BUS606: Operations and Supply Chain Management

Labor costs in the foodservice industry continue to increase from year to year. This can be due to an increasing minimum wage and pressure to pay all employees a "living wage" rather than relying on tipping to make up the difference. In addition, costs have increased because of the stiff competition for skilled service employees, which has not only increased wages but also fringe benefits covered by the employer.

Most students understand that wages and salaries are labor costs, but there are many other labor-related costs in addition to the wages/salaries paid. Employee benefits or "fringe benefits" include various types of non-wage compensation provided to employees in addition to their normal wages or salaries.

This list includes such costs as

• Social security taxes (employer share)
• Medicare taxes (required employer tax)
• Unemployment taxes
• Worker's compensation
• Group Insurance, such as health, dental, vision, life, etc.
• Vacation, personal and sick leave
• Disability income protection
• Retirement benefits
• Uniforms and laundry
• Employee meals (free or discounted)
• Employee training
• Tuition reimbursement or employer student loan contributions
• Use of a company car, or even company housing or a housing allowance
• Mileage for using a personal car for business
• Daycare (free or subsidized)
• Moving expenses
• Profit sharing

Some operations may even have other labor-related costs not included in the above list. The real cost of an hour of work is not simple to compute because of the fringe benefits and hidden costs. The first step to identifying labor costs is to categorize costs so they can be picked up as labor costs. For example, employee meals and laundering of employee uniforms are fringe benefits that may be hidden in other cost categories.

Labor costs may be divided into the following categories:

• Management (fixed labor/payroll cost)
• Full-time employees (fixed labor/payroll cost)
• Overtime/substitute employees (variable labor/payroll cost)
• Part-time employees (variable labor/payroll cost)
• Fringe benefits

Overtime should be nonexistent or nearly nonexistent. Management needs to keep an eye on those employees whose time is nearing 40 hours. Money spent on overtime usually indicates poor management and inefficiency.

There is much to learn from calculating the real cost of a labor hour. For instance, it is shocking when you consider that in some cases only about 50% of the labor hour is spent productively. It helps when evaluating labor costs to break down the costs by 15-minute intervals and relate the cost to the amount of work that can be produced. When management looks at the cost of a break, idle time, and "leaning" time, it is easy to see the value of training in efficiency, good scheduling of employees, and planning work carefully.