Track Earned Vs Actual Labor Hours to Boost Revenue for All Locations

In the wake of the great resignation, restaurants have been raising labor costs to both attract and retain all-star employees. These raises have certainly helped employee standard of living, but they also require more accurate multi location scheduling and team management to keep menu costs low and the restaurant profitable. Nowadays, an over-staffed shift costs more because your restaurant could be seriously overspending on labor.

This is where the idea of earned vs. actual labor hours comes in, which can help your restaurant make real-time scheduling decisions to keep labor costs low and still ensure workers get fair wages.

What are earned hours and actual hours?

Actual hours is the total number of labor hours worked by your staff in a given time. For example, if you have a staff of ten and each of them worked an average of 30 hours each week, actual hours total 300 hours per week (10 people x 30 hours).

Actual hours is what the bottom line number comes down to. Restaurant payroll, earned benefits, and overtime information all come from actual hours worked by your staff.

The concept of earned hours explores how many total hours should have been worked in a given time period based on actual sales. It's a backwards-looking metric that retroactively determines the number of labor hours that were actually needed to justify revenue earned in that time.

These numbers are important to measure because they make smarter scheduling decisions possible. In turn, helping employees stay efficient and keeping labor costs lower.

Calculating earned vs. actual hours variance

The difference between earned and actual labor hours shows a restaurant by how much they over- or under-staffed a shift. This number can be found by subtracting earned hours from actual labor hours.

Variance = Actual Labor Hours—Earned Labor Hours

Each of these numbers — actual and earned labor hours — requires its own equation. Actual labor hours is fairly straightforward: add the number of hours worked by each of your employees in a given week. If your restaurant is small, you can add these numbers yourself. For larger restaurants, it's faster to determine the average hours employees work and multiplying that by the number of employees in the restaurant.

Actual Labor Hours = Total Hours Worked By All Employees

Or

Actual Labor Hours = Number of Employees x Average Hours Worked

Earned labor hours, however, takes some more work to determine. This metric looks at how many labor hours you should have had in the restaurant to justify revenue in that time frame.

Target revenue per labor hour varies for each restaurant and is completely dependent on concept. A small coffee shop, for example, will likely be much lower than the number for a high-end steakhouse, since food and labor costs at the latter are significantly higher. In general, the best way to determine this number is by narrowing down how much incremental revenue you would need to see in order to justify adding another employee to a shift.

Earned labor hours is determined by dividing total revenue for the business by your target revenue per labor hour.

Earned Labor Hours = Total Revenue ÷ Target Revenue Per Labor Hour

Example

Let's walk through an example of these numbers in practice. Consider a restaurant with the following numbers:

• Number of Employees: 20
• Average Hours Worked by Employee: 35
• Weekly Revenue: $25,000
• Target Revenue Per Labor Hour: $40
• Average Hourly Wage: $15

This restaurant's actual labor hours total 700, as its 20 employees each worked an average of 35 hours.

Actual Labor Hours = 35 Employees x 20 Hours = 700 Hours

The restaurant's earned labor hours total 625 hours. This is because it grossed $25,000 against its target revenue per labor hour of $40. Its revenue per labor hour in this time frame was $35.71.

Actual Revenue Per Labor Hour = Total Revenue ÷ Total Labor Hours

Actual Revenue Per Labor Hour = $25,000 ÷ 700 Hours = $35.71

Finally, to find the difference in actual and earned hours, simply subtract. In this example, the restaurant had a variance of 75 labor hours.

Variance = Actual Labor Hours - Earned Labor Hours

Variance = 700 Hours - 625 Hours = 75 Hours

Remember, this restaurant has 20 employees. By coming in 75 labor hours above target, the restaurant over-staffed each employee an average of 3.75 hours for the week.

Hourly Overage Per Employee = Unearned Labor Hours ÷ Number of Employees

Hourly Overage Per Employee = 75 Hours ÷ 20 Employees = 3.75 Hours

In dollars, this average of unearned labor hours cost the restaurant $1,125 in wages that it didn't need to spend.

Unneeded Labor Costs = Unearned Labor Hours x Average Hourly Rate

Unneeded Labor Costs = 75 Hours x $15 = $1,125

Taking action on these numbers

Measuring earned vs. actual hours won't be worth your time unless you take action. Here are a few ways that these metrics can be used to make more informed business decisions.

Evaluate multi-location performance

There will always be some variance between your earned and actual hours — and leaders of restaurant groups should expect that. The ebbs and flow of scheduling and customer demand make it unavoidable.

That said, there are certain steps you can take to bridge the gap and keep revenue and profit strong.

• If earned hours exceed actual hours, consider prioritizing hiring for or staff them up properly, as well as speaking with managers to ensure their busiest shifts have ample support.

• If actual hours exceed earned hours, work with these managers to schedule staff more efficiently and retrain their staff to handle current order volume with a smaller staff.

• If actual hours equate to earned hours, gain feedback and advice from schedulers and managers for these locations to learn what they're doing right and what can be replicated in other locations.

Recommended Reading: How To Manage Teams Across Multiple Restaurant Locations

Evaluate your targets

If you find that actual hours exceed your earned hours week-after-week, it could be a sign that your restaurant's forecasting is off. In this case, you're scheduling too many employees to work too many hours compared to what's actually needed to help your restaurant run smoothly.

Alternatively, if your earned hours are more than your actual hours, it suggests you're not setting up your staff for success or your customers up for a great experience. Too few staff members mean you're serving fewer customers than you could — capping your revenue lower than it could be.

In both of these scenarios, it's worth revisiting your scheduling targets. This could involve adjusting your shift lengths to make sure you have ample staff when customer demand is highest, as well as implementing a split shift program to reduce the number of labor hours during slower times of the day.

Use it for manager performance evaluations

The disconnect between earned and actual hours can be an enormous financial strain on a restaurant group. With that in mind, one of the best things franchisees or restaurant group leaders can do is hold managers accountable for this discrepancy during the shifts they oversee.

Over staffing eats directly into the business's bottom line. If managers are scheduling too many employees, they're upping labor costs unnecessarily and potentially contributing to staff burnout. Setting a clear target for variance on this metric, communicating it to managers, and holding them accountable for hitting it is a fair success metric to factor into their performance review conversations.

Recommended Download: Free Employee Performance Review Excel Template for Restaurants

Make short term scheduling decisions

You'll never really know exactly how many employees you need for a shift until that shift comes. The day could be unexpectedly slow or surprisingly busy — and despite your best scheduling efforts, you could be way off.

For these occasions, you can make immediate decisions regarding your staff size for the shift. For example, you could air on the risky side and under-staff, then rely on on-call employees to come in if things get too busy. Conversely, you could be safe and over-staff, then relieve workers if things slow down.

While this sounds ideal, it's important to remember that these impromptu scheduling decisions must be done with tact and respect — especially when Fair Workweek laws come into play. While some employees might appreciate being able to leave a shift early or pick up some extra hours, others value consistency and certainty. However, making these real-time scheduling decisions is often the most sure-fire way to match earned and actual hours.

Recommended Reading: How Top Multi-Unit Restaurants are Using Tech to Grow

Automating Earned vs Actual Hours Calculations and Projections with 7shifts

A lot goes into matching earned and actual hours, which is where software can make things easier. For example, with 7shifts, your restaurant can use the Variance Reporting feature, which outlines the difference between scheduled and worked hours to align these two more closely.

7shifts variance reporting tool

For multi-location restaurants, the Operations Overview tool shows key restaurant metrics for all locations, including hours and revenue, to narrow down which units need improvement. To get even more granular, the Department-Based Budgeting tool makes the right scheduling decisions even more apparent for each area of the business.