6 Proven Tactics for Reducing Your Restaurant Labor Costs

Labor costs represent one of the most significant operational expenses in the restaurant industry and controlling them has become more difficult. Although technology offers you new ways to streamline operations, the real challenge is reducing labor costs without compromising service quality or the work environment. 

Achieving the right balance between staffing efficiency and cost control is essential for your restaurant's long-term profitability. Some of the most effective tactics include optimizing the staff scheduling process, improving employee retention, managing overtime pay and compliance costs, leveraging technology for data-driven decisions and task automation, and even addressing food waste when it directly impacts lower labor costs. 

Data from the National Restaurant Association reveals that in 2022, labor costs, including salaries and benefits, accounted for a median of 36.5% of revenue in full-service businesses. This article explores effective strategies for managing restaurant labor costs while maintaining service quality. You’ll also find actionable tips and practical ways to monitor performance and make smarter decisions. 

Understanding Restaurant Labor Costs 

Labor costs are often one of the largest restaurant expenses and directly influence your bottom line. On average, businesses allocate around 25% to 35% of their revenue to average labor costs, though this can vary depending on the type of service and other factors.  

Several external factors, such as inflation, minimum wage increases, and employee turnover, push labor costs higher.  As labor costs continue to rise, restaurant operators and managers must implement strategies to navigate and optimize staffing while maintaining high service standards.  

Average Food and Labor Costs for Restaurants 

Food and labor are the two biggest cost centers in any restaurant, often referred to together as prime costs. According to data from the National Restaurant Association, the median labor cost back in 2022 for full-service restaurants was 36.5%, though industry averages typically range between 25% and 35%, depending on the type of service. 

As of early 2025, labor costs remain a significant concern for restaurant operators. The National Restaurant Association's "State of the Restaurant Industry 2025" report indicates that labor costs have risen substantially in the last several years, with many operators increasing menu prices to maintain profitability.  

Simultaneously, food prices have also escalated, with essentials like beef, chicken, coffee, and fresh vegetables experiencing double-digit price hikes. These combined increases have led to a situation where, without price adjustments, restaurants would face substantial losses.  

To cover higher input costs and maintain a 5% pre-pandemic profit margin, the average restaurant would need to increase prices by approximately 26.2%. This underscores the ongoing financial pressures faced by the industry in 2025. 

Luckily, Quick-service and fast-casual restaurants tend to have slightly lower prime costs, thanks to simpler menus and streamlined operations. Full-service and fine dining restaurants usually report higher labor costs due to larger teams and complex service models. Meanwhile, casual dining restaurants often experience more balanced prime costs, thanks to simpler operations and menu design. 

While food costs generally range from 28% to 32%, labor can push above 35% in some cases, especially in markets with higher employee wages or frequent employee turnover. 

Case Study – Balancing Food and Labor Costs 

McDonald’s manages labor costs by scheduling staff according to customer traffic patterns. This helps align staffing with demand, reducing unnecessary labor during slower periods. The addition of self-service kiosks and mobile ordering has also lowered the need for counter staff, allowing employees to shift their focus to other tasks that support operations. 

When it comes to controlling food expenses, McDonald’s relies on long-term supplier relationships to lock in prices and maintain consistent quality. This approach helps keep costs predictable while securing access to high-quality ingredients. 

How to Reduce Labor Costs in a Restaurant Without Sacrificing Service 

Managing restaurant labor costs while protecting the customer's future value is one of those crucial balancing acts. Below are key operational areas where you can focus on reducing worker expenses without compromising service: 

1. Optimizing Staff Scheduling and Workforce Efficiency

Data-driven scheduling tools help reduce unnecessary employee hours by aligning shifts with real demand. Predictive scheduling plays a key role in avoiding both overstaffing and understaffing, which can eat into profits or hurt the guest experience. 

Another effective tactic is cross-training employees. This will not only increase team flexibility but also allow you to operate efficiently with fewer employees during slower periods. Additionally, implementing monetary incentives can encourage staff to work more efficiently, thus lowering high labor costs without sacrificing service quality. 

2. Leveraging Technology to Improve Productivity

Automation tools like self-order kiosks, mobile ordering, and kitchen display systems directly reduce front-of-house workload and speed up service. These technologies shift the focus from manual tasks to higher-value activities, significantly contributing to reducing labor costs without sacrificing service quality. 

Several restaurants—such as Pizza Ranch, BarBurrito, Gyu-Kaku Japanese BBQ, and Legal Sea Foods—have adopted technology to streamline operations and reduce staffing inefficiencies without sacrificing service quality. 

3. Reducing Overtime and Managing Compliance Costs

Excessive overtime pay can quickly increase worker expenses. Understanding labor laws and setting up proactive restaurant employee scheduling software helps you avoid those last-minute hours that cost more than expected.  

Best practices also include clear payroll management systems and regular compliance checks to stay aligned with local regulations. For more on how scheduling impacts profitability, 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 historical restaurant sales data and predictive scheduling tools, you can plan staff coverage accordingly, ensuring you have the right number of employees without overstaffing or understaffing during busy or slow periods. This flexibility enables you to manage variable labor costs while maintaining service standards. 

Frequently Asked Questions About Restaurant Labor Costs 

Managing restaurant labor costs is one of the most important aspects of running a business. Below are some common questions that help break down what’s typical in the restaurant industry and where your business might fit in. 

How much does one restaurant typically pay in labor costs, percentagewise? 

The labor cost percentage generally ranges between 25% and 35% of total sales. However, this depends on the type of restaurant, location, and operational model.  

What are the typical operating costs for a restaurant? 

Operating costs usually fall into three major categories: labor, food, and overhead (like rent, utilities, and insurance). Labor and food expenses together make up what's called the prime cost, which typically accounts for 55% to 70% of total revenue. The rest covers fixed and variable overhead expenses. 

What is the biggest expense for a restaurant? 

For most restaurants, labor and food costs are the two largest expenses. Depending on the business model, labor can be the single highest cost, especially in full-service establishments where staffing needs are more complex. In fast casual and QSRs, food expenses often come close to or even exceed labor costs in some cases. 

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

QSRs typically operate with profit margins between 6% and 9%, thanks to streamlined operations, faster table turnover, and lower labor costs per transaction.  

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.  

The Path to Sustainable Labor Cost Management 

The key to controlling labor costs is balancing operational efficiency with consistent service quality. What makes the difference is building a system tailored to your restaurant—one that keeps your team focused, your customers satisfied, and your margins in check. 

Leveraging automation, workforce management tools, and proactive scheduling empowers businesses to maintain a healthy labor cost percentage, stay competitive, and protect profitability, even as restaurant industry demands evolve. When managed effectively, labor cost control becomes a cornerstone of long-term operational strategy, not only a short-term solution.  

Check out our guide to see how predictions can help you improve operations, manage costs, and run a more efficient restaurant. Want support to manage labor costs more effectively? Request a demo with Paytronix solutions to explore how to improve your labor cost management, loyalty programs, and workforce optimization.