Your Restaurant Labor Percentage Is Lying to You

David Scott Peters: Hey there, restaurant pros. It’s David Scott Peters, and welcome to The Restaurant Prosperity Formula podcast. For over two decades, I’ve been guiding restaurant owners to success with the proven principles of something I call the Restaurant Prosperity Formula. I originally created the formula based on the daily practices of the most successful restaurateurs I coached, and it’s now the foundation of what I teach restaurant owners like you so you can achieve success.

What do I mean by success? Success is a restaurant owner who dictates the terms of their life and their bank account instead of their restaurant dictating those things for them. Success is a restaurant owner who has freedom from the restaurant and the financial freedom they never thought possible. How you define success is up to you, but I do know the way to achieve it is using the Restaurant Prosperity Formula.

This season, I’m diving even deeper into the core elements of the formula: leadership, systems, training, accountability and taking action. Along with my insights, you’ll hear from special guests, industry experts and inspiring success stories from fellow restaurant owners who’ve turned their businesses around and found their definition of success.

In this episode, number 161, we’re tackling “Your Labor Percentage Is Lying to You.” Let’s get started. But first, a word from our sponsor.

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Labor percentage is a scoreboard

David Scott Peters: Restaurants love labor percentage. We look at it. We talk about it. We complain about it. We compare it to last week. We compare it to budget. And when the number looks good, we feel pretty damn smart.

Here’s the problem. Your labor percentage can lie to you. Not because the math is wrong. The math is perfectly fine. The problem is what you think that number is telling you.

Labor percentage is a scoreboard. It is not a steering wheel. It tells you what happened. It does not automatically tell you why it happened, and it definitely does not tell your managers what they should do next.

That distinction matters because I see restaurant pros manage labor backward all the time. They wait until the end of the week. They look at labor percentage. Then they either celebrate or they panic. That’s not management. That’s archaeology. You’re digging through the remains trying to figure out what happened after it’s already over.

If you really want control over labor, you have to manage the thing that creates the percentage.

The basic math

Let’s start with the basic math. Labor percentage is labor dollars divided by sales. Simple enough, but think about what that means. There are two numbers moving at the same time. Labor dollars move. Sales move. So if labor percentage changes, that does not automatically mean your management changed. Your sales may have changed.

Let me give you a simple example. Say you schedule $5,000 in labor. You expect $20,000 in sales. That would put you at 25% labor. Beautiful. But instead of doing $20,000, you do $25,000. You still spend the same $5,000 in labor. Now your labor percentage is 20%. Did your manager suddenly become a labor management genius? No. Sales bailed you out. The percentage looks incredible because the denominator got bigger.

Now flip it around. Same $5,000 in labor. You expect $20,000 in sales, but you only do $16,000. Your labor percentage is suddenly over 31%. Did your manager suddenly become terrible? Maybe. Or maybe sales missed the forecast. Those are not the same problem. And if all you look at is labor percentage, you can end up coaching the wrong thing.

That is why I want you to stop asking only, “What was our labor percentage?” and start asking, “What were our labor dollars supposed to be? What did we schedule? What did we actually spend? What sales did we forecast? What sales actually happened? And what did management do when reality changed?”

That last question is huge, because this is where labor actually gets managed.

The schedule is a financial document

Before the shift, you build a schedule based on your sales forecast. Not based on who wants hours. Not based on who complained last week. Not based on giving everybody the schedule they prefer. The schedule is a financial document.

Let me say that again. The schedule is a financial document. Every name you put on it represents dollars. Every extra hour represents dollars. Every person who clocks in early represents dollars. Every person who stays late represents dollars. And every time somebody says, “Can I pick up an extra shift?” there is a financial consequence to saying yes.

That doesn’t mean people don’t matter. Of course they matter. But the restaurant has to be able to afford the labor you put on the schedule.

So step one is figure out how many labor dollars you can afford. That comes from your budget. For the restaurant pros I work with, I teach labor as a part of prime cost. Your target is not some random number you grabbed off the internet. It depends on your concept, your sales volume, your market and your operation. But you still need a target.

Then you convert that target into labor dollars, because managers cannot schedule percentages. They schedule hours and dollars.

This is where a lot of restaurants lose control. The owner says, “Keep labor at 25%.” Great. What exactly is the manager supposed to do with that kind of information at 2:30 on a Tuesday afternoon? Nothing. It’s too abstract. They need to know the labor budget for the day. They need to know how many labor dollars they’re allowed to spend. Then they can build a schedule against it.

Managing labor in real time

And after that, they need to manage the shift against actual sales, because even the best sales forecast is still a forecast. Weather changes. Events happen. Traffic changes. People call out. A bus pulls in. A game goes into overtime. Sales are not going to land exactly where you predict every day.

So your managers have to adjust. That means they need visibility. They need to know what sales are doing. They need to know what labor dollars are doing. They need to know whether the shift is running ahead or behind. They need to make decisions.

Do we cut somebody? Do we call somebody in? Do we move somebody from one position to another? Do we delay a break? Do we send somebody home? Do we stop somebody from clocking in 20 minutes early? Do we need another cook because sales are blowing past the forecast?

That is labor management. It happens in real time, not three days later when somebody opens a report.

And this is one of the reasons I teach restaurant pros to use a payroll guardian. I want management looking at labor every day. Not emotionally. Not guessing. Not saying, “It felt busy.” I want the numbers. What were projected sales? What were actual sales? What were projected labor dollars? What were actual labor dollars? What was the variance?

Now we have something to coach, because variance is where the conversation starts. If labor dollars were over budget, why? Was the forecast wrong? Did the manager overschedule? Did employees clock in early? Did somebody stay late? Did we have overtime? Did we fail to cut? Were there call-offs that created overtime somewhere else? Was the restaurant busier than expected, and we intentionally added labor?

Those are all different situations. That is why the percentage alone is not enough.

A good percentage can hide bad behavior

Here’s another problem. A good labor percentage can hide bad behavior. This one gets restaurant pros all the time.

The restaurant has a killer sales week. The labor percentage looks fantastic. Everyone high-fives. Meanwhile, managers were sloppy as hell. People clocked in early. Nobody cut. Overtime was unnecessary. The schedule was bloated. But sales were so strong that the percentage looked good.

That is dangerous, because now you reward bad management. You say, “Great job on labor.” No. Great job on sales, maybe. But you need to know whether labor was actually managed.

This is why I want you looking at labor dollars and schedule variance. If you scheduled $7,000 and spent $7,800, I want to know why, even if the percentage looks great. Because if your sales ever come back down to earth and you keep managing labor the same way, now the problem shows up.

The reverse is true, too. A bad labor percentage does not always mean bad labor management. If sales collapse unexpectedly and the manager reacts aggressively, maybe they still miss the target. Maybe they cut three people. Maybe they send somebody home early. Maybe they reduce closing staff. They did everything right, but sales were so far under forecast that the percentage still looks ugly. That manager may deserve credit, not criticism.

This is where leadership comes in. You have to coach decisions, not just outcomes.

Sales per labor hour

And that brings me to another number I like restaurant pros to understand: sales per labor hour worked. This can be a very useful productivity metric. Instead of asking only what percentage we spent, you can ask how productive the labor hours we used were.

Take your sales and divide them by the labor hours that were worked. Now you have another lens. If sales per labor hour is dropping, you may have too much labor relative to volume. If it’s climbing too high, you may be understaffed and beating the hell out of your team.

The point is not to chase one single magic number. The point is to give management better information, because labor is not just an expense. Labor is capacity. You are buying the ability to serve guests. You are buying speed. You are buying production. You are buying hospitality. You are buying management.

Spend too much, and you kill profit. Spend too little, and you can destroy service, burn out your people and lose sales. So labor management is not about cutting labor. It’s about using the right labor at the right time. That is a completely different mindset.

Early clock-ins, late clock-outs and overtime

And while we’re here, let’s talk about one of the stupidest ways restaurants lose labor dollars: five minutes here, 10 minutes there. Early clock-ins. Late clock-outs. Somebody clocked in at 3:45 when the schedule says 4. Someone is done at 10 but hangs around until 10:18. Another employee forgets to clock out. A manager edits it later. Nobody pays much attention, because each individual instance looks tiny.

Multiply that across 30, 40 or 50 employees. Multiply it across seven days. Multiply it across 52 weeks. Now it’s real money.

I’m not telling you to turn into the clock police and chase all your people around over 90 seconds. But you need systems. Employees should not decide when they start costing you money. Managers need to own that.

Same thing with overtime. Overtime is not always bad. Sometimes it’s the right business decision. If you have somebody exceptional, and paying them a little overtime saves you from destroying service, maybe that is exactly what you should do. But accidental overtime? That’s different. Managers should know before Friday that somebody is approaching overtime, not after payroll runs. Again, visibility. You cannot manage what you cannot see.

And this is why your labor systems need cadence. You don’t manage labor once a week. You manage it when you build the schedule. You manage it when employees clock in. You manage it during the shift. You manage it when sales come in differently than expected. You manage it when somebody calls off. You manage it when somebody approaches overtime. Then you review it afterward and coach what happened. That is a system.

Building managers who own labor

Now let’s talk about your managers. Because if you are still the only person who understands labor, you do not actually have labor control. You have owner dependency.

If every manager has to call you and ask, “Can I cut Sarah? Can I send Mike home? Can I call someone in? Can I approve overtime?” then congratulations. You have made yourself the payroll guardian. That is not the goal.

Your managers need a framework. They need the target. They need the numbers. They need the authority. And they need coaching.

This is where you have to teach them how to think, not just what to do. If sales are down $1,500 by 7 p.m., what does that mean? If sales are up 20%, what does that mean? If the kitchen is getting crushed, what matters more right now, labor percentage or execution? If the dining room is dead but the schedule is still fully staffed, what should happen?

Those are judgment calls. And judgment improves when you make the numbers visible and then coach decisions afterward.

This is where weekly management meetings become important. Don’t just say, “Labor was high last week.” That teaches nothing. Instead: “We were $1,100 over labor budget. Let’s figure out where. Monday, on target. Tuesday, $200 over. Wednesday, fine. Thursday, $400 over. Friday, $500 over.”

Now we can investigate. What happened Thursday and Friday? Was it overtime? Was it poor cutting? Was the sales forecast wrong? Did somebody stay late? Now your manager is learning.

This is how you develop somebody who can run the restaurant without you. You are not giving them an answer. You are teaching them to diagnose the business.

Manage what creates the percentage

And restaurant pros, this matters, because labor is too big a number to manage casually. For most restaurants, labor is one of your largest expenses. If you are off by a few points, that could be the difference between making money and losing money.

I don’t want you obsessing over the percentage. I want you managing what creates the percentage. Forecast sales. Set the labor budget. Build the schedule. Track scheduled versus actual. Track against forecast. Adjust during the shift. Watch overtime. Watch clock behavior. Review variance. Coach managers.

That is the work. Then labor percentage becomes what it’s supposed to be: a result, not a strategy.

Your action step

So here’s your action. Pull the last four weeks of labor. Don’t just look at the labor percentage. Look at the dollars. Look at scheduled versus actual labor. Look at overtime. Look at where your biggest variance happened, and ask one question: Do I know why?

If your answer is no, that is the problem. Because if you cannot explain why labor moved, you are not managing labor. You are watching it. And there’s a big damn difference.

Remember, labor percentage is a scoreboard. It is not a steering wheel. Your managers need a steering wheel. Give them the budget. Give them the tools. Give them the visibility. Give them the authority to make decisions. Then coach the decisions.

That is how you control labor without standing in the restaurant every hour of every day. And that is how you build a restaurant that works without you.

Closing message: There’s one number that’s quietly killing your restaurant profits, and most owners don’t even know what it should be. It’s your prime cost. And right now, most restaurants are running at least 15 points higher than they should be, which means you’re working harder and making less than you deserve.

If you’re tired of being stuck in your restaurant, tired of inconsistent or nonexistent profits, then it’s time to find out what’s really going on. I invite you to book a free 30-minute restaurant profit finder call with my team, where you’ll uncover exactly what’s eating your profits and what it’s costing you every single month. Just click the link in the description to get started.