Learn what labor rates are and how to calculate them.
Understand the concept behind the labor rate and learn how to implement it in your own business with ease.
Kristian Emil Larsen
18. February 2022
Do you have an overview of how much of your turnover goes to wages?
The amount of bankruptcies in the restaurant industry has been increasing since 2014. Therefore, it is important that you as a self-employed person have control over your labor rate so that you can make informed decisions when it comes to regulating your daily staffing level in your restaurant or shop.
By keeping track of payroll expenses compared to revenue, you get a solid tool to know when to reduce your payroll costs without compromising either customer satisfaction, efficiency, or revenue.
In this article, we review everything you need to know about labour rates, how to calculate it and not least how to apply it in practice.
What are labor rates?
Labor rates are a widespread unit of measurement used specifically by restaurants and retail stores to help the manager understand how good the economy is in the business.
The rate data is often used to assess whether wage costs are too high or too low compared to the revenue that comes in.
How to calculate your labor rate.
To calculate your labor rate, you must take your salary expense and divide it by your revenue, then multiply it by 100. See the example below.
Labor rate = (salary expenses) ÷ (revenue) x 100
With this simple formula you can calculate your wage percentage per year, quarter, month, week, day and even hour.
Example: A restaurant's labor rate on a given day.
Salary expenses on the day: €4.677,50 | Revenue on the day: €24.000
A healthy labor rate for most businesses in the retail and restaurant industry is around 25% -30%. However, this can vary considerably from company to company and typically depends on the following criteria:
- Company concept - Company location - Number of employees - Employee efficiency
Companies with several departments or locations should be aware that particular size, location and efficiency will create a difference in the wage percentages, which is why it is not unusual for the wage percentage to fluctuate a lot between companies within the same chain or franchise.
How to optimize your labour rate.
In order to help you get started with measuring and optimizing your labor rate, we wrote a blog with tips and tricks which you can implement immediately.