A shift differential is a type of variable compensation providing a special rate of pay for a person working a specific shift outside of traditional business hours. For example, nurses may get paid a shift differential for working overnight shifts, while technical support personnel could make extra money with a shift differential by working a holiday shift.
Shift differentials aren’t legally required for employers to pay employees. Although similar in theory, overtime pay is not a type of shift differential, and it is required by law.
Although employers don’t have to pay shift differentials, they should consider it. Shift differentials encourage workers to pick up less desirable shifts and reward the employees who do so.
The downside: shift differentials can cause some potential payroll complications. Knowing how to calculate shift differentials can benefit HR when managing payroll.
How to Calculate Shift Differentials
There are generally two types of calculations you can make for shift differentials.
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.
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.
Common Types of Shift Differentials
Weekend shift differential pay is common for customer service representatives, tech support representatives, healthcare workers, and other roles in organizations that need to be staffed on weekends. For example, a bank might offer a shift differential to loan officers and other staff who pick up Saturday hours.
Companies typically pay a weekend shift differential to allow easier staffing during the weekends, which are often considered undesirable to many employees. Shift differential on weekends enables employees to earn more money each hour without hitting overtime pay.
Shift differentials for weekends are usually in the 5% to 15% range. Companies may limit weekend shift differentials to one or two per month or allow workers to pick up any weekend shift they’d like to earn a shift differential.
Example of weekend shift differential pay:
Chris earns $25 per hour as a tech support representative. His company pays a 10% shift differential to employees who work one weekend a month for two 8-hour shifts.
Chris’s weekend shift differential pay would be 10% of $25, or $2.50, so he’d earn $27.50 for all hours worked over the weekend. His total pay for the full 16 weekend hours would be $440 ($27.50 x 16).
Companies pay holiday pay to workers who pick up holiday shifts, like working on Christmas Eve or Independence Day. This shift differential rewards employees who take on shifts that are normally challenging to fill, as many people prefer to travel or spend time with family rather than work on holidays.
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.
Holiday pay differs from paid holidays in that it provides extra compensation to employees who work a holiday shift. Meanwhile, paid holidays pay workers for time taken off during specific holidays, usually for which the entire company closes.
Example of holiday shift differential pay:
Nina works in the layaway department of a clothing store. The department typically experiences an uptick in business on Black Friday and throughout December. The company encourages layaway employees to work a Black Friday shift by offering a holiday shift differential of $3 an hour.
Nina makes a base wage of $20 per hour, so her pay with her shift differential included comes to $23 per hour. She works 8 hours on Black Friday, earning $184 ($23 x 8) compared to her regular earnings of $160.
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. Restaurants and bar workers, 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.
Example of second/third shift differential pay:
Will’s company hired him to work a third-shift factory job for at least one year before he becomes eligible for shift preference. His base pay of $25 per hour gets a $5 shift differential for every hour worked during the third shift.
Each eight-hour shift earns Will $240 with his shift differential ($30 x 8).
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.
Example of hazard pay:
Tia works for a roofing company in Arizona. She typically spends two hours in the office organizing estimates and making phone calls. The other six to eight hours of her workday are spent on work sites in sweltering conditions for most of the year.
The company pays the two hours Tia spends in the office each day at Tia’s base rate. She earns a salary which the company calculates to $40 per hour.
Tia’s hazard pay differential is 15%, so $6 per hour, which she earns for all hours she works onsite in 90-degree weather or above. For this pay period, Tia worked 60 hours that were eligible for hazard pay, giving her $360 in additional pay ($6 x 60) on her paycheck.
How To Calculate Shift Differentials and Overtime
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.
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.
Example: A base rate of $20 per hour becomes $30 per hour for overtime ($20 x 1.5 = $30).
A worker can make both overtime pay and earn a shift differential for some shifts. Here’s how that works:
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, with 10 of those hours 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 the number of hours with 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)
Calculating both is a little more complicated than just calculating one or the other, especially if some hours are included in a shift differential and not in overtime or vice versa.
That’s why I advocate using a payroll service that can do the tricky calculations for you. Consider combining that with time clock software to help you track employees’ regular, overtime, and shift differential hours.