What is Shift Differential Pay and How Do You Calculate It?

While many people work a typical 9-to-5, the workday does not look the same for everyone. Businesses that operate in the day and at night require employees to work evening, late night, and even overnight shifts. How can you get employees to work these undesirable hours? For many businesses, shift differential pay is an effective incentive to overcome hiring and staffing issues. 

Discover exactly what shift differential is, what it entails, and how you can accomplish it quickly and easily with payroll software.  

What is shift differential pay?

Shift differential pay is additional compensation for employees who work a less desirable shift, such as evening or overnight hours. This extra pay is added on top of the employees’ regularly compensated rate as an extra incentive. 

READ: Pay Transparency: What it Means for HR and How to Prepare

Shift differentials come into play most often for second (late) and third (overnight) shifts, weekends, and holidays. The differential pay for these hours can be a universal rate or adjusted based on need. The type of shift, level of responsibility, and experience can all influence this type of special pay rate. 

Shift differential vs. overtime pay

Overtime and shift differential are similar, but two very different things. They are not calculated in the same way, nor do they have the same legal implications.

• Shift differential refers to the bump in pay to work undesirable hours
• Overtime refers to the bump in pay for working more than the standard 40/hr per week

Overtime can apply to those working standard schedules or those who are working on a shift differential schedule once the 40/hrs per week limit (as set by the Department of Labor) has been exceeded.

DISCOVER: DOL Proposes New Overtime Rules: What to Know and How to Prepare

Why do companies use shift differentials?

Shift differentials are prevalent in several industries including healthcare, hospitality, security, customer support, and manufacturing jobs. The most common reasons for companies to use shift differentials are:

• Fill less desirable shifts
• Help retain employees
• Recruiting tactic  

Instead of shift differentials, employers may choose to compensate employees in other ways, including additional paid time off (PTO). 

Several factors can go into determining the percentage, such as job responsibilities, experience, hours already worked, and whether the employee is hourly vs. salary. There are no labor laws in effect that require additional compensation for these types of hours and companies do so at their own discretion. 

How do you calculate shift differentials?

Typically, the employer decides a shift differential pay rate, or even negotiates the extra amount with the employee. 

READ: The High Cost of Payroll Errors: What to Know and How to Prevent Them

Percentage shift differential 

Let’s say a hospital employee receives $20 per hour during a regular shift. When working an overnight shift, they receive a pay differential of 10%.

With a 10% shift differential, the employee would be paid $22 per hour for overnight shifts, with $2 per hour being the shift differential ($20 x 0.10 = $2).

Flat rate shift differential

For this example, let’s say a hotel employee works third shift. They make an additional $1.00 per hour during the third shift. If the employee works 40 hours in a week, that is an additional $40 they earn per week (40 x $1.00).

Salary-based shift differential

For our third example, an employee paid a salary is given a lump sum shift differential in addition to their regular wages. A factory line worker on the third shift may get paid an additional $100 per shift. The extra $100 is added to regular wages as a shift differential.

Time and half shift differential

Employees working holiday or weekend shifts can also receive time and a half pay, similar to common overtime rates. An employee who makes $10 per hour will receive $15 per hour for holiday/weekend pay if they are paid time and a half ($10 x 1.5 = $15).

Additional information about shift differentials 

According to the Culpepper U.S. Shift Differential Pay Practices Survey and/or ERC Pay Differential Survey:

• Second and third shift work are the most common shifts to be paid a differential
• The third shift is typically paid at a slightly higher rate than the second shift
• Holiday shifts typically are paid 1.5x the base rate
• Double shifts are rarely paid a differential
• The most common shift differential paid by employers is a flat premium per hour

HR payroll software + shift differential pay

Shift differential and other pay options can make processing payroll more difficult, time consuming, and prone to errors. Payroll software like Netchex can help make shift differential pay easy, automated, and error-free. 

READ: Why This is the Year You Invest in Payroll Software

Discover how Netchex can help your business improve your payroll process, including shift differentials: