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HAMG 2332-Hospitality Finance
Labor Control
Introduction
.Labor cost is critical since it comprises approximately one third of revenues and since foodservice, essentially a service
business, is dependent on the motivation, training and skills of its workforce
Labor Cost Problems.
The foodservice industry has four unique labor cost problems:
The industry tends to pay lower compensation, which attracts a less competent sector of employees.
The industry employs a large number of teenagers, who tend to be less reliable than older workers.
Based on current demographic trends, the percentage of teenagers available in the population will be decreasing. It has
been predicted that there will be a shortfall of teenage workforce for the food industry of up to 1 million workers in the near
future. The number of teenage workers shrunk by 11% between 1986 and 1990. This means that the foodservice industry
will have to rely more on elderly and handicapped employees.
Foodservice businesses experienced fluctuating levels of activity throughout the week and the day which complicates the
scheduling of employees and their productivity.
What determines payroll cost?
Payroll costs are determined by three factors: (1) the hourly rate of pay, (2) the level of fringe benefits and (3) employee
productivity.
Fringe benefits can be a significant portion of payroll costs. These benefits can include: vacation time, holiday pay, sick
leave, employee meals, social security (the employer's share is 7.65% of employee's salary), unemployment
compensation insurance, and medical insurance.
Productivity is important because it defines how much an employee is able to get done each hour. Restaurant operations
find it difficult to achieve full productivity due to the peaks and valleys in the daily volume of business. Management needs
to be concerned with the labor cost per productive hour.
For example if management was considering two potential employees: (1) an employee who is to be paid $6 an hour plus
$1.50 fringe benefit, and who takes an hour and a half to perform a particular task versus (2) another employee who is to
earn $7 hour plus $2 in fringe benefits, but performs the same task in one hour. The first candidate performs the task at a
cost of $11.25 (which would be $6 + $1.50 x 1.5 hours). The second employee, although the higher paid individual, is
more productive since he performs the given task at a lower cost: $9 ($7 + $2). Management's objective should be to
keep payroll cost as low as possible, not necessarily to hire lower paid, but unproductive, employees.
Productivity example:
We can illustrate productivity by the following simple example:
Server productivity Rank
Employee: Hourly Pay Hourly Fringe Customers per hour Cost per customer Cost Productivity
Jones $ 8.00 $ 2.00 25 $ 0.40 4 1
Johnson $ 7.50 $ 2.00 20 $ 0.48 3 3
Dilbert $ 6.00 $ 1.25 17 $ 0.43 2 2
Hounddog $ 5.85 $ 0.75 12 $ 0.55 1 4
If we just regard cost, Hounddog looks like the best bet at $6.60 per hour. However considering productivity, this
employee has the highest cost at $.55 per customer. Jones occupies an opposite position with the highest cost per hour
of $10.00 but the lowest cost per customer $.40. The moral of the example is to consider productivity as well as raw cost
per hour.
When management is able to control labor cost and keep the percent of labor cost down to an acceptable level, more
funds becomes available for employee compensation. Management is able to offer higher salaries and benefits thereby
attracting more productive employees. Companies that provide medical insurance to employees have experienced fewer
sick days. Because of this coverage employees don't have to take their children to emergencies rooms, which waste a
considerable amount of time; they are able to schedule appointments with their doctor at a convenient time.
Productivity Issues
The three basics elements that determine restaurant productivity are:
The employees hired.
The equipment available to employees in the performance of their duties.
The employees' work methods.
If employees are highly motivated, if equipment is provided to reduce as much labor intensive work as possible
and if management uses well thought out, efficient work methods, productivity should be high.
Factors that tend to cause lower productivity in the foodservice industry are:
The peaks and valleys in work volume.
The existence of many small single restaurant enterprises.
Menus with numerous items that require the restaurant's staff to produce many different types of meals.
Frequent changes in menus
An inexperienced workforce hindered by low pay and high turnover
Productivity is a critical in controlling restaurant costs. Fast food operations have achieved high productivity through
simplified menus, automated equipment, self-service, pre-prepared foods and simplified work processes. For example, a
typical fast-food operation is able to serve 100 patrons with 10.5 hours of labor input, whereas it takes over 70 hours for a
full-service operation to handle the same number of patrons.
Management needs to be alert to any mismatch between work to be done and number of workers available. Parkinson's
Law states that workers tend to adjust the pace of their effort in proportion to the work that needs to be done; if there is
less work to do, they would work at a slower pace. This is often the case in the food industry, with uneven flows of work,
peaks and valleys of activities and where employees often set their own work standards.
Strategies to Reduce Labor Cost.
There are a number of strategies that management can use to keep labor cost under control. Fast food and chain
restaurants have pioneered most of these strategies:
The use of pre-prepared convenience foods. Pre-prepared and convenience foods are more expensive, but they save
labor and reduce food waste. Some large chain operations have commissary kitchens that serve many of their
restaurants. Commissary kitchens prepare meals for inventory thereby realizing the benefits of factory type production.
Limit the number of items offered on their menus. Restaurants with specialized menus attract those customers who want
the types of meals offered. With a limited number of menu items, restaurants are able to operate more efficiently.
Restaurants with many items on their menus incur high labor and food costs; they also have great difficulty in maintaining
meal quality.
Self-service salad bars, buffets and self-bussing of dishes.
Cross utilization of employees. For example, bus persons can assist servers by carrying meals orders to the diners'
tables.
Designing the restaurant with the layout, equipment and working conditions that facilitate high productivity. Too often
restaurant facilities are designed without any consideration to worker efficiency. Chain restaurants have achieved
efficiency and productivity by standardizing their restaurant layouts and equipment.
Greater use of labor saving equipment. For example point-of-sales systems and terminals improve the productivity of
cashiers, kitchen and serving area personnel, accountants and management. Hand held computer terminal are coming
into use. Kitchen equipment can increase productivity through improved microwave ranges and automated ranges and
ovens.
Getting Effective Control of Labor Cost
A seven-step program that management can use to gain effective control of their employees and to maintain and improve
productivity is as follows:
Personnel policies. Effective supervision needs to be backed up by sound administrative policies. Policies should cover:
recruiting, hiring, orientation and training, supervisory policies, evaluations methods, compensation and job termination.
A job analysis which consists of two parts: the job specification and the job analysis.
· The job specification outlines the qualifications that a potential employee needs to fill the job. This covers education and
work history, plus physical, mental and age requirements.
· The job description lists the tasks and duties to be performed. Job descriptions are useful in hiring, training and orienting
new employees. When preparing a job analysis., management needs to review the entire restaurant workload and
determine how it is to be divided between employees.
A good job analysis eliminates questions of who does what, prevents work overlap and prevents individual employees
from being overworked or under worked.
Work simplification is the study and analysis of each job to determine the easiest and most productive way of performing
its duties. This includes changes in procedures, work layout, the use of labor saving equipment, and the use of pre-
processed foods. Work simplification increases productivity and reduces labor cost.
Work production standards are developed from information in work production records. The standards are measurements
used to judge a worker's productivity. These measurements, expressed in sales dollars per day, meals produced per day,
or in other quantitative factors, measure employee productivity.
Workload forecasts are derived from the daily meal forecast. Management, using work standards, calculates the number
of employees needed to handle the expected workload. Management's goal should be the achievement the proper level
of staffing commensurate with the work to be done.
Scheduling of workers. After determining the number of workers needed, management must schedule the individual
workers in the proper time slots. The process is complicated by fluctuations in the number of customers served throughout
the day. Scheduling should ensure that the proper number of employees are on hand to handle the volume of work
required throughout the day.
Control reports provide information on the day's results. The reported information should include actual versus forecasted
meals served and labor cost and hours. Control reports are used to review how effective management is in controlling
labor cost. Any significant exception or variance from standards needs to be followed up by management to determine if
changes are required.
Analyzing Labor Cost.
If management is going to able to control and analyze labor cost they will need techniques for doing this. In this section of
the topic we will look at some ways of analyzing labor costs.
Elements of the analysis
The two functions of labor cost analysis are:
To determine whether labor costs are over or below management established standards.
To determine where in the operation the deviations from standard are taking place.
Difficulties in analyzing labor cost.
There are basically three difficulties in analyzing labor cost problems:
Once it has been determined that labor costs are excessive management needs to determine why. There can be a
number of factors: poor scheduling, poorly trained or inefficient employees, excessive overtime, high employee turnover
or high absenteeism.
Another difficulty in analyzing labor cost is that the discrepancies can occur in different parts of an operation and balance
each other out. For example, high labor cost in the kitchen could be offset by low cost in the service area low. Each of the
labor components must be analyzed separately. Discrepancies can balance out over time so labor cost needs to be
analyzed on a weekly, daily or even hourly basis. Sometimes labor costs can be too low and result in poor service and
potential loss of customers.
Quality needs to be considered as well as quantity. A particular server may not serve as many patrons as other servers
but may have better rapport with the customers and results in return business.
How important is labor cost?
By looking the following income statement we can see labor's significance,
Budget- Income Statement Common Size
Amount
Sales Percent
Food $ 3,300 74.9%
Beverage 1,105 25.1%
Total sales 4,405 100.0%
Cost of sales
Food 1,320 40.0%
Beverage 331 30.0%
Total cost of sales 1,651 37.5%
Gross profit 2,754 62.5%
Controllable Expenses
Salaries and wages 1,410 32.0%
Direct 264 6.0%
Utilities 250 5.7%
Marketing 100 2.3%
Repairs and maintenance 200 4.5%
Administration 200 4.5%
Total controllable
expense 2,424 55.0%
Operating profit 330 7.5%
If management considers the above statement a normal allocation of cost, they could then monitor future labor costs by
measuring how close it adheres to the 32% standard.
However labor cost percents costs can sometimes be misleading:
Percentages, calculated on a weekly or monthly basis, will not disclose daily discrepancies, which can often balance each
other out.
Menu price and employee wage rate changes in will affect the relationship of sales to labor cost. If management uses
labor cost percents, they need to recognize when these changes take place and adjust the percent standard accordingly.
Labor cost percents can be distorted by a number of underlying causes, such as sick or vacation relief.
Comparing labor cost percents between restaurant operations, which on the surface look similar, can be misleading.
Labor cost percents depends on a number of factors: menu pricing, the amount of convenience foods used, buffet service,
layout of the restaurant, equipment utilized, local labor market and services provided. Seemingly similar operations can
have vastly different cost percents because of these circumstances.
Categorizing labor.
Foodservice labor cost can be broken down into four categories:
Preparation
Sanitation
Service
Administrative
These categories are useful in analyzing labor cost. Separate accounts can be set up in the accounting system to keep
track of labor cost categories.
The following example shows how weekly labor cost can be related to sales volume:
Position Department Pay Hours
Manager Administrative $ 400.00 44
Office Administrative $ 250.00 40
Cashier Administrative $ 260.00 52
Storeroom Administrative $ 202.50 45
Chef Preparation $ 350.00 48
Cooks Preparation $ 780.00 130
Pantry Preparation $ 539.00 98
Pastry Preparation $ 231.00 42
Utility Preparation $ 176.00 44
Host/ hostess Service $ 300.00 60
Servers Service $ 1,080.00 400
Bus persons Service $ 231.00 105
Dishwashers Sanitation $ 800.00 200
Porter Sanitation $ 160.00 40
Sales $ 17,278.50
Covers 2,992
The above cost data can be summarized in terms of dollars, hours, relationship to sales and labor cost per cover:
Department
Administrative Preparation Sanitation Service Grand Total
Total Sum of Pay $ 1,112.50 $ 2,076.00 $ 960.00 $ 1,611.00 $ 5,759.50
Total Sum of Hours 181 362 240 565 1348
Sales ratio 6.4% 12.0% 5.6% 9.3% 33.3%
Pay per cover $ 0.37 $ 0.69 $ 0.32 $ 0.54 $ 1.92
From the above we can see that labor is 33.3% of sales and that each cover involves $1.92 of labor cost. These results
can then be compared to historical records and to budgetary goals.
Another way of analyzing labor cost is to designate employee work types into three volume related categories: fixed,
semi-variable, and variable. Fixed employee workload does not vary with the volume of business in the restaurant. A
secretary or a cashier are examples of fixed labor. Semi-variable employees are fixed unless there is a significant change
in sales volume. Dishwashers are an example of semi-variable employees. Variable employees work level varies directly
sales volume. Kitchen preparation personnel and servers fall into this category.
Controls for individual job types- work production standards
Work production standards are quantitative expressions of the amount of production expected from various types of jobs
in a specific period of time. These standards can stated in terms of sales dollars or meals served per worker. A server
may be rated on the dollar volume of business handled or on the number of covers handled. A coffee shop server might
be expected to handle forty-five to sixty covers in a two-meal period, whereas a server in a more formal dining room could
only be expected to handle from 25 to 30 covers. The standards will vary by job description. Unit production standards
can be expressed, for example, in covers by servers, dishes washed by dishwashers, meals prepared by cooks and
patrons served by the cashier. Food service operations usually use an employee workday as the unit in which to express
work standard performance. To determine the number of employee workdays, divide work hours by 8. For example, if 100
hours of server time were used during a day, then the number of workdays would be 12.5.
How are work standards developed?
Work standards can be developed in a number of ways. Larger operations may employ sophisticated techniques such as
time and motion studies to set their standards. Staff industrial engineers or outside consultants would perform this service.
The work standards would be determined for one restaurant and then applied to the other restaurants of the chain.
If there are no industrial engineers or outside consultants available, records of employee productivity can be used. By
analyzing the work performance history of the better employees over a period of time, management can observe the
range or distribution of work units produced per day; the standard can then be based on the average or a point within the
center of observations. Obviously it would not make sense to take the highest or the lowest point as these might represent
unusual circumstances. Once management has established work standards for all employees, they can then monitor daily
performance against these standards. Typically, new employees might be below standard but their performance should
improve over time. Work standards for the entire workforce can be revised upward as the work force becomes more
experienced.
How do work standards compare with percent controls?
Work standards provide a definite baseline or goal to achieve, and it is relatively straightforward to observe how well each
worker performs against predetermined standards. It is a simple matter for management to see if a particular job is over or
below standard. The performance against standard can also give information relating to the quality of service and whether
the particular job is overworked. Labor cost percents provide less specific information. They merely show the relationship
between labor cost and sales and this relationship can vary if there is a change in either of these categories
Bar Charts
Bar charts are a great help in analyzing the effectiveness of employee scheduling. The information is presented in a visual
format. The chart displays how well worker are scheduled in relation to the hourly workload and pinpoints where and when
there are too many or too few employees. Bar charts show how well management is doing in the scheduling of
employees. To see an example of a bar chart see Figures 6.1 to 6.3. If you would like to experiment with a bar chart, you
can down load an Excel Sheet, which demonstrates bar charts. There is a "before" situation in which service personnel
are scheduled in a block fashion. The after situation shows how employees would be scheduled in a staggered fashion to
match the varying hourly workload over the course of a day. There also graphs showing both cases.
Staffing and Scheduling
Introduction
In this section we consider the effect of staffing and scheduling of workers and the effect on labor cost. Scheduling is
especially critical as up to one third work hours may be excessive.
Staffing
The terms "staffing" and "scheduling" are often used interchangeably, but they each have a distinct meaning and
definition. Staffing is the function of determining the number and type of employees needed for a particular restaurant. For
example staffing determines the number of servers, preparation workers, sanitation employees, and administrative
employees. It is usually done in the planning process, in advance of actually filling the work positions.
Scheduling entails the actual assignment of employees to positions determined by the staffing process. Scheduling can
be quite challenging because of special problems. Management needs to have the right number of people on duty to
match anticipated business which can vary throughout the day.
Job number control list
A number of restaurants use a procedure called a job number control list to facilitate the staffing of the restaurant. Each
job listed on the control list needs to be analyzed, described and formalized. Quite often a work production standard is
used to determine the number of positions required for each job type . Under this system new employees must be hired
for a specifically numbered and classified job that is documented with a job description and a job specification. People are
not hired just because "the help is needed." Restaurants using the job number control list system must plan in advance for
the duties and responsibilities of each job in their operations. Under this system overlapping jobs are avoided. No one is
added to the payroll on a permanent basis unless it is for a numbered job. Too often employees are hired for temporary
needs, but they remain staff on after the need is over. Having specific jobs listed on the job control form doesn't mean that
every job listed needs to be hired. The list should provide the number of employees needed in a given position to handle
the highest possible volume. If the list provides for 10 cooks, but only 5 are justified by current business volume; then only
5 cooks should be hired. An example of a job number control list is displayed in the textbook, Table #7.1.
Staff equivalents
This question here involves the issue of full time staff equivalents. To cover one full time, 365 day a year, position requires
1.55 employees:
Number of employees need to cover
one full time position for one year.
Days
Days in the year to be covered 365
Weekend days off (104)
Sick days (7)
Holidays (8)
Vacation (10)
Days worked by one employee 236
Full time equivalents to cover one
1.55
position: 365/236
If a restaurant requires 40 employees on hand each day of the year, then they would need to hire 62 full-time employees
(40 x 1.55).
Part-time workers
Part time workers are used extensively in the foodservice industry.Part-time workers offer advantages and disadvantages.
The advantages are:
Because of the uneven activity in the daily operation of a foodservice operation, part-time workers are used to fill in for
short periods of time when activity is high
Part-time employees are not as costly as full time employees. They receive lower salaries and little or no fringe benefits.
Part-time workers can be utilized to fill in on the weekends and provide coverage when regular employees have time off.
However, there are problems:
In a large city, it can be expensive for part-time workers to commute to work. The cost of transportation quite often
cannot be justified by income earned in a short work shift.
Using part-time employees increases the number of individuals on the payroll.
There is more accounting work, such as the writing of checks and the filling out of tax forms
Part-time helps creates more scheduling
Labor scheduling problems
Management can encounter a number of the problems when scheduling workers:
If a restaurant serves three meals a day, it is often impossible for one shift to handle all three meals. On the other
hand, the time period between breakfast and dinner does not lend itself to two full shifts.
Foodservice operators experience peaks and valleys of activity during normal work shifts, not the steady
production encountered in a factory setting.
The proper scheduling of workers requires accurate forecasts of daily activity. The best forecast can be upset by
weather or other factors beyond management's control resulting in too few or too many workers.
The foodservice industry cannot use idle workers to produce meals for inventory which can be released at
another time when needed. The time of idle workers cannot be stored and used at another busier time.
An intangible factor of scheduling relates to service quality. While management may be able to determine the
number of people needed to handle a given number of customers, the issue of quality can be an important
variable in staffing.
The scheduling process
Foodservice labor scheduling proceeds in the following steps:
Develop work production standards for each position in the restaurant.
Examine the daily activities of an operation's various units to determine their busy and slow periods.
Determine how customer counts affects the different organizational units within the restaurant.
Determine the number of workers or work hours needed to handle forecasted customers in accordance with the
operation's work production standards.
Prepare the schedule based on the capabilities of each of the organization's employees. The assignment should
be based on a number of factors such employee experience, rotation considerations, wage rates and any legal
restrictions such minors work hours.
After completion of the above steps schedule the employee for each workday.
After the schedule is finished it should be reviewed by the next level of management (the restaurant managers.). The
review should cover issues such as; (1) projected sales relationship to work hours, (2) projected labor cost percent, (3) the
number of customers per labor hour, (4) labor cost per hour and (5) any other criteria utilized by management.
After the schedule is approved, notify the individual employees of their work schedule.
Review the schedule on an after fact basis to determine how actual performance compares to schedule. Determine if
there is a need for change.
Scheduling patterns
Scheduling patterns are important. Foodservice operations could schedule their workers on a block basis. Workers would
work as a group in a regular shift:
7:00AM 10:00AM 11:00AM 12:00PM 1:00PM 2:00PM 3:00PM 4:00PM 5:00PM 6:00PM 7:00PM 8:00PM 9:00PM 10:00PM
Because most restaurants experience varying levels of activities during the day, they a use a staggered work schedule.
Employees arrive at different times building up to a full staff level at meal times:
7:00AM 10:00AM 11:00AM 12:00PM 1:00PM 2:00PM 3:00PM 4:00PM 5:00PM 6:00PM 7:00PM 8:00PM 9:00PM 10:00PM
Generally, staggered scheduling is the preferable method to use in a restaurant operation.
Introduction
Up to this point we have been concerned with labor cost from the following aspects:
What are the problems that are peculiar to the foodservice industry?
What are the tools available to foodservice management to help in the analysis and control of labor cost?
How does management go about the process of staffing and scheduling their restaurant?
In this topic we will at additional but important issues that can have substantial impact on labor cost.
Job Evaluation
In the process of job evaluation management attempts to specify how workers fit into the organization. This can be done
in three ways:
Job analysis is a complete description of each of the jobs in the organization. This is usually done through a job
description (Figure 8.1 in the text) that sets forth the position name, code, salary grade, responsible duties, qualifications,
and reporting and supervisory responsibilities.
How each job fits into the organization. This is done through an organization chart (Figure 8.2 in the text), which shows
the reporting structure of the organization.
A critical factor in job evaluation is to assure that each employee receives the right wage. Factors such as labor supply,
relation to other companies, skills required, consistency within the organization and supervisory responsibilities. This is
accomplished through wage and salary policies, which are administered by personnel department.
Supervision issues
Management needs to deal with certain issues that can arise in supervising workers. Some the critical ones are:
Absenteeism. Absenteeism to needs to kept to a minimum. Excessive absenteeism will increase labor cost due to the
need for replacements. Also service quality will suffer. Download here to see a spreadsheet demonstrating the three
absenteeism ratios discussed in the textbook. Absenteeism.xls
Turnover. The foodservice is plagued with high turnover. Some estimate it at 10% per month or a complete turnover in
personnel in ten months. The consequences of this situation are inexperienced workers, high training and hiring cost and
diversion of management time to the hiring process.
Overtime. Overtime can result in excess pay hours and premium pay. There may be times when overtime is justified but it
needs to be tightly controlled by management.
Employee well-being issues.
Employees with health problems will not be effective workers. Some of the issues that management needs to deal with in
these areas are:
Safety and accident prevention. Management needs to effective prevention programs to reduce accident exposure in
order to protect workers, reduce exposure liability claims and comply with government laws and regulations.
Wellness programs. Management can encourage employee health through formal or informal policies. If medical
insurance is a fringe benefit, a formal wellness program could be cost justified by reducing medical insurance premiums.
Substance abuse. Management needs to be alert to employees with drinking or drug problems. Problems in this area can
have devastating effects on productivity and worker morale. Employee Assistance Programs has been an effective tool in
dealing with these kinds of problems.
Fringe benefits
The foodservice has been rather stingy in providing extensive fringe benefits to its workers. However this is changing.
With the labor force getting tighter and the need to reduce high turnover the industry is improving the benefits offered to
employees. Some of the major offerings are:
Compulsory benefits. These include socials security (which both the employer and employee must contribute an equal
amount), workmen's compensation and unemployment insurance.
Medical insurance. A very expensive benefit but one that highly valued by workers. This benefit has been shown to
reduce absenteeism. It can also be a tool to reduce the industry's high turn over problem.
Retirement programs. These programs are generally restricted to management but larger foodservice companies are
extending these benefits to its non-management workforce. The most popular type plans are defined contribution in which
both the employer and employee contribute to a fund such as a mutual fund. These benefits also offer tax advantage to
the worker.
Profit sharing. These are generally restricted to management employees. They designed to motivate employees to
maximize the operation's income. They are designed to create a "win, win" situation where both the employee and
stockholder benefit.
