Understanding the basics of your restaurant payroll percentage

In this article we’ll teach you how to calculate your payroll percentage, why it’s an important measure of the health of your business, and how you can improve restaurant labor costs with modern technology and sound management practices.

What is payroll percentage?

Your restaurant payroll percentage is a measure of the portion of your revenue that funds labor cost. Regardless of job code (cooks, managers, servers, etc.) all hourly wages and salaries go into your cost of labor; when that labor cost is divided by your revenue, you’ve calculated your restaurant payroll percentage. 

Restaurant Payroll Percentage = Total Payroll Costs / Total Revenue

Your payroll percentage can be tracked through each pay cycle (we recommend weekly payroll) and on longer time frames such as quarterly or annually. As you’re continuously working to actively manage your cost of labor, it’s best to calculate your payroll percentage on frequent intervals.


How to calculate payroll percentage?

Use the restaurant payroll percentage calculator below. Input your Payroll Costs and Revenue into the calculator below to get your restaurant’s payroll percentage.


Importance of calculating your payroll percentage accurately

Later in this piece we’ll discuss strategies to manage and reduce your restaurant’s cost of labor. The only way to recognize if these changes are working is to have an accurate measure of your labor cost. Thus, when calculating your restaurant payroll percentage, be careful to account for your true total labor expenses, including tips, taxes, and benefits. If you leave these out, you’ll have an overly rosy impression of your labor cost and will miss potential areas for optimization.

Identifying areas of improvement

In order to improve a business process, it’s critical that you understand how it’s currently being done. As preparation for improving your labor cost, make an inventory of all the procedures you use when:

  • Setting employee schedules
  • Tracking hours worked
  • Managing overtime
  • Tracking and allocating tips
  • Running payroll

Male and female cafe managers wearing stripped aprons smiling at camera.

Identifying areas where cost savings can be made

Most restaurant staff are paid hourly, which means that business owners have the ability to make fine-grained adjustments to employee schedules. In the ideal case, the number of staff on hand should exactly match customer demand. Tracking your sales and labor data in real-time allows you to make accurate determinations of whether your staff is being used optimally. The best modern restaurant management software integrates with your POS to offer actionable real-time data to managers.

Beyond data on your sales in the moment, restaurant software can pull historical sales data for the current period (such as month over month) and use it to make accurate predictions of future demand. These forecasts allow you to set staffing levels appropriately, minimizing labor cost while supporting the customer experience. 

Using historical sales data is an example of data-driven decision-making. This should be adopted as a general management practice to control costs. Puzzling over a complex scheduling issue? Questioning how many people to put on a holiday weekend shift? When in doubt, look to the data. Your restaurant software should empower you to reference relevant data sets for all manner of labor and financial management decisions.

Restaurant server smiling at camera working on tablet in hand.

Best practices for reducing payroll costs

In order to make informed data-driven decisions, you’ll want your restaurant management software to be connected to your POS system. In most restaurants, the POS is the most accurate record of employee hours worked for front of house staff. Additionally, your POS data will indicate the level of customer demand. Combined, these data sources can indicate whether or not you set staffing at an efficient level. Learn from your data and streamline your future scheduling.

Another way to stretch your payroll dollars is to use restaurant-specific payroll software. The restaurant industry has unique characteristics, like tip calculations that vary based on local and state law. Your payroll software should be able to make all the necessary adjustments to wages, taxes and benefits in compliance with local, state, and federal law. Mistakes in payroll can lead to expensive legal liability and tax penalties, so be sure your payroll software is built for the specific needs of the restaurant industry.

One of the best solutions for labor cost savings is proper staff training. The better your staff are at their jobs, the less employees are required for a given level of customer service. Many restaurants leave money on the table by not training up their entire staff to the level of your highest performers. If you have one server that efficiently serves five tables while another can only serves three, there’s a training opportunity there. Likewise in the kitchen, if some line cooks are slower than others, there’s training to be done. Of course, there’s natural variability in human performance, and it may not be possible to bring all of your staff up to the same level, but by merely attempting such training, you put yourself ahead of most restaurants. 

Finally, we all know the restaurant industry is afflicted by high employee turnover. When staff who know how your restaurant runs leave and are eventually replaced by fresh faces who need to learn everything from the ground up, efficiency suffers. It makes good sense to try to retain staff for longer tenures rather than constantly having to hire and train new people. Your best assets for employee retention are competitive compensation, good management, and a safe and respectful working environment. All these factors are within your control. 

Restaurant team overlooking owner on laptop looking at finances in the dining room.

Strategies for reducing payroll costs 

Implementing flexible scheduling

To optimize your payroll, consider offering flexible scheduling to your staff. That is, try to align their working hours precisely with customer demand. If you know you’ll need an additional server from 6 – 9 pm on Fridays and Saturdays, make that someone’s schedule. By having staff on hand only when needed, and not working during quiet periods, you’ll support the guest experience while minimizing labor cost.

Offering employee incentives

Incentivize your staff to work the way that best supports your business. It’s up to you to devise a compensation incentive scheme that matches the specific needs of your restaurant. An example incentive is offering bonuses to staff that are willing to close on weekends. The right incentive program aligns your business goals with employee financial motivations.

Implementing employee training programs

As discussed earlier, proper staff training is key to getting the most out of the employees you have. The most scalable and repeatable way to train staff is through organized programs. You might have a server training program, a cook training program, a hostess training program, etc. You can get the content for these programs by modeling your best performers and asking them to explain their processes and decision making.

Utilizing technology to streamline payroll processes

Modern restaurant management software will pull data directly from your POS to calculate hours worked, tip distribution, benefits owed, and more. There’s really no reason to run payroll by manual spreadsheets anymore. Save time and reduce errors through payroll automation.


Reduce your payroll percentage

As we’ve seen through the course of this article, there are numerous tactics and strategies for labor cost control available to motivated managers. The right mix of technology and process improvements will vary by restaurant, but it’s guaranteed that results will come to managers who make labor cost reduction a priority. In this ongoing quest, restaurant management software is your greatest ally.