How to Calculate Labor Cost Percentage (with Industry Benchmarks by Sector)

Labor is often the largest expense for businesses, especially if you rely on hourly staff. Calculating your labor cost percentage shows how much of your revenue is going towards payroll and whether your staffing levels are sustainable.

This guide explains how to calculate your labor cost percentage and how your numbers compare to industry benchmarks.

What Is Labor Cost Percentage?

Labor cost percentage is the metric that shows how much of your business’s revenue goes towards paying employees.

Managers use this metric to understand whether the company’s staffing levels make sense compared to the profit being generated.

If your business relies on hourly teams (which is common for restaurants, retail stores, hotels, or clinics), labor is likely one of your largest operating expenses.

An hourly model means that even small changes in scheduling or overtime can push up labor costs greatly.

When you track total labor cost as a percentage of revenue (in the form of labor cost percentage), you have a quick way of checking whether your payroll is staying in line with sales.

Labor cost percentage is also a useful metric for comparison and tracking. You can look at it from week to week, month to month, or compare it against industry benchmarks to see where your operations stand.

If the percentage is too high, this can signal that your staffing levels, shift planning, or demand forecasting need to be reevaluated.

Labor Cost Percentage Formula

Calculating the labor cost percentage is simple. Here’s the formula:

Labor Cost Percentage = (Total Labor Cost ÷ Total Revenue) x 100

Both numbers must be from the same period. If you calculate labor costs for a single week, you should compare them against the revenue earned during that same week.

Labor Cost Percentage Calculation Example

Let’s say you run a small cafe and want to review your performance for the past week.

First, gather the two numbers needed for the calculation:

• Total weekly revenue: $8,500

• Total labor cost: $2,850

Step 1: Divide total labor cost by total revenue

2,850 ÷ 8,500 = 0.335

Step 2: Convert the result into a percentage

0.335 × 100 = 33.5%

This means your cafe spent 33.5% of its revenue on labor that week. In other words, roughly 33 cents of every dollar earned went towards payroll.

What Counts as Total Labor Cost?

Your organization’s “total labor cost” is an important number when calculating the labor cost percentage.

While wages are a large part of the total labor cost, there are many other expenses (like payroll taxes, benefits, overtime, and paid time off) that are all added to the total cost of labor.

If these costs aren’t accounted for, your final labor cost percentage will reflect lower than it should be.

To get an accurate number, make sure you include these components when calculating:

Labor Cost Percentage Benchmarks by Industry

Once you’ve calculated the labor cost percentage, the next step is understanding how it compares to similar businesses.

Labor costs look very different depending on how a business operates and what its typical staff requirements are. For this reason, labor cost benchmarks are usually discussed by industry.

Here’s a table with common ranges across several major sectors:

Note: These figures are industry averages based on research and financial reports. Actual labor cost percentages can vary significantly depending on factors such as location, wage laws, business model, and staffing needs. Treat these as approximate benchmarks.

What to Do if Your Labor Cost Percentage Is Too High

If your labor cost percentage is higher than industry benchmarks, this doesn’t automatically mean you’re overpaying employees. More often, this indicates an issue with scheduling, overtime, or staffing efficiency.

Here are some actions you can take to cut down on costs without disadvantaging your employees:

• Reduce overtime. Overtime can increase labor costs quickly, especially if your business relies on hourly workers. Review your weekly schedules to help identify situations where employees are regularly working overtime. Make small adjustments, such as distributing office hours across staff, to reduce overtime costs.
• Match staffing levels to demand. Labor costs can climb simply because schedules don’t match how busy your business actually is. Review your past sales to identify slower periods, and adjust staff levels accordingly. For instance, weekday afternoons might only need a small team compared to the rush you see on weekends.
• Cross-train employees. Cross-train staff so a smaller team can handle more responsibilities during busy periods. d.
• Reduce employee turnover. Frequent hiring and training can drive up labor costs. Focus on retaining experienced employees (who require less supervision) through good scheduling, fair workloads, and decent pay.

Keep Labor Costs in Check with ZoomShift

One of the most difficult parts of managing labor costs is that issues often show up too late. By the time payroll runs, scheduling mistakes and overtime costs have already added to your costs.

This is where ZoomShift can help. With built-in scheduling and time tracking, you can assess employee hours built throughout the week. Employees can clock in using simple web or mobile time clocks, and you can monitor hours worked in real time.

ZoomShift can also prevent common problems by blocking early clock-ins and flagging overtime. Because schedules and timesheets are monitored in the same system, you can quickly adjust shifts when demand changes. If a shift is overstaffed or overtime is approaching, schedules can be updated right away.

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JD Spinoza

JD enjoys teaching people how to use ZoomShift to save time spent on scheduling. He’s curious, likes learning new things everyday and playing the guitar (although it’s a work in progress).