How to Calculate Your Restaurant Labor Cost Percentage

Restaurant labor cost is the total amount your restaurant spends on labor: pay for salaried and hourly staff, plus taxes and benefits. Restaurant labor cost percentages are one of the clearest signals of an operation's overall health and potential profitability. Most full-service restaurants land somewhere between 25% and 35% of revenue. 

A full dining room and a stacked ticket rail are what you worked for. Keeping labor costs in check is what lets you keep earning it, especially with staffing shortages making every schedule a tighter squeeze. Labor cost is one of the two biggest levers on your bottom line, right alongside cost of goods sold (COGS).

In this article, you'll learn how to calculate restaurant labor costs and why turning that number into a percentage makes it so much more useful. 

Key takeaways

1. Labor costs include more than wages. Restaurant labor cost covers all compensation-related expenses: hourly and salaried wages, overtime, payroll taxes, benefits, bonuses, paid time off, and uniform costs.

2. 30% is the benchmark. A healthy restaurant labor cost percentage typically runs around 30% of gross revenue (about half of your prime costs alongside COGS).

3. Three formulas to know. Labor as a % of sales = (Total Labor Cost ÷ Total Revenue) x 100. Labor as a % of operating costs = (Total Labor Cost ÷ Total Operating Costs) x 100. Labor cost per hours worked = (Weekly group labor hours x avg wage) ÷ 52.

4. Cross-train, schedule smart, tighten clock-in discipline. Cutting wages or shifts isn't the answer; optimizing how you deploy your team is.

5. Turnover costs money. Here's what's actually driving it. With the restaurant industry's average turnover rate at nearly 80%, the root causes — low pay, poor management, lack of recognition, limited career growth — are worth addressing directly.

6. Keep your best people. Lower your costs. Investing in training, recognition, and a positive workplace culture reduces turnover, boosts engagement, and helps maintain lower labor cost percentages over time.

7. The right tools track it for you. Toast Payroll, Sling by Toast, and your POS can automate labor cost tracking, improve scheduling accuracy, and support retention through better workforce management.

What are ordinary restaurant operating costs?

Restaurant operating costs include fixed costs and variable costs.

• Fixed costs include rent, insurance, and other standard monthly or annual costs that don't regularly fluctuate.

• Variable costs include restaurant food costs — or cost of goods sold (COGS) — and restaurant labor costs. COGS and labor costs added together are known as your restaurant prime costs.

Along with fixed and variable costs, new restaurants also have start-up costs to consider, such as new equipment, physical improvements, and probably marketing materials like a website. But start-up costs won't be factored into your standard operating costs.

What makes up restaurant labor costs?

Restaurant labor cost is the total dollar amount your restaurant spends on labor — covering pay for salaried and hourly workers, plus taxes and employee benefits.

The amount restaurant owners spend on labor also affects your prime cost — the total cost of goods sold plus total labor costs — which is the metric many restaurateurs use to assess their restaurant's efficiency.

New restaurateurs may be surprised to learn that labor costs include more than just their restaurant staff's hourly wages. Understanding the relationship between wages and labor hours is essential for accurate calculation.

• Hourly wages — What you pay your team per hour worked

• Salaried wages — Fixed compensation for managers and salaried staff (technically a fixed cost, but they roll up to labor costs)

• Overtime & premium pay — Time-and-a-half, double time, tip make-up, and other earnings

• Payroll taxes — Employer-side taxes on all wages paid

• Benefits — Health insurance, retirement contributions, and more

• Bonuses — Performance or retention incentives

• Paid time off — Vacation, sick days, and other paid leave

• Uniform & equipment costs — Anything labor-related that hits the books

Basically, anything that can be categorized as "labor-related" goes into your labor cost percentage calculation.

What's a good restaurant labor cost to aim for?

Typically, prime costs (COGS and labor costs) are around 60% of revenue — a pretty even split, with average labor costs around 30%.

It's important to understand the variations in labor needs depending on restaurant type. The table below shows typical ranges by restaurant format:

Note: These are industry reference ranges. Actual figures vary based on market, location, and operational model. Consult a financial advisor for guidance specific to your operation.

How to calculate restaurant labor cost percentage [Formula]

There are a few ways to calculate labor cost percentage. We'll be diving into three labor cost percentage formulas in particular: labor as a percentage of sales and labor as a percentage of total operating costs.

Download our Restaurant Metrics Calculator at the link below to calculate your labor cost. Then, read on to learn how to calculate labor cost percentage in an easy, accessible way. We'll also give you a few tips on lowering your labor costs while keeping your restaurant running at peak performance.

Formula Reference: Restaurant Labor Cost Calculations

Labor as a percentage of sales

Labor cost percentage based on sales is the most common formula. Here's how it works:

1. Determine your restaurant's labor cost. This cost includes all the money that the business had to pay to its employees throughout the year.

2. Determine your restaurant's revenue. Revenue, in this case, is your bottom line: the amount of money that your business takes in before any taxes or other deductions have been made. You can find this number in your POS system dashboard.

3. Divide your restaurant's labor cost by its annual revenue. For example, if the restaurant paid $300,000 a year to its employees and brought in $1,000,000 a year in sales, divide $300,000 by $1,000,000 to get 0.3.

4. Multiply by 100. This final number is your restaurant's labor cost percentage. In this example, it is 30%.

Use this formula to determine your labor cost percentage based on total revenue:

(Total restaurant labor costs / Total restaurant revenue) x 100 = Labor as percentage of sales

Restaurant labor as a percentage of total operating costs

Labor cost percentage can also be calculated relative to total operating costs. In this case, the steps are only slightly different.

1. Determine your restaurant's annual labor cost. This cost includes all the money that the business had to pay to its employees throughout the year.

2. Determine your total operating costs. Total operating costs are the total cost of doing business – not just food and labor, but marketing, rent, and every other expense that keeps the doors open. 

3. Divide labor cost by total operating costs. For example, if labor costs $9,000 per month and total operating costs are $15,000 per month, divide $9,000 by $15,000 to get 0.6.

4. Multiply by 100. This final number is your restaurant's labor cost percentage. In this example, it's 60% of the total cost of doing business.

Use this formula to determine your labor cost percentage based on total operating costs:

(Total restaurant labor costs / Total restaurant operating costs) x 100 = Labor as percentage of operating costs

Restaurant labor costs by hours worked

Calculating your labor costs by hours worked is a way to segment your staff into different operational groups, such as servers, bartenders, kitchen, and dish room employees. The point here is to quantify the cost per hour for each group.

For example, say you have five cooks each working 40 hours per week, and they're paid $20 on average. Here's the formula for calculating cost by hours worked for this cohort:

Average cost per hour of work = (Weekly hours worked by group x Average hourly wage) / 52 weeks in a year

5 cooks x 40 hours each = 200 weekly hours worked by group

200 hrs/week x $20 avg hourly wage = $4,000

$4,000 total wages per week / 52 weeks in a year = $76.92

After dividing by 52 to get the average over the course of the year, restaurant labor costs for the cooks at this restaurant are $76.92 per hour worked on average.

How can I lower labor costs?

The answer isn't to just pay your employees less or to schedule fewer shifts. Reducing overstaffing is crucial, but it shouldn't come at the expense of necessary operational coverage.

“81% of restaurant leaders agree that training improves retention. Providing your managers with integrated training and recognition solutions will enable them to boost employee engagement, reduce turnover, and cut labor costs.” - Christopher McNutt, Senior Product Manager for HR, Restaurant365

Here are a few creative ways that restaurant owners and operators can help lower labor costs:

• Bonuses and incentives can help motivate employees, keep them working efficiently, and hopefully reduce absenteeism.

• Cross-train and turn your employees into jacks of all trades. For example, if a host can jump in when a server goes home sick, they can keep diners happy without adding extra payroll.

• Understand clock-in behaviors and consider enforcing rules around clock-in and clock-out so that employees aren't getting paid for unworked hours.

• Plan your schedule ahead of time using restaurant technology such as Sling by Toast, which integrates directly with your payroll and point of sale. Advanced scheduling can help restaurateurs forecast and plan for known busy times or downtimes.

• Go paperless. Remove tedious pen-and-paper processes from your payroll and labor management processes with products designed specifically for restaurant payroll.

In addition to these, a great way to sustain lower labor costs is by increasing employee retention and reducing turnover rates.

What's the average restaurant industry turnover rate?

The average annual restaurant industry turnover rate is about 75%.

Prior to the pandemic, the average restaurant industry turnover rate was 71.6% (from 2013–2019). The data shows that the 2020 annual rate of 132% was heavily influenced by the lockdowns and subsequent restaurant closings in March and April of that year (36.5% and 28.7%, respectively).

Since then, the restaurant industry turnover rate has remained higher than pre-pandemic, though it's on track for its lowest annual rate since 2018.

Source: U.S. Bureau of Labor Statistics, Job Openings and Labor Turnover Survey (JOLTS), Series ID: JTS720000000000000TSR, Seasonally adjusted, Industry: Accommodation and food services.

Reducing employee turnover as a means to help lower restaurant labor costs

Restaurant turnover is inevitable. An employee may not work out and need to be let go. Long-time employees may decide to retire, get out of the industry, or branch off to open up their own shop.

The point is: some turnover is natural, healthy, and expected.

However, when turnover becomes a problem, it becomes a really big problem. Toast’s 2025 Voice of the Restaurant Industry Report shows that 42% of FSRs face moderate to extreme hiring challenges in today’s labor market. As competition for talent remains high, FSR operators are increasingly exploring new strategies to improve recruitment, boost retention, and optimize labor productivity.

Operators are preparing to do more with less; 49% of FSR operators say they would focus on increasing staff efficiency and speed of service if labor challenges intensify over the next 12 months.

Restaurant operators can take action to improve labor cost percentages and boost profit margins

Maintaining a consistent level of employee satisfaction is essential to help reduce restaurant employee turnover rates.

Owners, operators, and managers can consider how to be more strategic and intentional with new and ongoing employee retention strategies.

Activities and initiatives that boost employee morale can be great in the short term, though they likely need to be rooted in a more sustainable approach to consistent employee engagement and company culture.

Here are two tactics that can help improve your work environment, beat burnout, and boost employee retention.

• Cultivating a positive, supportive workplace culture: A strong workplace culture can be a great foundation to encourage churn reduction and boost employee retention. Such a culture will look different across restaurants, though it should help cultivate camaraderie and reduce restaurant industry burnout — which employees from servers to dishwashers are subject to.

• Focusing on hospitality and making your staff one team: Our data shows that connecting with regular customers (26%) and being part of a team (18%) are also key sources of job satisfaction. And it’s not one-sided. Toast data shows that 70% of guests consider themselves regulars at one or more restaurants. The bond between staff and their regulars is real, and for many workers, that sense of connection is one of the most rewarding parts of the job.

Keep your margins strong with the right tools

You've already done the hard work of building a team worth keeping. Toast Payroll syncs timesheets directly from your POS. Sling by Toast helps you schedule smarter before the week starts. Together, they give you the visibility to protect your margins — and the time to focus on what fills the room.

Schedule a free demo today to learn more or expand your suite of Toast products.

Frequently asked questions about restaurant labor costs

What is included in restaurant labor costs? Everything you pay your team: hourly wages, salaries, overtime, payroll taxes, benefits, bonuses, PTO, and uniform costs.

How do I calculate restaurant labor cost percentage? Divide your total labor costs by your total revenue (or total operating costs), then multiply by 100. A result around 30% of revenue is generally considered healthy for most restaurant formats.

What is a good labor cost percentage for a restaurant? Around 30% of gross revenue is the typical benchmark, though it varies by format — fine dining often runs 35–45%, while quick service can run 20–25%.

How do I reduce labor costs without cutting staff? Cross-train your team, tighten clock-in/clock-out discipline, schedule proactively with tools like Sling by Toast, and invest in retention — because replacing an employee costs more than keeping one.

How does labor cost relate to prime cost? Prime cost combines your total labor costs and cost of goods sold (COGS) – the two largest controllable expenses in your restaurant. Most healthy restaurants target prime costs at or below 60% of revenue, with labor and COGS each contributing roughly half.