What Is a Shift Differential and How Does It Work?

Shift Differentials

June 17, 2022

What Is Shift Differential?

The typical work day in America looks like the day shift, with employees working between 8 a.m. and 6 p.m on the weekdays. During this time, they receive a regular rate for their hours worked. According to the most recent report from the Bureau of Labor Statistics, over two-thirds of hourly and salaried employees typically work this schedule on weekdays.

Of course, there are also employees that work outside these hours whether by choice or by necessity. A shift differential is a premium pay rate for employees who work outside of regular business hours. This can include:

  • Night shift or “graveyard” shift
  • Weekend shifts
  • Holiday shifts

Differential pay is more common in some industries than others, such as:

  • Manufacturing
  • Healthcare
  • Customer Service
  • Security
  • Hospitality
  • Transportation

Unlike the average business, these industries require employees around the clock to operate efficiently. Offering shift differential pay is one way to entice employees to work these “undesirable” hours.

How Is Shift Differential Pay Calculated

Shift differential rates are calculated by each organization, meaning there’s no standard for this type of additional compensation. The Society for Human Resource Management found that companies are nearly equally split on the method used to calculate shift differentials for hourly employees. Around 49% pay shift differentials as an additional flat amount per hour while 47% calculate the differential as a percent of the hourly base rate.

SHRM also offers a convenient 6 step system to help organizations calculate the regular rate for overtime purposes when a nonexempt employee receives shift differentials.

Step 1: Determine Straight Time Pay = Total Hours x Hourly Rate

Step 2: Determine Shift Premium Pay = Number of Hours Worked on Shift x Shift Differential Rate

Step 3: Determine Total Compensation = Straight Time Pay + Shift Premium Pay + Other Compensation

Step 4: Determine the Regular Rate = Total Compensation ÷ Total Hours

Step 5: Determine the Overtime Pay Amount = RR x 0.5 x OT Hours

Step 6: Determine Total Gross Pay (Before Taxes) = Total Compensation + Overtime Pay

While this is a very specific formula, a more simple way to calculate differential pay is by taking a worker’s regular hourly wage and then adding an additional percentage of that wage. The average for this additional compensation typically ranges between 5% and 15% of the base salary.

Is Shift Differential Mandatory?

It’s important to note that differential pay is not a legal requirement and therefore is not regulated by the government. This is why there’s no standard for this type of pay and businesses can offer vastly different incentives.

Since shift differentials are up to internal company policies, it will typically be outlined in the employee handbook. Often, it may also be disclosed in job listings or at the time of employment so workers can gain a holistic view of their potential compensation.

Shift Differential vs. Overtime

It’s easy to confuse shift differential with an overtime rate, and while they are complementary they are calculated differently. Additionally, while the former isn’t a legal requirement, the latter is.

The Fair Labor Standards Act (FLSA) states that, unless exempt, employees covered by the Act must receive overtime pay for hours worked over 40 in a workweek at a rate not less than time and one-half their regular pay rates.

The two are often confused because shift differentials are included in overtime pay calculations. Just remember that differentials are incentives while overtime is required to be offered (and paid out) by law.

Benefits of Offering Shift Differential

Offering this unique compensation can prove to be beneficial to your business. Here are just a handful of ways to utilize differential pay to your advantage:

Find Coverage for Undesirable Shifts

The great thing about differential pay is that it can be tailored to different shifts. For instance, an organization can choose to bump up this additional compensation for a second or third shift depending on its needs. By offering more pay for one of these shifts, you can find additional coverage when you need it the most.

Encourage Employees to Work in Different Conditions

This extra pay can also be used to entice employees to work in what would be considered hazardous working conditions. A good example of this would be an overnight security guard or warehouse worker, which is a position that may come with inherently more risk.

At the same time, this higher pay can also be a good incentive for employees to relocate for their position. The ability to be paid more can give workers the peace of mind that they can afford to move to an area with a higher cost of living for the position.

Overcome Staffing Challenges

The labor shortage is still affecting thousands of organizations across the country. Much of this is due to the combination of an aging workforce entering retirement age and stagnant wages that are not drawing people to enter the workforce.

Offering shift differential pay can help your organization overcome these staffing challenges since it shows your commitment to competitive pay. Some industries, like healthcare, also use this type of pay to accommodate a surge in demand. You may also choose to use this pay structure to account for shifts in seasonal demand or more differences in staffing needs throughout the year.

Differentiate Your Business

And last but not least, providing this type of pay can differentiate your business from the rest. You can utilize differential pay as a recruiting tool and advertise it on job listings or during interviews. This can immediately attract qualified candidates and be the reason an employee accepts your job offer over another.

Challenges of Calculating Shift Differential

Offering a shift differential is only beneficial if an organization is able to accurately capture the hours worked and pay it out efficiently. Of course, this can come with some difficulties:

Calculating Differential Pay

As a business, there’s a fine line between enticing employees with additional compensation and remaining profitable. When it comes to calculating differential pay it’s important to consider market rates, cost of living, and other factors to ensure you’re remaining competitive. Offer a pay rate that makes sense for your organization and industry.

Tracking Hours Worked

Many industries offer different shifts outside the traditional 9-5 workday. For example, hospitals require staffing 24/7, meaning there are many shifts for employees to choose from. On the other hand, manufacturing positions may need only a few overnight workers to keep things operating efficiently.

Regardless, it can be a challenge to determine when an employee is working outside their regular hours. After determining what hours would be available for this additional pay, you can use technology like a dedicated time clock to help accurately capture their hours worked and what would be eligible for additional pay.

Paying Out Overtime

Then you need to make sure you’re correctly paying out this extra income. Consider how it will appear on your employee’s paycheck; as a separate line item or rolled into any overtime pay. Explain this to your workers so they can easily see where their added compensation is included.

When your business offers different premium times, holiday pay, etc. it can sometimes be overwhelming to calculate pay. This is why it’s important to lean on technology and use software and hardware to your advantage.

Using PayClock

With PayClock, you can easily calculate employee time for payroll instantly and accurately to accommodate for all hours worked even at different pay rates.

More than just timecards or a timesheet solution, PayClock is a comprehensive web-based software and time clock system that lets you manage all of your workforce employee time data with detailed reporting delivering faster payroll processing.

This includes calculating:

  • Pay codes, rounding rules, breaks, premium time, shift differentials, holiday calendars
  • Accruals and holiday calendars
  • Employee time-off requests and supervisor approvals
  • Absence, shift and schedule management, and more

You can rest assured that your payroll will be completed accurately while employees are content to receive their right wages on time. Begin using differential pay to differentiate your organization and operate more efficiently today with PayClock.

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