indd 06:58:8:PM 12/16/2014 Page 215 CHAPTER 7 Managing the Cost of Labor OVERVIEW T his chapter explains the techniques that managers use to control labor costs by establishing and monitoring labor cost standards. Factors that affect labor productiv- ity as well as methods for improving labor productivity are presented. This chapter teaches you how to schedule employees based on established labor productivity standards, as well as how to compute a labor cost percentage and other measures of labor productivity used in the foodservice industry. Chapter Outline t -BCPS&YQFOTFJOUIF)PTQJUBMJUZ*OEVTUSZ t &WBMVBUJOH-BCPS1SPEVDUJWJUZ t .BJOUBJOJOHB1SPEVDUJWF8PSLGPSDF t .FBTVSJOH$VSSFOU-BCPS1SPEVDUJWJUZ t .BOBHJOH1BZSPMM$PTUT t 3FEVDJOH-BCPS3FMBUFE$PTUT t 5FDIOPMPHZ5PPMT t "QQMZ8IBU:PV)BWF-FBSOFE t ,FZ5FSNTBOE$PODFQUT t 5FTU:PVS4LJMMT LEARNING OUTCOMES At the conclusion of this chapter, you will be able to: r Identify the factors that affect employee productivity.
r Develop labor standards and employee schedules used in a foodservice operation. r Analyze and evaluate actual labor utilization.indd 06:58:8:PM 12/16/2014 Page 216 216 $IBQUFSøø.BOBHJOHUIF$PTUPGø-BCPS LABOR EXPENSE IN THE HOSPITALITY INDUSTRY You have learned that having the correct amount of food and beverage products available to serve your guests is important. Knowing how those products should be prepared and served is also vital. To see why, consider the case of Pauline.
She manages the open-to-the-public cafeteria located in a large urban hospital. Both hospital staff and patients’ visitors, who constitute the majority of her cafeteria guests, have good things to say about the quality of her food. They complain often, however, about the slowness of her cafeteria line, the soiled tables during the busy lunch hour, and the frequent running out of items at the salad bars. Pauline often feels that she needs more employees.
She knows, however, that her current staff is actually larger than it was a few years ago. She also knows that she now serves more guests each day than she has in the past. Her question is, “Do I have the right number of employees scheduled to work, and at the right times, for the number of guests I am serving today?” Unfortunately for her, Pauline is so busy “helping” her employees get through the meal periods that there seems to be little time for thinking about and planning the strategies and techniques she needs to apply if she is to solve her labor-related customer service problems. In years past, when labor was relatively inexpensive, Pauline might have responded to her need for more workers by simply hiring more employees.
Today’s foodservice manager, however, does not have that luxury. In today’s increasingly costly labor market, you must learn the supervisory skills needed to maximize the effectiveness of your staff and the cost control skills required to evaluate their efforts. That is because labor is a significant foodservice operating cost. In fact, in some foodservice establishments, the cost of labor actually exceeds the cost of food and beverage products.
Today’s competitive labor market indicates that, in the future, foodservice man- agers will likely find it even more difficult to recruit, train, and retain an effective team of employees. Therefore, the control of labor expenses takes on a greater level of importance than ever before. In some sectors of the foodservice industry, a reputation for long hours, poor pay, and undesirable working conditions has caused some high-quality employees to look elsewhere for more satisfactory jobs or careers. It does not have to be that way, and it is up to you to help ensure that in your organization it is not.
When labor costs are adequately controlled, management has the funds neces- sary to create desirable working conditions and pay a wage that will attract the very best employees. In every service industry, better employees mean better guest service and, ultimately, better business profits. LABOR EXPENSE DEFINED Payroll is the term generally used to refer to the salaries and wages you will pay your employees. Labor expense includes salaries and wages, but it also includes other labor-related costs.
FICA (Social Security) taxes, including taxes due on employees’ tip income 2. FUTA (Federal unemployment taxes) state unemployment taxes 3. Group life insurance 5. Health insurance, including: Medical Dental Vision Disability Trim Size: 8.indd 06:58:8:PM 12/16/2014 Page 217 -BCPS&YQFOTFJOUIF)PTQJUBMJUZ*OEVTUSZ 217 6.
Pension/retirement plan payments 7. Employee training expenses 9. Employee transportation costs 10. Employee uniforms, housing, and other benefits 11.
Vacation/sick leave/personal days 12. Tuition reimbursement programs 13. Employee incentives and bonuses Not every operation will incur all of the costs listed. But some operations will have all of these and more.
You can be sure, however, that regardless of the facility you manage, you will incur some labor-related expenses in addition to wages and salaries. The critical question you must answer is, “How much should I spend on payroll and other labor expenses to deliver the quality of products and service that I feel is appropriate?” Before you can hope to answer that question, it is important that you understand well the individual components that make up payroll and labor expense. FUN ON THE WEB! In the United States, the Patient Protection and Affordable Care Act (ACA) was signed into law in 2010. This health insurance-related law directly affects the benefit costs incurred by many food service organizations.
To learn more about the ACA, and its requirements go to: http://www.gov/law/index. PAYROLL Payroll refers to the gross pay received by an employee in exchange for his or her work. That is, if an employee earns $10.00 per hour and works 40 hours for his or her employer, the gross paycheck (the employee’s paycheck before any mandatory or voluntary deductions) would be $400 ($10.00 per hour × 40 hours = $400). This gross amount is considered a payroll expense.
If the employee earns a salary, that salary amount is also a payroll expense. A salaried employee generally receives the same income per week or month regardless of the number of hours worked. Thus, if a salaried employee is paid $700 per week when he or she works a complete week, that $700 is included in payroll expense. Salaried employees are actually more accurately described as exempt employees because their duties, responsibilities, and level of decisions make them “exempt” from the overtime provisions of the federal government’s Fair Labor Standards Act (FLSA).
Exempt employees do not receive overtime for hours worked in excess of 40 per week and are expected by most organizations to work the number of hours needed to do their jobs. FUN ON THE WEB! The designation of which workers can (and cannot) be considered exempt employees is governed by the US Department of Labor and the Fair Labor Standards Act (FLSA). Minimum allowable salary levels are also determined by the Wage and Hour Division (WHD) of this depart- ment. To learn more about wages that must be paid to exempt and to nonexempt employees, go to: www.indd 06:58:8:PM 12/16/2014 Page 218 218 $IBQUFSøø.BOBHJOHUIF$PTUPGø-BCPS FIXED PAYROLL VERSUS VARIABLE PAYROLL When you manage a foodservice facility, you must make choices regarding the number and type of employee you will hire to help you serve your guests.
Some employees are needed simply to open the doors for the minimally anticipated busi- ness. Minimum staff is the term used to describe the least number of employees, and the least number of payroll dollars, needed to operate a business. For example, in a small operation, this may include only one manager, one server, and one cook. The cost of providing payroll to these three individuals would be its minimum staff payroll.
Suppose, however, that the operation anticipated much greater volume on a given day. The increased number of guests expected means that the operation may need more cooks and more servers, as well as cashiers, dishroom personnel, and, perhaps, more supervisors to handle the additional workload. Clearly, these addi- tional staff positions create a work group that is far larger than the minimum staff, but it is needed to adequately service the anticipated number of guests. Payroll costs may be fixed or variable.
Fixed payroll refers to the amount an operation pays in salaries. This amount, in most cases, is fixed because it remains unchanged from one pay period to the next unless the individual receiving the pay separates employment from the organization or is given a raise. Variable payroll consists primarily of those dollars paid to hourly employees. Thus, variable payroll is the amount that should “vary” with changes in sales vol- ume.
Generally, as you anticipate increased volume levels in your facility, you may need to add additional hourly and, sometimes, additional salaried employees. The distinction between fixed and variable labor is an important one. As a manager, you may have little direct control over your fixed labor expense, whereas you will have nearly 100 percent control over variable labor expenses that are above your minimum staff levels. LABOR EXPENSE Unlike payroll expense, labor expense refers to the total of all costs associated with maintaining your workforce.
Labor expense includes employee taxes and benefits costs and is always larger than payroll expense. The actual amount of taxes and employee benefits paid for by a specific opera- tion can vary greatly. Some expenses, such as payroll taxes and contributions to workers’ unemployment and workers’ compensation programs, are mandatory for all employers. Other benefit payments, such as those made for employee insurance and retirement programs, are voluntary and vary based on the benefits a business chooses to offer its employees.
As employment taxes and benefit costs increase an operation’s labor expense will increase even if payroll expense remains constant. Most foodservice operators have total control over their payroll expense. It is, therefore, often referred to as a controllable labor expense. Other labor expenses, such as taxes and some benefits, over which an operator has little or no control, are commonly called noncontrollable labor expenses.
In reality, however, you can exert some control over these noncontrollable labor expenses, such as a foodservice manager who works very hard to ensure a well-trained workforce in a safe environ- ment and thereby achieves a lower rate on workers’ compensation, accident, and health insurance for his or her employees. In this chapter, we deal primarily with payroll-related expenses. This is in keep- ing with the concept that these are the most controllable of labor-related expenses. To determine how much payroll is needed to operate your business, you must be able to determine how much work must be done and how much work each employee can perform.
If too few employees are scheduled to work, poor service and reduced sales can result, because guests may choose to go elsewhere in search of superior food and service levels. If too many employees are scheduled, payroll and other labor-related expenses will be too high, resulting in reduced profits. The best solution Trim Size: 8.indd 06:58:8:PM 12/16/2014 Page 219 .BJOUBJOJOHB1SPEVDUJWF8PSLGPSDF 219 to this challenge is to know how many employees are needed given the estimated number of guests you will serve. To determine this number of employees, you must have a clear idea of the productivity of each of your employees.
Productivity is the amount of work performed by an employee in a fixed period of time. EVALUATING LABOR PRODUCTIVITY There are many ways to assess labor productivity. In general, productivity is mea- sured by the productivity ratio as follows: Output = Productivity ratio Input To illustrate this formula, assume a restaurant employs 4 servers and it serves 60 guests. Using the productivity ratio formula, the output is guests served; the input is servers employed, as follows: 60 guests = 15 guests per server 4 servers This formula demonstrates that, for each server employed, 15 guests can be served.
The productivity ratio is 15 guests to 1 server (15 to 1) or, stated another way, 1 server per 15 guests (1/15). There are several ways of defining foodservice output and input; thus, there are several types of productivity ratios. Some of these are presented later in this chapter. All of these productivity ratios can be helpful in determining the answer to the key question, “How much should I spend on labor?