Labor Cost
Labor cost is the total amount spent on employee compensation during a period: gross wages plus employer payroll taxes (Social Security, Medicare, unemployment) plus benefits (health insurance, workers’ compensation, paid time off). For most small businesses, the employer’s total cost is roughly 108–115% of gross wages.
Labor cost percentage = Total labor cost ÷ Revenue × 100
If weekly revenue is $12,000 and total labor cost (including employer taxes) is $3,360, labor cost percentage is 28%.
Targets by business type
| Business type | Typical labor cost % |
|---|---|
| Full-service restaurant | 28–35% |
| Quick-service / fast casual | 25–30% |
| Retail | 15–25% |
| Professional services | 40–55% |
Why it matters
Labor and COGS are the two largest variable costs for most businesses. Together they’re called prime cost (COGS + labor), which should typically stay below 60–65% of revenue for a restaurant. If prime cost exceeds 65%, there isn’t enough left to cover rent, utilities, insurance, and profit.
Managing labor cost
Labor cost percentage moves in two directions:
- Revenue increases (more customers, higher average check) drive the percentage down without cutting staff.
- Labor decreases (fewer hours scheduled, lower wages) drive the percentage down but may hurt service quality and employee retention.
The goal is matching staffing to demand: enough people during peak hours to deliver good service, fewer during slow periods. POS data by day and hour reveals demand patterns; the schedule should mirror them. See Weekly KPIs and Business Metrics and Managing Employees for the Long Term.