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Which components should be included in labor costs

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Question:

I’m in the fried chicken fast-food business. Should we add social security taxes when calculating our labor cost?

– Joe Delpit, President, Chicken Shack Systems, Baton Rouge, Louisiana

Answer:

Yes. When calculating labor costs, you want to make sure you are including all applicable payroll taxes as well as employee benefits to get the most conservative—and accurate—picture. By omitting any relevant costs, you may be making things look better on paper, but are only cheating yourself by using numbers that do not reflect the true costs of operating your restaurants.

Labor costs calculations should include:

  • Salaries
  • Hourly wages
  • Independent contractors (if applicable)
  • Benefits both obvious such as health insurance premiums and retirement contributions, as well as things that you may not be thinking about like staff meals, uniforms and training expenses
  • Payroll taxes such as social security and Medicare, but only the portion you pay as an employer
  • Unemployment insurance

These costs, taken together, represent the true cost of your employees—not just what is reflected on their pay stub. Using that authentic number will help inform decisions, and help management think more critically about ways to control labor costs.

One important consideration: If you are not currently including those costs but realize you should be, be sure to indicate the change in accounting to whoever might see your reporting. Be careful in comparing performance to prior periods so you aren’t comparing accurate numbers with skewed numbers.

More on restaurant labor costs here.

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