Shift Differential: What It Is & How to Calculate It

Many businesses stay open outside the general 9 to 5 business hours to keep up with customer demand, especially during the holiday season.

However, convincing employees to take up shifts outside business hours is challenging.

That’s where shift differential can move the needle.

Shift differential is the incentive that employers offer to employees who choose to work on these shifts at odd hours.

To help you understand and possibly implement this at your workplace, this blog will walk you through the concept of shift differential pay, the types of shift differential, how to calculate it, and how it differs from overtime pay.

What Is Shift Differential?

Shift differential is the incentive given to employees in the form of extra compensation for working shifts outside business hours.

Most organizations pay it for working shifts during nights, weekends, public holidays, etc., but some pay it for split shifts as well. This pay isn’t required or mandated by federal law or FLSA; however, many employers offer it to encourage employees to take up the less preferable shifts. Usually, employers decide the shift differential rate, but they can also negotiate it with the employees as part of collective bargaining agreements with unions. Shift differential can be provided as a flat amount or can be offered as a percentage per hour.

The shift differential pay rates can vary based on factors such as:

• States and countries, considering factors such as the cost of living, market rates, and local regulatory requirements.
• Type of worker, i.e., salaried or hourly worker
• The industry, shift type, work type, and shift timings. For example, the less favorable the shift is, the higher the rates of differential pay can be. Employers can choose to pay employees working the third shift with a higher differential amount than those working the second shift.

Note: Shift differentials are taxed like regular pay, as payroll taxes are calculated on the employee’s gross wage.

Types of Shift Differential

There are three types of shift differentials that are popular among employers, including night shift differential, weekend shift differential, and holiday shift differential.

Night Shift Differential The night shift differential is paid for working night shifts, including the second and third shifts. This differential type is popular in industries that demand overnight shifts, such as healthcare, customer care, and security.

Weekend Differential Weekend differential is paid for working on weekends, usually Saturday and Sunday. Mostly, workers in the retail sector who work on weekends are entitled to this pay.

Holiday Differential Holiday differential is paid for working on public holidays such as Christmas and Thanksgiving.

Apart from these shift differential types, there are other types of differential pay being given by employers for specific conditions, including on-call differential, hazard duty differential, and call-back differential.

On-Call Differential Various industries use this differential pay to hire employees for on-call shifts. Here, employers expect them to be available at any hour of the day, outside their general work hours, at short notice. This differential type is common in emergency services and healthcare industries. Here are a few rules of On-Call work shifts applicable in the USA & Canada.

Hazard Duty Differential Employees who work in high-risk working conditions, perform hazardous duties, or whose work duties involve physical hardship can be granted hazard pay.

Call-Back Differential The call-back differential can be given when an employee completes their shift and leaves the office but is asked to return to the office to fill the unplanned absence of any other employee. This type of differential is common in healthcare industries.

Benefits of Offering Shift Differential

Improving Employee Satisfaction

When employees are compensated extra for working non-traditional hours, they feel satisfied with their jobs and feel more engaged at work.

For instance, when some employees are assigned night shifts more often than others, they get easily frustrated and start considering it as an unfair practice. Employers can significantly reduce this feeling of inequity, favoritism and frustration among employees by introducing differential pay.

With fewer conflicts like these between employees and management, the quality of work is not impacted as much as it would in the absence of such provisions.

Attracting the Right Talent Pool

Shift differential pay can help employers attract the right talent pool to their organization, who are willing to work odd shifts in exchange for extra pay. Employers can mention the availability of shift differentials and the rates in the vacancy announcement itself.

Employees don’t prefer such shifts due to odd work hours; however, paying them extra compensation can easily help employers get coverage for those shifts.

Reducing the Turnover

By paying employees a shift differential, employers can significantly reduce the probability of employees quitting their jobs due to inconvenient shift hours, and this reduction in turnover can also save recruitment and training costs of hiring new candidates.

Thus, organizations can improve employee retention and engagement by providing differential pay for unconventional shifts.

Overcoming Staffing Problems

Industries that operate 24/7 require coverage for second and night shifts, and finding resources willing to take up such shifts is tricky. Differential pay helps employers easily get coverage for night shifts as employees take up these shifts voluntarily in exchange for getting paid more.

Fulfilling Seasonal Staffing Needs

Many businesses experience a sudden surge in customers during the peak season. Thus, they need temporary resources to help them fulfill staffing needs for an indefinite period during the busy season. In such cases, offering differential pay can help businesses get coverage for extended periods.

For example, if you have a retail business and experience additional staffing needs during the holiday season, providing a shift differential can help you get coverage for extended hours.

Drawbacks of Offering Shift Differential

Increased Labor Cost

Differential pay can increase the overall labor cost for any employer, especially if most employees work non-traditional hours.

Inequality and Dissatisfaction

Employees who work the general shift may feel dissatisfied and find it unfair that others working the odd hours get paid more than them.

Increased Chances of Payroll Errors

When some employees work general shifts and others work odd shifts, the administration may likely face difficulty calculating payroll. They'll need to track the employees concerning their shifts and the days, their eligibility for differential pay, and rates as well. Also, if the differential pay rate is variable for different shifts, it can further aggravate the situation for the payroll department.

Which Jobs Pay Shift Differential?

Managers in customer care support roles may have to work odd hours or stay overnight to solve difficult customer concerns or respond to any major query, for which they may receive additional premium pay.

Similarly, healthcare professionals, including doctors and nurses, may have to work non-traditional shifts, including second shifts, third shifts, or even weekends, to handle emergency cases or look after the patients.

Here’s a list of industries and jobs where shift differential pay is available for employees to get coverage for unconventional shifts:

Customer support Healthcare Security Manufacturing Retail Hotels Construction Factories Information Technology Law enforcement Transportation Utilities and infrastructure

Difference Between Overtime and Shift Differential Pay

Overtime pay and shift differentials are two different types of pay. Employers pay overtime for working additional hours on top of the assigned fixed hours. On the other hand, they pay shift differential as incentives for working the assigned shift or hours during odd times.

Overtime pay is a legal compensation mandated by FLSA for hourly workers who work more than 40 hours a week. They must get compensated 1.5 times the regular rate for every hour worked beyond standard work hours.

On the other hand, shift differential is not mandated by any law. Rather, it’s a complementary pay that employers offer to retain and attract a talented workforce.

Shift differential is pay that incentivizes work for working shifts outside the business hours, such as night shift, weekends, and public holidays. The pay rates can vary from one organization to another.

Shift Differential Payment Modes

A shift differential is mostly given to employees who work on an hourly basis; however, salaried employees can also be offered this pay.

The type of differential pay can vary from one organization to the other. Let’s have a look at these:

Flat Rate

Employers offer a fixed amount to employees for working shifts during odd hours. For example, employers can choose to offer an additional flat amount for every hour they work, such as $10 for every hour they work in a night shift.

Similarly, they can choose to provide an extra lump sum payment for the shift occurring during odd hours, such as $50 for the graveyard shift.

Percentage-Based

Employers offer a certain percentage of the employee’s hourly pay rate/base pay as a shift differential. They can choose to keep these rates variable according to the degree to which these are unfavorable.

While hourly workers can be compensated in these two ways, for salaried employees, the percentage-based method is preferred the most.

Insight Into Shift Differential Pay Rate Ranges The usual shift differential rate may vary from 5% to 20% of an employee’s hourly rate. However, most employers follow a 10% to 20% pay rate. However, healthcare sectors generally provide higher shift differential than other industries, which can be as high as 70-80% for holiday and weekend shifts.

How to Calculate Shift Differential Pay

You can calculate the differential pay by multiplying the differential pay rate by an employee’s hourly base pay rate.

The steps to calculate the differential pay and the total pay are as follows:

Step 1: Multiply the hourly base pay rate with the differential pay rate to get the differential per hour

Step 2: Multiply this differential per hour by the number of hours worked in that shift to get the total differential pay for that shift

Step 3: Multiply the hourly base pay rate with the total hours worked in that shift to get normal pay

Step 4: Add the normal pay and differential pay to calculate the total pay for that shift

For instance, let’s say an employee’s normal base pay is $20 per hour, and the duration of their night shift is 8 hours. They are entitled to differential pay at the rate of 15% for working the night shift.

Shift Differential Calculator The shift differential pay per hour: Base pay rate x Shift differential rate = Shift differential pay per hour $20 x 15%= $3 differential per hour Thus, for every hour worked during the night shift, that employee will be entitled to $3 more for every hour worked in that shift. As an employee works an 8-hour long night shift, the differential pay for a night shift comes to: $3 x 8 hours = $24 Now, the total earnings of the employee for that one night shift: Normal pay + Differential pay = Total pay for that shift ($20x 8 hours) + $24 = $184

Thus, that employee will receive $184, including the $24 of shift differential for working that shift.

Overtime Pay With Shift Differential Pay

Pay differentials are not exempt from overtime; thus, if an employee works outside the business hours apart from working the regular work hours, then that employee will be eligible for overtime as well as shift differential pay.

In order to calculate overtime pay along with differential pay, you need to find out the regular pay rate first.

Let’s extend the same example for this case.

Suppose an employee is paid $20 per hour and works a total of 45 hours in a particular week. From these 45 hours, the employee works 30 hours on the day shift and 15 hours on the night shift.

Also, the shift differential pay rate for the night shift is 16%.

Day shift pay: $20 x 30= $600 Differential pay: $20 x 16% = $3.2 Night shift pay: $20 x 15 = 300 Premium pay with differential: $3.2 + $300 = $303.2 Regular pay rate: ($600 + $303.2) / 45 = $ 20 Overtime pay rate: $20 x 0.5 = $10 Total overtime pay: $10 x 5 = $50 Total gross pay: $600+ $303.2 + $50 = $953.2

Tips to Implement Shift Differential Effectively

Clearly Communicate the Shifts Eligible for Differential Pay

Not communicating the shifts for which you provide differential pay can lead to confusion and conflicts. Thus, the first and foremost step is to spell out which hours and shifts (e.g., weekends and night shifts) will qualify for differential pay.

Also, specify the pay rates for each shift type if you have separate rates per the degree of unfavorable shifts.

Tip: Train the supervisors and managers with every detail related to the shift differential policy so they can communicate the details to their teams and clarify doubts if the employees have some queries or concerns.

Define Eligibility Criteria

Define guidelines for who qualifies for differential pay. For example, specify the job functions, shifts, and responsibilities they must handle when working shifts to be eligible for differential pay.

Set Differential Pay Rate

As an employer, you must set the differential pay rate for shifts beyond business hours. For instance, an organization that operates round-the-clock requires three shifts. The first is from 9 am to 5 pm, the second from 5 pm to 1 am, and the third from 1 am to 9 am. Thus, for second and third shifts, employers can pay shift differential to employees who work these shifts.

As the third shift is the least preferred compared to the second, employers can set higher differential rates for third-shift workers.

Similarly, if a particular shift has more workload or responsibilities than the other, consider setting a higher differential rate for that shift.

Tip: Pay heed to the workload, tasks, & roles and responsibilities associated with a particular odd-hour shift. You can choose to set a uniform differential pay rate for all the odd-hour shifts. However, setting a higher pay rate for more busy or inconvenient shifts will help you find dedicated resources who would like to pick that up.

Include Policy in Employee Handbook

As an employer, you should consider including the shift differential policy in the employee handbook, including its pay rates, shifts qualified, and eligibility criteria. Employees can refer to this handbook whenever they need it.

Review the Policy Regularly

Organizations should review the updates in labor laws, regulations, and market conditions from time to time to optimize the shift differential policy accordingly.

Leverage Historical Data to Estimate Staffing Needs

Differential pay adds an extra cost, which can highly impact any organization, especially small and midsize enterprises (SMEs).

Organizations can forecast their staffing needs by vetting historical data and seasonal trends to avoid expenses where staffing isn’t required. Such analysis and review can provide long-term benefits in better human resource and financial management.

Take Employee Feedback

Employers often consider that differential pay can compensate for an employee’s disturbed work-life balance and other issues. However, they often overlook the fact that money isn’t always the solution to all problems. Not addressing employees' concerns can leave them with unengaged resources having productivity issues.

Pay heed to the potential concerns and issues that employees may face while working odd hours. For example, parents with young children may find it difficult to get childcare services during odd hours, or workers living far from the office may face transportation difficulties.

Thus, assess the situations employees must be dealing with by conducting a survey and see how satisfied your employees are and what major issues they’re dealing with while working such shifts.

See if you can help them sort these issues by providing some childcare facility at the office or providing extra pay for childcare services. In rare cases, employers can also provide the facility to work from home on certain days or offer flexible work timings.

Tip: You can use the concept of shift bidding to get coverage for odd shifts and understand which employees are willing to work unconventional hours.

Get the Right Technology for Payroll Calculation

Once you have decided on the differential pay rates for the shifts, now it’s time to calculate the payroll, including the differential amount.

However, calculating the payroll isn’t straightforward when you’ve set different pay rates for different work shifts.

For instance, if an employee works a first shift one day, a second shift the next day, and the graveyard shift the other day, then keeping a tab on their schedule and calculating the payroll, considering differential premium pay for each shift can be complex.

In addition, calculating gross pay becomes difficult when overtime pay and differential pay both come into the picture.

That’s why you need a time-tracking solution such as Replicon, powered by ZeroTime™, to help you efficiently capture the time and shifts worked, track overtime, and support payroll operations with configurable differential pay.

Bottom Line

Shift differential pay is a way to incentivize employees to pick up shifts outside the general business hours so that business operations can continue as long as required. Offering differential pay can improve employee morale, engagement, and satisfaction and help curb turnover rates.

However, calculating overtime and shift differentials can become somewhat complex, especially if you have a larger workforce. Still, with the right solution, you can streamline the payroll calculation and ensure accurate payroll processing, which makes implementation easier.