Nothing eats into a quick-service restaurant’s profits faster than labor and food expenses, each accounting for up to 33 percent of a restaurant’s sales, according to the National Restaurant Association.
Most operators, 98 percent, say labor costs are a significant issue, and 97 percent cite higher food costs. Nearly four in 10 say their restaurants were not profitable last year, the association says in its new 2024 State of the Restaurant Industry report.
Controlling food expenses can be a tall order, leaving restaurateurs with the option of reducing the cost of labor by resorting to understaffing, which could undermine operations and customer service, potentially hurting the bottom line.
Thankfully, there are other options to controlling labor costs beyond cutting staff, ranging from the latest in software to hiring foreign workers. Here are seven proven ways to reduce costs without sacrificing food quality or customer service:
Conduct a labor cost analysis
What’s causing the soaring labor expenditures—is it high overtime costs, overstaffing or unnecessary labor costs? Knowledge is power, so the first step in reducing labor costs should be identifying the factors via a labor cost analysis.
A comprehensive analysis should include scheduling, staff levels, payroll and productivity metrics. Analyzing turnover rates and costs of recruiting and training workers can also identify opportunities for controlling costs.
Tracking the total labor costs is equally important, which can be calculated as either a percentage of total operating costs or as a percentage of sales, using the following formula: Divide the total amount paid to employees per year by the total operating costs (or total sales) and then multiply by 100.
Once the baseline of costs has been determined, franchisees can set targets for improvements and track their progress against these new benchmarks for controlling labor costs and increasing profit margins.
Cross-train workers
Hiring individuals to be proficient in particular roles is essential in the food sector, but it’s also important for workers to be capable of different tasks beyond their primary responsibilities. The best way to achieve this is by cross-training staff, and teaching workers how to handle various other tasks.
Cross-training helps instill new skills in workers and boosts flexibility and operational efficiency during busy hours. It’s a strategic move that can eliminate the need for overtime while alleviating the impact of staffing shortages or absenteeism.
Enhance employee retention and reduce turnover rates
According to data from the Bureau of Labor Statistics, the restaurant turnover rate in 2024 stood at approximately 64 percent. Some driving factors behind this phenomenon are low pay, lack of recognition for a job well done, lack of career development and difficult managers. The estimated cost of losing an employee is one-half to two times their salary, which can quickly diminish any profit margin. A turnover cost calculator can give a clearer picture of how much staff churn truly costs.
A few ways to improve employee retention include competitive salaries, providing growth opportunities, improving work culture, and recognizing and rewarding employees for their efforts. Employee welfare policies and loyalty programs can also go a long way in reducing the turnover rate and creating more engaged (and happier) staff.
Hire international talent via the EB-3 Visa program
In addition to high turnover rates, franchisees face a severe labor shortage. Although numbers have improved over the past year, the restaurant industry has a much higher rate of job openings than other sectors, with nearly half of owners needing more employees to meet customer demand.
U.S. employers overall are facing a shrinking labor pool due to a low birth rate and more workers retiring than entering the workforce. An effective option for filling vacancies where there are not enough qualified U.S. workers is the EB-3 Visa program, offering qualified foreign workers permanent residency in the United States based on employment in a specific job category. These workers are dedicated and highly motivated entry-level employees eager to take on roles as line cooks, janitorial workers and food prep as a means to gain their U.S. permanent residence while growing within a franchise company.
The EB-3 application requires specific qualifications and compliance with immigration laws and regulations, but working with EB-3 Visa experts will mitigate any challenges with the process.
Use labor management software
The QSR industry is largely people-driven, and proper workforce management often requires managers and owners to oversee workers to maximize productivity. However, labor management software can handle most managerial and employee duties while being faster, more effective and more accurate.
This software can streamline and automate tasks such as employee scheduling, time tracking, recruiting, budgeting, performance analysis and payroll, not only saving many working hours but also ensuring compliance with labor laws and minimizing costly clerical errors.
Minimize overtime hours
Overtime hours can increase labor costs by up to 50 percent, requiring franchisees to establish clear policies to approve extra hours only when necessary. Incorporating labor software can help monitor overtime, and analyze when peak hours occur so managers can consider cost-saving alternatives, such as temporary hires, cross-training current employees or job-sharing.
It should be noted that a federal rule that would have increased the minimum salary threshold for certain employees to be exempt from overtime and minimum wage requirements was struck down by a court in November. However, the rule’s future is uncertain given the new presidential administration, according to the U.S. Small Business Administration.
Create a culture of cost-consciousness
Educating employees on the importance of being cost-aware and how to use tools for efficient resource and time management empowers them to understand the contribution they can make to the financial health of the company. Embrace an initiative to reward staff members who identify areas for improvement, such as reducing waste and increasing efficiency—after all, who better to see what isn’t working but those on the front lines?
Giving staff members recognition for their contributions builds employee morale which in turn results in lower staff turnover and overall job satisfaction. Rewards can be bonuses, gifts, promotions or even a simple Thank You note.
Wrapping it up
Getting a handle on labor costs is the fastest way for franchise owners to reduce their overall operating expenditures. Start with a labor cost analysis to identify where improvements need to be made. Make a policy of cross-training staff members and strengthening employee retention initiatives. Install the latest in labor management software and outline clear policies about overtime approval requirements. Create an initiative for employees to identify cost-cutting measures and then reward them for doing so. And finally, explore the possibility of hiring foreign workers via the EB-3 Visa program to fill vacant positions with eager, long-term employees.
Incorporating just a few of these suggestions can help reduce labor costs, improve employee morale and overall productivity while beefing up those profit margins.
John E. Dorer is an accomplished Global Mobility Executive with more than 23 years of hands-on experience in the field. As the CEO of eb3.work, he leads an expert team of immigration attorneys and recruiters committed to solving the pervasive problem of entry-level labor shortages through employer-sponsored green card programs, particularly the EB-3 visa program.
