A shift differential provides an increased rate of pay for a person working a specific shift outside of normal business hours.
For example, nurses may get paid a shift differential for working overnight shifts. While technical support personnel could make extra money by working a holiday shift.
Shift differentials aren’t legally required, companies use them to make less desirable shifts more enticing.
Don’t confuse differential pay with overtime pay. Overtime kicks in when someone works more than a specific amount in a given day or week (usually 40 hours per week). Overtime is required by law and will apply to any hour worked once the threshold is reached.
Here’s the simple way to think about it:
- Shift differential pay is an increased rate for a specific work shift, the extra pay happens regardless of how many hours the person worked that day or week.
- Overtime pay is when someone works more than a specific number of hours in a given day or week, the extra pay only applies to hours worked beyond that threshold. Even if the hours are normal business hours.
How to Calculate Shift Differentials
There are generally two types of calculations you can make for shift differentials.
Flat Rate Increase to Hourly Rates
The first is a flat-rate calculation, which adds a specific amount to a person’s base wage for the hours worked during the shift differential period. With this calculation, a person making $5 per hour as their shift differential would get $5 per hour added to their base pay of $30, bringing their total for the special shift to $35 per hour.
Salaried employees don’t receive shift differential pay as often as non-salaried workers, but they can. They usually get a flat rate per shift, like $200 for working a holiday. This amount simply gets added to their paycheck.
Percentage Rate Increase to Hourly Rates
The second calculation is a percentage of a worker’s regular rate. If the employee making $30 per hour gets a shift differential of 25%, they’ll make $37.50 per hour during the special shift.
Salaried workers can also get a percentage using the same calculation, although their employer first needs to determine their hourly rate based on the number of hours included in the company’s workweeks and how many weeks the employee works.
Any shift differential pay earned by a worker is taxable just like their base pay, as it’s a form of employee compensation.
How to Pick the Best Shift Differential Calculation Method
Whatever you choose, keep it as simple as possible. That’s one of the biggest lessons I’ve learned in Operations and HR. The simple policy lasts, anything that’s even a smidge complicated becomes a mess before you can turn around.
I do have two simple guidelines on how to pick your shift differential:
- If most of your employees make a similar hourly rate, do a flat $X/hour increase for everyone on the shift. It’s simple to implement, fair, and easy to understand.
- If you have folks with vastly different hourly rates and need some of the folks on the higher end to show up to the shift, you’ll probably need to use a percentage. An extra $5/hour for someone already making $70/hour isn’t going to entice them to work on Christmas.
When to Use Shift Differentials
Weekend Pay
Companies typically pay a weekend shift differential to allow easier staffing during the weekends, which are often considered undesirable.
Weekend shift differential pay is common for customer service representatives, tech support representatives, and healthcare workers.
Shift differentials for weekends are usually in the 5% to 15% range. If you’re concerned about your overhead, you can limit the number of weekend shift differentials to 1-2 per month. Personally, I’d allow workers to pick up any weekend shift they’d like. Most folks prefer some consistency in their schedule and this should reduce your turnover a bit.
Holiday Pay
Companies pay holiday pay to workers who pick up holiday shifts, like working on Christmas Eve. Since these shifts are notoriously difficult to fill, extra pay is usually required if you want to fill shifts without alienating your employees.
Holiday pay is also used to encourage people to pick up extra shifts during busy holiday periods, like retail stores preparing for holiday rushes due to special promotions and sales.
Second/Third Shift
Common in factory work, second or third-shift differential pay rewards workers willing to take on mid-day and evening/overnight shifts, like 3 PM to 11 PM or 11 PM to 7 AM. Hotel workers, emergency workers, and customer or technical support workers might also work second and third shifts and receive this differential pay.
These shifts are difficult to staff because they can be challenging for people with families to work around. Job applicants might be more willing to work these shifts if an enticing second/third shift differential is involved.
Companies handle these shift differentials in different ways. Sometimes, a company will hire someone to work a second or third shift permanently or for the foreseeable future. That employee can earn their base pay plus a shift differential for as long as they continue working that shift.
Other times, a company might hire someone to work second or third shift only part of the time. In that case, the employee earns a base wage for regular shifts and a shift differential whenever they work an eligible shift.
Hazard Pay
Hazard pay is specifically for hours worked under strenuous or dangerous circumstances.
For example, emergency cleanup crews working in a hurricane recovery zone might receive hazard pay for the hours spent on the project. Nurses and other medical professionals also sometimes received hazard pay during the COVID-19 pandemic.
Hazard pay is more commonly paid as a percentage of a person’s base wage, typically between 10% and 25%, but it can also be a flat rate per hour or per project.
How To Calculate Shift Differentials and Overtime Together
What if an employee is earning overtime and a shift differential at the same time?
Overtime is required by the Fair Labor Standards Act (FLSA), a federal law that regulates minimum wage and general compensation. The FLSA mandates that non-exempt employees working more than 40 hours in a week get paid overtime pay. Also watch out for state overtime regulations which may have additional requirements.
This pay must be 1.5 times the employee’s regular rate, also known as time and a half. In other words, an employee’s base pay gets multiplied by 1.5 to determine their overtime rate.
A worker can make both overtime pay and earn a shift differential for some shifts.
Remember this rule: overtime gets applied to the total regular wage. So if you’re already offering shift differential pay, that would be included in the regular wage. Then overtime gets added to everything (base pay + shift differential pay).
Here’s the formula: (base pay + shift differential pay) x (overtime pay)
The overtime 1.5 rate is NOT applied to just the base pay, it gets applied to the combined total regular wage. That includes the shift differential pay.
Let’s say Luke works in tech support, making $25 per hour with a $3 shift differential for working overnights ($28).
This week, Luke worked 50 hours, the last 10 of those hours were during an overnight shift with a shift differential.
First, we need to calculate Luke’s basic pay for his 40 hours without overtime or a shift differential. Then, we calculate the number of hours with a shift differential and overtime. In Luke’s case, he has 10 hours that include both types of additional pay.
Here’s how it would look:
- $25 (base rate) x 40 = $1,000 (regular pay for 40 hours without a shift differential or overtime)
- $28 (base rate with shift differential) x 1.5 = $42 (overtime rate)
- $42 x 10 = $420 (overtime pay with shift differential)
- $1,000 + $420 = $1,420 (total pay for the week)
How To Avoid Payroll Mistakes with Shift Differential Pay
If managing shift differential pay and overtime seems complicated, it is. And if you’re in multiple states with different overtime regulations, you’re in for a GRAND time.
If there’s one thing I don’t mess around with, it’s payroll. State agencies regularly go after small businesses that mess it up. And they should, I have no issues with that. But some of this stuff is easy to mess up. Ignorance or an honest mistake won’t be a valid excuse.
I highly recommend getting a modern payroll service in place. Once employees upload their info and you add their hours, all the wage calculations happen automatically. Most of them have time tracking built in with great integrations to mobile apps and time kiosks. And the good payroll services are very on top of state regulations, keeping you in the clear.
