6 Tips for Reducing Restaurant Labor Costs

Labor costs are a major expense. Controlling them is hard. While tech offers ways to improve operations, the challenge is lowering labor costs without losing good service. 

The right balance is a must. Some tips include: 

• Improving scheduling 

• Keeping more workers

• Managing overtime 

• Using tech

• Lowering food waste

The National Restaurant Association says that in 2022, labor costs were 36.5% of revenue in full-service businesses. This article explains tips for managing restaurant labor costs.

Understanding Restaurant Labor Costs 

Labor costs are a big cost. It is usually 25% to 35% of the restaurant's revenue.  

Labor costs are impacted by:  

• Inflation 

• Minimum wage increases 

• Employee turnover

As labor costs go up, restaurant managers must make changes.  

Average Food and Labor Costs

Food and labor are the two biggest costs for restaurants. 

Labor costs are a concern for restaurants. The "State of the Restaurant Industry 2025" report shows that labor costs have risen in the last few years. To offset it, many restaurants have increased prices.

Food prices have also went up. This means that restaurants have had to raise prices to keep making money. 

The average restaurant would need to increase prices by 26.2%. 

Quick-service restaurants have lower prime costs because of simpler menus. Full-service restaurants have higher labor costs due to larger teams. Casual dining restaurants have more balanced prime costs.

While food costs are around 30%, labor can be above 35%.

Case Study 

McDonald’s manages labor costs by scheduling staff based on traffic. The new self-service kiosks and mobile ordering has allowed for less staff. 

McDonald’s uses supplier relationships to lock in prices. This helps keep costs lower.

How to Reduce Labor Costs Without Making Service Worse

Managing labor costs and keeping customer's future value is a must. Below are areas where you can focus on lowering worker costs: 

1. Improving Staff Scheduling 

Scheduling tools match shifts to demand. Predictive scheduling plays a role. 

Another tip is cross-training workers. This helps with team flexibility and lets you use fewer workers. Bonuses can get staff to work better. 

2. Using Tech

To speed up service, try tools like: 

• Self-order kiosks 

• Mobile ordering

• Kitchen display systems

These tools lower labor costs and keep service quality good. 

Several restaurants are now using these tools. 

3. Reducing Overtime 

Overtime pay increases worker costs. Understanding labor laws and restaurant employee scheduling software helps you avoid overtime.  

Use a payroll management system and know local laws. Read our guide on how to reduce restaurant costs. 

4. Training Staff on How to Reduce Food Waste

Training staff on how to minimize food waste goes beyond kitchen savings. It also builds awareness and accountability across the team. When everyone understands portion control, proper storage, and prep techniques, it directly supports labor efficiency and contributes to broader cost reduction.  

This is especially true in restaurants that rely on in-house food production to maintain consistency and quality while managing labor expenses. This focus on reducing waste also helps control food costs, contributing to overall profitability. 

Workforce Strategies to Control Restaurant Labor Costs 

Managing labor costs isn’t just about scheduling and systems. It’s also about your people. Reducing labor costs is easier when retention is high and roles are clearly defined.  

Improving retention directly helps control labor costs by minimizing turnover and onboarding expenses. Here are two workforce-focused strategies that can help maintain a strong team while keeping labor expenses under control: 

1. Employee Retention Strategies That Reduce Labor Costs

Offering competitive pay and benefits remains one of the most effective ways to reduce turnover. When workers feel valued and fairly compensated, employee satisfaction increases, and they’re more likely to stay. This directly reduces the cost of hiring and training new staff, and contributes to lower overall labor expenses. 

Providing opportunities for growth through training and career development also helps. When staff see a future with your business, they’re less likely to leave, saving recruitment and onboarding costs.  

2. The Role of Outsourcing and Third-Party Services

In certain situations, outsourcing non-core roles—such as cleaning, delivery, or bookkeeping—can be a smart way to reduce overhead and allow your team to focus on core operations. Additionally, relying on third-party delivery services or ghost kitchens helps cut restaurant labor costs by offloading specific tasks, especially during peak hours or in areas where hiring and staffing remain difficult. 

Monitoring and Adjusting Labor Costs Over Time 

Monitoring and adjusting restaurant labor costs is a crucial part of running an efficient business. Using key performance indicators (KPIs) to track labor-related expenses helps managers stay on top of fluctuations and ensure the business remains profitable. These KPIs provide valuable insights into areas that need attention, allowing for proactive adjustments rather than reactive fixes. 

Real-time reporting tools are crucial for making data-driven decisions. By accessing up-to-date data on labor hours, overtime, and employee scheduling software, restaurant owners can quickly identify trends and adjust staffing needs as conditions change—whether during peak times or slow periods. Additionally, labor reports generated from your scheduling or payroll software can provide real-time insights for better decision-making. 

How to Calculate Labor Costs in a Restaurant 

Understanding how to calculate labor cost percentage is essential for reducing costs through better analysis. Here's a step-by-step guide you can apply in the real world. While some aspects may vary based on the type of restaurant, the core principles remain the same. 

1. Determine Total Fixed Labor Costs: Add up all hourly wages, salaries, payroll taxes, and benefits for your employees (including payroll costs, taxes, overtime, and tip-related taxes, if applicable).  
2. Divide Labor Costs Into Categories: Direct labor (servers, cooks) and indirect labor (management, administrative staff) to gain a clearer picture of where adjustments can be made. 
3. Calculate Sales for the Same Period: This is the total revenue generated by your restaurant over the same period for which you are calculating labor costs. 
4. Apply the Labor Cost Formula:  
   Labor Cost Percentage = (Total Labor Costs / Total Sales) x 100 
5. Analyze and Monitor the Result: The labor cost percentage result will give you the proportion of your revenue that is spent on labor. The ideal labor cost should fall within the target range—typically between 25% and 35%, depending on the restaurant type.  

Track this number regularly to spot trends, such as higher-than-usual restaurant labor costs during certain periods. Achieving a good labor cost percentage is essential for maintaining healthy margins without sacrificing service quality. 

Adjusting Staffing Models Based 

Temporary demand, such as holidays or local events, often requires more seasonal workers. On the other hand, daily demand trends (e.g., weekends or lunch rushes) can help you fine-tune scheduling. 

Using restaurant sales data and scheduling tools, you can plan staff coverage. This lets you to manage labor costs. 

FAQs About Restaurant Labor Costs 

Below are some common questions.

How much does a restaurant pay in labor costs? 

Between 25% and 35% of sales. But this depends on the:

• Type of restaurant 

• Location

• Model

What are the operating costs for a restaurant? 

Operating costs are:

• Labor 

• Food 

• Overhead

Labor and food are the prime costs. The rest covers fixed and variable costs. 

What is the biggest expense for a restaurant? 

Labor and food costs, especially in full-service restaurants. In fast casual, food expenses are similar to labor costs. 

What is the average profit margin for a quick service restaurant (QSR)? 

QSRs are between 6% and 9%. This is because of

• Good operations

• Faster table turnover 

• Lower labor costs

What is the average profit margin for a full-service restaurant (FSR)? 

Full-service businesses tend to have lower margins, usually around 3% to 5%, due to higher labor costs, longer service times, and more complex operations.  

Tips for Better Labor Cost Management 

Controlling labor costs means balancing operations with service. 

Get a good labor cost percentage by using:

• Automation 

• Workforce management tools 

• Smart scheduling  

Check out our guide to see how predictions can help you:

• Improve operations

• Manage costs

• Run an efficient restaurant 

Want support to manage labor costs? Request a demo with Paytronix solutions to explore how to improve your loyalty programs and workforce optimization.