How to Calculate Labor Cost Percentage (With Formula and Examples)

Labor is the biggest controllable expense for most small businesses. Knowing your labor cost percentage tells you whether you're staffing efficiently or bleeding money. Here's how to calculate it, what the numbers mean, and how to bring them down.

The formula

Labor cost percentage is straightforward:

Labor Cost % = (Total Labor Cost / Total Revenue) x 100

If you spent $12,000 on labor last week and brought in $40,000 in revenue, your labor cost percentage is 30%.

The hard part isn't the math. It's knowing exactly what goes into "total labor cost."

What counts as total labor cost

Wages and salaries are just the starting point. A complete labor cost calculation includes:

• Gross wages (hourly pay and salaries before deductions)
• Overtime pay
• Payroll taxes (Social Security, Medicare, federal and state unemployment)
• Benefits (health insurance, retirement contributions, PTO)
• Workers' compensation insurance
• Bonuses and commissions

Payroll taxes alone add roughly 7.65% on top of gross wages for most employers. Benefits can add another 10-30% depending on what you offer. If you're only looking at gross wages, your real labor cost is significantly higher than you think.

Step-by-step calculation

Let's walk through an example for a restaurant doing $50,000 in weekly revenue.

Step 1: Add up gross wages. You paid $11,500 in hourly wages and salaries this week.

Step 2: Add payroll taxes. Employer-side payroll taxes at roughly 8%: $920.

Step 3: Add benefits (prorated weekly). Health insurance, PTO accrual, and other benefits cost about $1,200 per week across your team.

Step 4: Add overtime and bonuses. One employee picked up extra shifts: $380 in overtime.

Step 5: Calculate total labor cost. $11,500 + $920 + $1,200 + $380 = $14,000

Step 6: Divide by revenue and multiply by 100. $14,000 / $50,000 x 100 = 28%

At 28%, this restaurant is within a healthy range.

Industry benchmarks

Labor cost percentage varies widely by industry. Here are typical ranges:

• Full-service restaurants: 25-35%
• Quick-service restaurants: 20-28%
• Retail: 15-25%
• Healthcare: 40-55%
• Hospitality/hotels: 25-35%

These are guidelines, not hard rules. A fine-dining restaurant with highly trained staff will naturally run higher labor costs than a fast-casual spot. The key is knowing your target and tracking against it weekly.

How scheduling directly affects labor cost

Your schedule is your labor budget in action. Every shift you add or remove changes your labor cost percentage for that period. The most common scheduling mistakes that inflate labor costs:

Overstaffing slow periods. If you have 6 servers on a Tuesday lunch that only needs 3, you're paying double the labor for the same revenue. Look at your sales data by day and daypart, then staff accordingly.

Unplanned overtime. One employee staying an extra hour each day adds up fast over a pay period. Track weekly hours as you build the schedule, not after timecards are submitted.

Poor shift transitions. Overlapping shifts are sometimes necessary, but excessive overlap means you're paying two people to be there when one would suffice. Be intentional about overlap windows.

Ignoring labor cost when approving swaps. A shift swap where a $20/hour employee replaces a $14/hour employee changes your cost even though coverage stays the same.

Practical ways to reduce labor cost

You don't have to cut hours or pay people less to improve your numbers. Smarter scheduling gets you most of the way there.

Track labor cost weekly, not monthly. Monthly is too late to course-correct. Weekly tracking lets you adjust the next schedule based on actual performance.

Schedule to demand, not to habit. If sales data shows Monday nights are slow, reduce Monday night staffing. Don't keep three closers just because that's how it's always been done.

Cross-train employees. When one person can cover multiple roles, you need fewer total staff on the floor. Cross-training also gives you more flexibility when building the schedule.

Reduce no-shows. Every no-show either leaves you short-staffed (hurting revenue) or forces a last-minute call-in (often at overtime rates). Shift reminders and clear attendance policies help.

Use your POS or sales data. Most businesses already have the data they need to forecast demand. The problem is that the schedule gets built on gut feeling instead of numbers.

The bottom line

Knowing your labor cost percentage isn't a one-time exercise. It's a weekly habit that tells you whether your schedule is aligned with your revenue. Calculate it, benchmark it, and adjust your scheduling to keep it in range.

Try Timely free for 7 days and see how much easier it is to build schedules that keep labor costs where they need to be.