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How to Manage Hospitality Labor Costs in 3 Steps

If you’re managing a business in the service industry, you know that hospitality labor costs can take a big chunk out of your overall expenses. Without proper control, they can make or break your bottom line.

Cutting costs and cutting to what extent is always a difficult question. You need the right data to forecast, analyze, and plan how you’ll use your labor resources in the future.

So, how can you manage your hospitality labor costs while maintaining your business growth? Here are 3 steps you can apply today.

1. Know what your labor costs are

First, you need to know how you’re spending on labor resources. To do that, go through your daily reports, employee timesheets, and sales revenue. Then use those numbers to calculate your labor costs using this formula:

Total sales revenue / Total payroll = Labor cost percentage

When dividing your overall revenue by payroll, don’t forget to factor in employee benefits and other payroll charges. 

If your percentage is around 30%, you’re in the “safe” zone of the hospitality industry. This number suggests that 70% of your expenses are incurred elsewhere.

If you have a labor cost percentage of more than 30%, you are paying too much for labor resources. In this case, you need to investigate carefully where and what you’re overspending your budget on.

2. Find where you can control labor costs

You can control your labor costs by adjusting your scheduling practices, limiting overtime, and reducing the turnover rate.

Improve scheduling practices

When your scheduling process is poorly planned, you may:

  • Schedule too many hours for certain staff, resulting in overtime costs.
  • Schedule too few hours for certain staff, meaning you don’t know how to maximize your labor resources. For example, instead of scheduling 2 shifts for 1 employee, you may hire 1 more employee. It’s certainly more expensive to hire 2 people instead of 1.

Trying to optimize costs by cutting staff or asking staff to work overtime isn’t really a good idea. Instead, business owners can adjust their scheduling practices to ensure employees have a balanced and equal amount of workload.

Limit overtime hours

Overtime is a common cause of rising labor costs. Don’t rely on overtime to make up for sloppy work schedules. 

You can limit unplanned overtime by:

  • Providing employees with enough resources required to complete their tasks in time
  • Cross-training employees so that they can perform several tasks and fill in if demand spikes unexpectedly
  • Using a scheduling app that will alert you when an employee is approaching overtime
  • Hiring enough staff and maximizing your scheduling practices

Reduce the turnover rate

Employee turnover is a costly problem. You have to pay for exit costs, recruiting and training new employees, and additional costs you’re not aware of. You lose the expertise and productivity of the leaving staff. Other staff will have to work longer hours to cover the vacant position, meaning their morale will be affected.

Keep a close eye on your business staff turnover rate, as well as your resources and budget. This allows you to spot a high turnover rate and adjust your management timely. 

Besides, convincing employees to work full-time and focusing on retention strategies are also good ideas to reduce turnover and labor costs.

3. Offer more attractive incentives

Offering incentives during lay-off and short-time periods can be a great way to improve the morale of existing staff while keeping labor costs in check. You don’t have to splurge. Instead, you can select incentive ideas that are suitable for your situation and budget.


Labor costs are an indispensable part of businesses, especially those in the hospitality industry. Reassess your labor resources and costs, then adjust your strategies accordingly. You’ll be able to cut unnecessary costs while maintaining the efficiency of your business operations.

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