Rethinking Labor Costs: How Viewing Labor as an Investment Can Maximize Restaurant Revenue

By: Adam Bennett

March 24, 2025

This paper presents a new framework for understanding labor’s role in restaurant profitability by reframing labor as an investment and the foundation of revenue generation.

The restaurant industry has long adhered to the traditional notion that labor should be viewed as a percentage of revenue, usually around 30-35%. This viewpoint treats labor as a burden that can be minimized to maintain profitability. However, this whitepaper introduces a paradigm shift; rather than seeing labor as a burden and an expense, it should be viewed as an investment that directly drives revenue.

Using gathered research data and insights derived from a turnover/productivity-cost calculator that I developed, this whitepaper demonstrates:

How each dollar invested in labor yields a return of three times its value in revenue.
The true costs of turnover, particularly the hidden revenue losses when restaurants experience turnover and during training.
Strategies to optimize productivity, retain skilled workers, and increase overall revenue through smarter labor investments.
How Snag-a-Shift can help your restaurant avoid productivity pitfalls and reduce risk when hiring new workers.

The ultimate goal is to help restaurant owners and managers shift their mindset from minimizing labor costs to maximizing workforce productivity. By adopting this new framework, restaurant operators can boost profitability by fostering a more productive and motivated workforce.

Key Takeaway:

Labor is not a cost to be minimized but an investment to be optimized. This whitepaper provides actionable insights and tools for restaurant owners to maximize revenue by making optimized labor decisions.

The Problem with Traditional Labor Metrics

The restaurant industry traditionally says that labor costs are a percentage of revenue, ranging from 30% to 35%. This traditional or top-down approach is understandable considering revenue projections are based on a number of factors, including past sales data, seasonal trends, local events and current market conditions. These shifting factors make it hard to pinpoint, but you can determine within a reasonable measure what your revenue might be and plan your staffing accordingly.

However, viewing labor this way doesn’t give you a great picture of what labor is, other than simply an expense. There is no way to maximize its potential or minimize its pitfalls.

When I started viewing labor as an asset to be optimized, I began to see that the productivity received from the labor is the most important metric. Reducing labor hours may seem like an effective way to maintain profitability, but these measures can undermine productivity, reduce service quality, and increase employee turnover.

As turnover rates rise and staffing challenges become more prevalent in the landscape, restaurant owners must rethink how they view and manage their labor costs. This whitepaper introduces a new framework: Labor should be treated as an investment that yields measurable returns in the form of increased revenue, higher customer satisfaction, and long-term profitability.

The Paradigm Shift: Labor as a Revenue Generator

First, let’s establish the definitions of labor and revenue. According to Merriam-Webster, Labor is the use of mental or physical effort, especially when it’s difficult or required and Revenue is the total income produced by a given source.

So, we could more specifically define Revenue as the total income produced by the use of mental or physical effort, especially when it is difficult or required.

This section introduces a new framework where labor is viewed as an investment rather than an expense. Instead of focusing on what percentage of revenue labor consumes, restaurant owners should evaluate how much revenue each dollar spent on labor generates. This leads to the concept of the Wage-to-Revenue Multiplier or (WTR Multiplier).

A 3x WTR Multiplier means that for every dollar per hour you spend on labor, your workers should earn you $3 per hour in revenue. When you look at revenue the traditional way, labor being 30%-35% of revenue is ⅓ of your revenue or revenue is 3x what you spend on labor. So you can see we’re just looking at the data from the opposite perspective.

Instead of viewing labor as a percentage of revenue and thus an expense, revenue becomes a multiple of what you spend on labor and labor becomes an asset. When you view labor and revenue from this viewpoint you can start to think of labor in terms of the productivity you are getting in return.

The Bureau of Labor Statistics (bls.gov) defines productivity as,

“A measure of economic performance that compares the amount of goods and services produced (output) with the amount of inputs used to produce those goods and services”.

As an example, say you pay $20 per hour to two different employees, both work 6-hour shifts. One employee produces 70% productivity over the course of their shift and they generate $252 of revenue for you. The second employee produces 100% productivity over the 6 hours and matches the expected revenue so they generate $360 of revenue for you.

You can see the difference in the return and that the $20 per hour spent in each case is not of equal value. So this proves it’s not about spending more to make more, but the productivity you get in return.

Key Takeaway:

The viewpoint has changed. It’s not about minimizing costs but maximizing productivity received for revenue spent.

The Hidden Costs of Turnover

My Thought Process

In 2006, J. Bruce Tracey, Ph.D., and Timothy R. Hinkin, Ph.D. at Cornell University published “The Cost of Employee Turnover: When the Devil Is in the Details,” examining the multifaceted turnover costs in the hospitality industry, specifically in hotels. However, the insights from their study are equally applicable to the restaurant industry.

The study highlights how turnover negatively affects productivity through four main traps:

A dip in productivity occurs when a worker gives notice and prepares to leave.
Lost revenue from unfilled positions.
Revenue is lost during the learning curve of a new hire.
Disruption costs occur when new employees frequently seek assistance from colleagues.

I also recalled a YouTube Short where a professor redefined restaurant revenue by viewing it as a multiple of the labor cost. He explained that for every dollar spent on wages, a restaurant owner expects to generate three dollars in revenue. This perspective underscores that a worker’s output must not only cover their wage but also contribute to all other operational costs, leaving only a slim margin for profit.

Bringing these ideas together, the identified productivity traps and the wage-to-revenue multiplier, I developed a calculator that quantifies the revenue loss incurred during turnover. Notably, two of the traps have a significant financial impact: revenue loss when a position goes unfilled and reduced productivity during the new hire’s training phase.

The Productivity Traps

Operating Understaffed

When a worker vacates a position and that role remains unfilled, the restaurant is not only missing out on the revenue that the absent worker would have generated, but it also forces the remaining staff to cover the gap. As a result, the wage-to-revenue multiplier increases, meaning each existing employee must generate more revenue than originally anticipated. This additional pressure leads to overtime, fatigue and ultimately, burnout, which degrades service quality and customer experiences. This situation is unsustainable over the long term.

The Learning Curve

Another significant productivity trap is the learning curve that new hires experience. When a new worker starts, they are not immediately working at 100% productivity because they need to learn the processes, procedures, and culture. Imagine a 90-day training period during which the worker’s productivity gradually increases. For example, if a worker is paid $15 an hour and the wage-to-revenue modifier is 3x, at 70% productivity on their first day they generate $31.50 per hour. By the end of the training, when they reach full productivity, they generate $45 per hour. The revenue lost during this ramp-up period—this shrinking productivity gap—is a hidden cost that the restaurant bears every time a new hire is being trained.

Exiting Workers and Training Interruptions

While the revenue losses from unfilled positions and the learning curve are the primary productivity traps, it’s also important to acknowledge two additional factors. First, there’s the initial dip in productivity that occurs when an employee gives notice—during this transition period, performance often declines as the worker’s engagement wanes. This might cost a restaurant a little over $300. Second, new hires can cause minor disruptions by frequently needing assistance from their colleagues, which adds to the overall strain on resources. Ensuring that your training program is efficient is very important in minimizing this productivity trap, as it can quickly approach $1000 or more. Together, these factors compound the hidden costs of turnover, even if their individual impacts are more modest compared to the larger traps.

Summary

By using the WTR (wage-to-revenue) modifier, we’re able to put a dollar value on the cost of these productivity traps and it becomes much clearer how these losses affect the restaurant, up to $10,000 each time turnover happens.

According to the POS system company Toast, the average turnover rate in the US restaurant industry is over 79%. This means that if a restaurant starts the year with 20 employees, 16 will be replaced by the end of the year.

Maximizing Productivity and Revenue

When labor is viewed as an investment rather than a cost, the focus shifts from minimizing wages to maximizing productivity output per worker.

Using the wage-to-revenue (WTR) Modifier, you can project potential revenue based on labor investment:

(Number of employees)×(Avg.Wages)×(Time Period)×(WTR Modifier) = Projected Revenue

Comparing the actual wage-to-revenue modifier to projections reveals whether your labor strategy is working. To determine your actual WTR Modifier:

((Number of Employees)x(Avg.Wages)x(Time Period))/Revenue=WTR Modifier

If the actual WTR is higher than projected, your workforce is more productive than expected, indicating you may need to hire more workers to sustain optimal operations.
If actual WTR is lower than expected, you have a productivity issue—a sign that inefficiencies are limiting output, and you need to optimize labor allocation.

By focusing on labor efficiency and productivity instead of just reducing costs, you ensure that your investment in staff drives revenue growth rather than hindering it.

Solutions:

Minimize Time Operating Understaffed

The biggest productivity trap caused by turnover is running understaffed. When a worker leaves, you lose the revenue they generate, often exceeding $1,000+ per week. Of course, you don’t lose that money, the labor just gets distributed to the remaining workers and your WTR modifier goes up, indicating you are understaffed.

Operating understaffed has compounding effects:

Increased workload on remaining staff → overtime costs.
Greater risk of fatigue, errors and injuries.
A domino effect leading to even more turnover.

Minimizing the time spent operating understaffed is critical to preventing this drain on efficiency and profitability.

Create your training program to operate as efficiently as possible

The second-largest productivity trap is inefficient training. The time it takes for a new hire to reach 100% productivity directly impacts labor efficiency.

New hires rarely start at full capacity—most begin at 70-75% productivity.
Their output gradually increases as they gain experience and confidence.

An optimized training program should reduce the time it takes for new hires to reach peak efficiency. The faster they become fully productive, the sooner your labor investment translates into the maximum amount of revenue.

How Snag-a-Shift Helps Alleviate These Challenges

Traditional hiring processes are slow, expensive, and ineffective at addressing immediate staffing needs and turnover-driven inefficiencies. Snag-a-Shift provides a flexible, on-demand solution to keep restaurants fully staffed and productive.

Reduce Time Spent Understaffed – When an employee leaves, instead of operating understaffed, restaurants can instantly post single shifts and fill them within hours or days. This prevents revenue loss and helps avoid burnout for current staff.
Lower Hiring Risks & Costs – Since workers are 1099 contractors, restaurants can bring in new talent without a long-term commitment, eliminating employment overhead like payroll taxes and workers' compensation.
Boost Workforce Productivity – With access to ready gig workers, restaurants can fill shifts and reach full productivity faster.
Adapt to Business Volume – Whether it’s seasonal demand or unexpected surges, Snag-a-Shift enables restaurants to quickly scale up their labor force, preventing understaffing.

Alleviating the Risk of New Hires

When restaurants hire, and especially if this is a worker’s first job, they are taking a risk on that new hire. If they don’t work out, the restaurant is out all of the time and money they’ve spent on training and the restaurant owner or manager has to start the hiring process again.

Using On-Demand Staffing, workers get experience from single shifts at many different locations. Their training will be more diversified and the risk is spread to all of the restaurants where they work, so no one restaurant shoulders all of the burden and cost of training a worker.

Conclusion: A New Way to Think About Restaurant Labor

The restaurant industry has traditionally approached labor costs through the lens of expense management, focusing on keeping wages within a fixed percentage of revenue. However, this mindset fails to capture that labor is the Driver of Revenue, rather than an expense.

As we have explored in this whitepaper, reducing labor costs isn’t about cutting wages to the lowest possible percentage but Maximizing Productivity Received from the Investment of Labor.

By embracing this new perspective, restaurant owners can:

Improve profitability by:
- Optimizing staffing strategies based on productivity rather than cost targets.
Reduce the hidden costs of turnover by:
- Ensuring that training programs are as efficient as possible.
- Time spent understaffed is kept to a minimum.

Instead of reducing labor costs, restaurant owners should focus on making each labor dollar work as efficiently as possible. This shift in thinking will separate thriving businesses from those constantly struggling to balance their budgets.

By adopting the principles outlined in this whitepaper, restaurant operators can create a more profitable, efficient, and resilient business model where labor is seen as an asset, rather than an expense.

Appendix: Supporting Data and References

Citations

Tracey, J. B., & Hinkin, T. R. (2006). The Cost of Employee Turnover: When the Devil Is in the Details. Cornell Hospitality Report. Cornell University School of Hotel Administration. Retrieved from https://ecommons.cornell.edu/server/api/core/bitstreams/b556c92c-4579-4495-b5a3-5c2e1e9e13c7/content

About the Author

Adam Bennett is a full-stack developer and industry researcher with over 23 years of experience in customer service, retail, and restaurant operations. Having worked across multiple sectors—including three years in back-of-house restaurant roles, seven years in call centers, and over a decade in retail management—Adam has firsthand knowledge of the operational and staffing challenges businesses face.

Driven by a passion for problem-solving, Adam spent the last year researching the reasons for the high cost of labor in the restaurant industry, uncovering key insights into turnover, productivity, and workforce optimization. This research led to the development of Snag-a-Shift, an On-Demand Staffing Platform designed to help restaurant owners quickly restaff when they face turnover by giving them access to the gig economy.

With a unique blend of hands-on industry experience and technical expertise, Adam Bennett is committed to helping restaurant operators rethink labor strategies and build more profitable, sustainable businesses.