages. Time and again, restaurants fail to consider overtime laws and continue to schedule labor on an ad-hoc basis.

For example, as per New York State law, most employees must be paid at the rate of 1.5 times their regular rate of pay for all hours worked above 40 hours per workweek.

How to avoid this mistake?

Spread your staff evenly across shifts, and make sure they’re all scheduled below the 40-hour threshold. Use predictive scheduling to plan work schedules at least a week in advance, so you make sure you don’t exceed the threshold. This way, you’ll not only save on overtime costs, but you’ll also end up giving your employees more predictability around their schedules and keeping them satisfied, leading to lower staff turnover.

Ideally, your employee scheduling software should alert you with an automated warning message every time a staff member is about to cross their overtime threshold. Simple automation like this provides management with increased visibility into how to best mitigate unnecessary overtime, and in turn, high labor costs.

3. Stingy scheduling, leading to understaffed shifts

In an attempt to boost profits, some restaurant managers schedule the lowest possible number of employees to keep tight control over labor costs. This can cause the restaurant to be understaffed and lead to issues like long lines and increased wait times, all leading to customer attrition.

How to avoid this mistake?

Have a more evolved goal of achieving ‘optimum’ labor costs so you can serve your customers effectively. Keep track of both your revenue data and your labor cost data. On average, labor costs should be less than 30% of gross revenue in the restaurant industry.

Always keep the customer in mind when scheduling labor. Seek their feedback on what they thought about your staff after they’ve dined at your restaurant. Ask how they felt about the level of available customer service. Customers are your number one priority. Controlling costs is your secondary goal.

4. Cutting wages to reduce labor costs

It’s a common mistake to think that cutting staff wages is an effective way to reduce labor costs. This is often a blind and oversimplified attempt at quickly lowering labor costs in the short term. Cutting wages can lead to short staffing issues, employee burnout, and bitter workers.

How to avoid this mistake?

Before laying off employees, those in hospitality must take a step back and realize the value of tracking scheduled vs. actual labor costs. By understanding the variance between these two costs, managers can pinpoint the source of increased labor costs.

Thankfully, modern solutions exist for restaurant owners. The right workforce management system should map labor costs to sales in real-time while also displaying the variance between scheduled and actual wages. This data increases visibility into front-line issues, helping managers tackle high labor costs before they get out of hand.

According to Josh Cameron of Workforce.com, “What’s much better is to have the schedule and the attendance in one system, so you can tick these things off throughout the day or at the end of the shift and if there are differences, you can go see why that happens.”

5. Not investing time and effort in employee engagement

Sometimes, bars and restaurants fail to properly curate employee engagement. For instance, management might not invest in continual training and cross-training, which can lead to issues in customer service and proper equipment care. If left unchecked, these issues can greatly increase operating and labor costs.

Improper employee engagement may also take the form of toxic, inefficient, or uninspired workplace environments, resulting in expensive staff turnover. One study found turnover rates in the hospitality sector (including restaurants) to be as high as 74.9%. When the restaurant fails to engage its employees, it causes disgruntled employees to leave the business, leading to high labor costs resulting from hiring and training new talent.

How to avoid this mistake?

Some employees leave their jobs because they may not know the exact processes to follow, their specific responsibilities, or their role’s connection to the larger business of the restaurant. By investing time and money into professional development, you’ll support their job performance and boost job satisfaction levels. Make sure you have detailed job descriptions, for starters, so your employees know exactly what they’re hired to do.

Keeping track of the number of hours your staff has spent on training is a great way to ensure their knowledge and skills are up to the mark. Make sure your employee scheduling software has the ability to record employee qualifications like training hours or specific certifications — this extra organization always ends up paying off.

Also, focus on collecting shift feedback from your employees. It’s a concrete way to boost engagement since you can ask staff to rate shifts and provide comments on them every time they clock out. This way, managers can uncover issues in staff satisfaction before they become a headache.

For instance, maybe a waiter says that they worked an overstaffed shift and didn’t get to serve enough tables. Or perhaps a waiter could say that they were working in a shift with staff they don’t get along with. Use this feedback to adjust schedules, boost employee engagement and reduce labor costs associated with turnover.

Record, report, and analyze labor data to manage restaurant labor costs effectively

It is easy for restaurants to overlook all sorts of granular data when managing their labor costs. To avoid this, they need to recognize the power of automation and workforce analytics. Restaurant timekeeping platforms should actively record and report data on wages, overtime, and hours worked, and also fully integrate with local POS and scheduling systems, so as to properly account for demand and employee engagement.

Learn more about how to avoid costly mistakes in restaurant labor by chatting with us today.