Shift Differential

What Is Shift Differential?

Shift differential refers to the extra pay an employee receives for working on a certain schedule, such as evenings. This schedule typically involves taking on hours that are beyond what's considered normal for the job.

For example, a customer service job may consider federal holidays and any hours outside of the 9 AM–5 PM schedule worthy of shift differential pay. On the other hand, a hospital that operates around the clock may offer shift differential pay for working the least desired shift or one that's outside what's normal for a particular employee.

How Do Shift Differentials Work?

It’s important not to confuse shift differential pay with overtime pay. Shift differential pay is an incentive guided by company policy, not a legal requirement. You can choose when and how you offer it, which means that it may be a:

Overtime pay is required for all employees covered under the Fair Labor Standards Act (FLSA) who work more than 40 hours per week. Also called "time-and-a-half," the pay for overtime must be at least 1.5 times the employee’s regular rate.

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When Is Shift Differential Most Commonly Used?

Shift differential pay is often used when an employer asks their employees to work an undesirable or non-standard shift. Employees may consider a shift to be less than ideal based on various considerations, such as:

Here are examples of workplaces that frequently have hours outside the norm:

Employers at these and similar businesses often use shift differential pay to incentivize workers to take on the shifts that not many employees want to work or have the flexibility to work.

Benefits of Offering Shift Differential Pay

While calculating payroll for shift differentials, many employers quickly realize it's a major expense. However, the benefits often outweigh the cost. This is because shift differential pay positively affects the business in many ways, including:

What is shift differential pay if not a way to keep employees content while allowing your business to increase revenue and customer satisfaction? These results can make the higher payroll expense well worth it in the end.

Calculating Shift Differentials as an Employer

Unlike overtime, shift differential pay is not governed by federal or state laws. Therefore, you can offer it any way you wish. It's best practice to craft a shift differential policy and document it in the employee handbook or another guide. When calculating shift differential pay, you need three pieces of information:

For example, an employee making $15 per hour may have worked 40 hours one week, with 10 of those hours being an overnight shift with a 6% differential. Here’s how you can use an employee’s wage to calculate how much they've earned for regular daytime and overnight shift work:

  1. Multiply their hourly wage by the number of normal hours worked ($15 x 30 = $450 base pay)
  2. Multiply their hourly wage by the shift differential percentage ($15 x 0.06 = $0.90 shift differential)
  3. Add the normal hourly wage to the shift differential ($15 + $0.90 = $15.90 shift differential rate)
  4. Multiply this elevated pay rate by the number of shift differential hours worked ($15.90 x 10 = $159 premium pay)
  5. Add base pay and premium pay ($450 + $159 = $609 gross pay)

Keep in mind that if employees work overtime, you must factor any shift differential pay earned into your overtime pay calculations.

How Overtime Affects Shift Differentials

Employers are required to pay non-exempt employees covered under the FLSA 1.5 times their regular rate of pay for any hours worked above the standard 40-hour workweek. According to the FLSA, the regular rate is the total non-overtime compensation per hour worked. To get this right, employers must include shift differential pay to determine their rates.

For example, suppose an employee makes $20 per hour with a differential of 10%. This employee works a 45-hour week, with 35 hours on the standard day shift and 10 hours on an overnight shift. Night shift differential pay applies. You can calculate how much your employee earned by completing the following steps:

Step 1: Determine the employee's total non-overtime compensation.

  1. Multiply the hourly rate by daytime hours worked ($20 x 35 = $700 straight-time pay)
  2. Multiply the hourly rate by the shift differential to find the differential rate ($20 x 0.10 = $2)
  3. Add the shift differential rate to hourly rate ($20 + $2 = $22 shift differential rate)
  4. Multiply the shift differential rate by the number of hours on the overnight shift ($22 x 10 = $220 shift premium pay)
  5. Add the straight-time pay to the shift premium pay ($700 + $220 = $920 total non-overtime compensation)

Step 2: Figure out the employee's new regular rate of pay.

  1. Divide the previous total by the total number of hours worked ($920 / 45 = $20.44 regular rate of pay)

Step 3: Calculate your employee’s total gross wages using this new regular rate. Since the employee's regular rate is included, you multiply 0.5 to figure out the overtime pay:

  1. Multiply the regular rate of pay by 0.5 ($20.44 x 0.5 = $10.22 overtime rate)
  2. Multiply the overtime rate by the number of overtime hours worked ($10.22 x 5 = $51.10 total overtime pay)
  3. Add the total non-overtime compensation to the total overtime pay ($920 + $51.10 = $971.10 gross wages)

Special considerations may apply in your state or industry (e.g., healthcare). Be sure to follow all applicable laws when calculating overtime for your employees.

Is Shift Differential Pay Taxed?

Shift differential is treated no differently than an employee's normal income from a paycheck. No matter which pay is earned, both you and your employee are subject to all applicable taxes at the federal, state, and local levels.

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