Restaurant · Guide · Updated July 2026

How to Calculate Labour Cost for Your Restaurant

The typical food and beverage restaurant runs on a 5 to 10% net margin. That means every percentage point you shave off your labour cost goes almost directly into your pocket. To do that, you first have to know exactly what your labour cost is, and most operators are calculating it wrong because they are only counting hourly wages.

What Actually Counts as Labour Cost?

Labour cost is not just the cheque you hand your staff every two weeks. It includes every dollar you spend because a human being works for you:

• Wages, hourly and salaried, front and back of house
• Benefits, health, dental, or any staff perks you fund
• Bonuses and incentives, performance pay, tip-outs you subsidise, holiday bonuses
• Payroll taxes, the employer portion of every tax remitted on behalf of your team
• Training costs, onboarding time, external courses, certifications
• Uniforms, anything you purchase or launder for staff
• Staff meals, subsidised or complimentary meals during shifts

Bundle all of these together under one “Labour Cost” line in your books. The moment any of these items slide into a miscellaneous category, you lose the ability to see the full picture and you lose the ability to fix it.

Why Two Calculation Methods?

There are two ways to look at your labour cost percentage, and both are worth running. They answer different questions. One tells you how labour stacks up against what your customers are paying you. The other tells you how labour stacks up against everything it costs to keep the doors open. Use both.

Method 1: Labour Cost as a Percentage of Revenue

This is the number most operators quote when they talk about labour cost. The formula is straightforward:

Total Labour Cost / Total Revenue x 100 = Labour Cost %

Here is the example from my own restaurant operation. We generate one million dollars in revenue over the course of the year. Every labour-related expense combined, wages through staff meals, comes to two hundred and eighty-five thousand dollars.

285,000 / 1,000,000 x 100 = 28.5%

That 28.5% is your benchmark number. If you are sitting at 35%, that is a red flag. It tells you labour is eating too large a share of every dollar a customer spends. You now have a specific number to investigate rather than a vague feeling that something is off.

Method 2: Labour Cost as a Percentage of Total Operating Costs

Total operating costs are everything it takes to run the restaurant: rent, cost of goods sold (all your ingredients and food costs), marketing, miscellaneous operating expenses, and yes, labour. Labour must be included here. A common mistake is to treat labour as separate from operating costs. It is not separate. It is one of the largest line items inside that total.

Total Labour Cost / Total Operating Costs x 100 = Labour % of Ops

Using the same restaurant: one million dollars in revenue, eight hundred and fifty thousand dollars in total operating costs, two hundred and eighty-five thousand dollars in labour.

285,000 / 850,000 x 100 = 33.5%

Notice the number is higher. That is not a discrepancy, it is a different lens. As a share of what it costs to operate, labour is 33.5 cents of every operating dollar. This view matters when you are deciding whether to add a role, cut a shift, or restructure a team. It shows you labour’s weight relative to every other cost you carry.

How to Use These Numbers as a Benchmark

A percentage on its own means nothing. Its value comes from comparison: against your own prior months, against the industry norm, and against what you projected when you built your model.

The goal is always to bring the number down over time. In the example above, the labour cost as a function of revenue sits at 28.5%. If you can work it down to 28%, that is 0.5% of one million dollars, five thousand dollars that moves directly toward profit. Reduce it to 23.5% and you have freed up fifty thousand dollars. On a business running at a 5 to 10% margin, fifty thousand dollars is the difference between a good year and a great one.

The lever you pull depends on what the number reveals. If your labour percentage spikes, you go looking for the cause. An extra manager at eighty thousand dollars a year shows up in the math before it shows up as a crisis. You catch it, you address it, you move on. Without the calculation, you find out too late.

Should You Calculate Monthly or Annually?

Run the numbers annually for your benchmark and for year-over-year comparison. Run them monthly to catch problems early. The annual figure smooths out seasonal swings and gives you the truest picture of where your business stands. The monthly figure is your early warning system. If March’s labour percentage jumps five points above your annual average, something changed in March and you need to know what.

What About BOH vs. FOH Labour?

The same formulas apply when you want to isolate one part of the business. Take only your back-of-house labour costs, divide by total revenue (or by total operating costs), and you get your BOH labour percentage. You can then compare that against output metrics, such as meals produced, to understand efficiency at the kitchen level. The math is identical; the input numbers are narrower.

The Bottom Line

Labour cost is the single largest controllable expense in your restaurant. Include every dollar you spend on your people, not just wages. Calculate it as a percentage of revenue and as a percentage of total operating costs. Use both numbers as a monthly and annual benchmark, then work to bring them down. The operator who knows their numbers always finds the problem before it finds them.

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