4 Ways to Manage Labor Costs

June 25 2019

With labor costs rising throughout the US, restaurant operators can use some time-tested strategies to manage costs without impacting service.

Here’s a look at four ways you can track payroll and tip wages better, optimize schedules, manage labor hours and ensure you can support tip tax credits. You can streamline operations and benefit from IRS compliance at the same time.

FICA Tip Tax Credit

You can reduce the federal taxes on your restaurant’s profits by claiming a tax credit for the Social Security and Medicare taxes you pay on tips reported by employees. Employees who receive more than $20 in tips a month should report those earnings to the employer at least monthly. The employer must withhold FICA and income taxes on wages and the reported tip income. Tax law allows employers to take a credit for the employer’s share of the FICA taxes on reported tips.

Like most tax laws, there are many rules governing various aspects of tipping income. Work with an accounting firm that specializes in restaurants to ensure you take advantage of what can be a sizable tax credit.

Tools to Optimize Scheduling

Managing labor schedules is a tough job, even in a small restaurant, let alone a large operation. One useful tool is the Gantt chart. They’re often used for project management, like restaurant startups. But they’re also helpful for scheduling your staff.

A Gantt chart is a form of a bar chart that shows the start and end date of multiple tasks in a project. A Gantt chart helps connect your plan to individual activities. But instead of scheduling construction steps, a Gantt chart can schedule employees’ daily shifts.

A Gantt chart can help you avoid being understaffed or overbooked. There are a number of online tools to create your own chart. Teamweek is a Gantt chart software for restaurant management that’s free for up to five people to manage their schedules. Paid options are available for larger groups.

With a Gantt chart, you have a clear view of your staff’s schedule for any given day, the length of their shifts and where those shifts may overlap. You can schedule people’s days off, so there’s no question about the availability of your staff. You can look ahead daily or weekly to identify gaps and make sure you’re staffed at the appropriate level. A Gantt chart will help you gain control over your labor costs and levels before they happen.

Enforce Time Clock Rules

If you’re not careful, employees can steal significant amounts of time through time clock manipulation. They can punch in and out for a friend, take frequent or lengthy breaks on the clock and find other ways to get paid for not working. Of course, smartphones have complicated the situation as its tough to resist the temptation to check in with your friends.

Of course, restaurant employees need and deserve reasonable breaks so they can serve customers better. But it’s easy for break times and lack of discipline to get out of hand.

Enforce a no-tolerance policy for your time clock rules. It can be tough to do, but diligence will pay off. Also, there are technology solutions that allow employees to clock in and out only for the time they’re scheduled to work and track employees’ locations to ensure they’re on-premises while clocked in.

Departmental Labor Analysis

Most restaurant operators can tell you a rough estimate at least of the cost of labor as a percentage of sales. But that overall number may be too vague to give you guidance in ensuring your investing wisely in your labor costs. You want to avoid understaffing of course, but the best goal is to have the right people in place at the right time.

The industry rule of thumb is that labor costs of a full-service restaurant should consistently fall within a range of 25% to 35% of total sales.

Reporting labor cost on a restaurant’s P&L by job classification makes analyzing labor spend much easier.  For a full service restaurant, a departmental breakdown could be as follows:

  • FOH staff
  • BOH staff
  • Catering & Delivery
  • Cleaning staff
  • Management

Further defining job codes within each department allows for even better analysis.  For example, a job code classification within “FOH Staff” could include:

  • Hosts
  • Servers
  • Bartenders
  • Bussers

Utilizing a timeclock system that allows employees to clock in according to the job they are working on a given shift will then allow hourly labor to be tracked by department.  Make sure to work with a payroll processor who can setup departments in the payroll system to align with the departments in your timeclock or POS system, so your payroll reporting will give you accurate labor distribution and costing by department.

To help take control of your labor costs, work with an experienced accounting firm that specializes in restaurant operations. Tablespoon has the experience and the tools to optimize your labor spend. Contact us today.