Staffing challenges paired with business demands can create complications for planning and scheduling the right coverage of workers.
Why?
Different shifts have different needs. When you need to schedule coverage for unfavorable shifts such as weekends, holidays, or extended hours, addressing the struggle to fill these shifts requires acknowledgment that these shifts have a different value to you and your staff than standard shifts.
Enter shift differential pay. This is a modified compensation strategy that turns those less desirable shifts into more attractive ones.
Let’s explore what shift differential pay is, how you calculate it, and why it’s an essential component of your scheduling program.
What is shift differential pay?
Undesirable shifts have more value because they are harder to fill; shift differential pay is the solution to that reality.
How does it work?
Shift differential pay modifies a staff member’s compensation rate when they work hard-to-fill shifts to make them more competitive. By paying a staff member a premium rate to work hours that are odd or extended, you’re adding a financial incentive that offsets their lack of desirability.
Working undesirable hours can be grating to workers. Shift differential makes scheduling easier and helps employers retain staff, which is essential to your business’s long-term stability.
While not a legal requirement like overtime pay, shift differential pay has evolved as a simple, elegant solution for industries that struggle to maintain consistent scheduling for uncompetitive shift hours.
What are shift differential hours?
The typical workweek consists of first shift work, also known as the day shift: An eight-hour shift that generally ranges anywhere between 5:00 AM and 6:00 PM. Although not all industries follow the nine-to-five workday format, this is the standard point of comparison when determining what an “irregular” hour is.
Hours that lend themselves to shift differential pay are irregular compared to those standard first-shift hours. Think of these as a night pay differential, a weekend pay differential, holiday shift differentials, and the like.
Here’s a quick overview of shift hours that tend to use shift differential pay:
- Second shift (Swing/Evening shift): An eight-hour shift that may range between 4:30 PM and 1:00 AM
- Third shift (Graveyard/Night shift): An eight-hour shift that may range between 1:00 AM and 9:00 AM
- Extended hour shifts: Shifts that exceed the general eight-hour standard
- Weekend shifts: Shifts scheduled on Saturday and Sunday; generally, in a context where weekend shifts are outside normal business hours
- Holiday shifts: Shifts on widely celebrated holidays, such as Christmas, Thanksgiving, Fourth of July, and Juneteenth
How to calculate shift differential
As previously mentioned, shift differential pay is not legally mandated compensation. This means there isn’t a designated standard per se on how shift differential should be calculated.
There are three primary ways employers can factor shift differential pay into payroll. Shift differential pay may be calculated as:
- A percentage of basic hourly pay
- A dollar amount per hour
- A dollar amount per shift
A percentage of basic hourly pay
A popular way to calculate shift differential pay rate is as a percent of a staff member’s hourly pay.
This adds an additional incentive for experienced employees and schedulers. Because the shift differential is a percentage, seasoned staff members with higher base pay are just as incentivized to take on these shifts—if not more so. In turn, schedulers have a wider pool of staff members with diverse experience levels more readily at hand.
In the event that employees are salaried, percentage-based shift differential pay is determined by the theoretical hourly rate of their salary.
Example:
To encourage the floor nursing staff to work the graveyard shift, a hospital offers a fifteen percent shift differential pay. Jacob volunteers. His base pay is 35 dollars an hour. With the fifteen percent increase to his base pay, Jacob’s final hourly rate for the shift will be 40.25.
The hospital also offers pay shift differentials to the overnight ER doctors. Vanessa’s salary is 295,000, with a theoretical hourly wage of around 184 dollars an hour. With the 15 percent shift differential pay, Vanessa would make 211 dollars an hour for the night shift.
A dollar amount per hour
Compensation by a dollar amount per hour amount is a straightforward way to calculate shift differential pay.
In this case, the employer sets an increase to an hourly employee’s rate. Like the percentage increase mentioned before, this method will typically factor in an employee’s hourly wage and at a flat dollar increase to that amount.
As with the percentage calculator, salaried employees will have their theoretical hourly rate factored in when his method is used.
Example:
A grocery store needs clerks to manage overnight stocking, so they offer a 10-dollar night shift differential to incentivize the shift. Eric’s base rate is 19 dollars an hour. The premium pay he’ll receive for working the third shift will be 29 dollars an hour.
A dollar amount per shift
Setting a dollar amount per shift may be the simplest way to calculate shift differential. Instead of factoring in an employee’s base hourly rate and adjusting from there, this option simply sets a flat dollar amount increase for a given shift.
The flat dollar amount makes this option a helpful one when managing salaried employees. Employers don’t need to figure out any theoretical hourly rates from salary amounts, just flat additional compensation per shift.
Example:
A marketing firm needs a few team members to work weekend shifts in order to close up with a client. The firm offers a flat 175-dollar lump sum to team members who come in on Saturdays. Mark takes up the offer and gets 175 dollars worth of additional compensation on his next paycheck.
Shift differential vs. overtime pay: What’s the difference?
Shift differential is often conflated with overtime pay, but they are completely different. Overtime pay is modified compensation initiated after an employee works more than 40 hours a week. Any hours worked from that point on payout at a rate of time and a half. For example, 40 dollars an hour becomes 60 an hour.
These are the key differences that distinguish shift differential pay from overtime pay:
- Legal requirement: Overtime pay is a Department of Labor federally mandated requirement as per the Fair Labor Standards Act (FLSA), whereas shift differential pay is paid out at an employer’s discretion.
- Compensation standards: Overtime pay will always pay out time and a half for the number of hours worked after 40 hours a week; shift differential pay has more flexibility in how the incentivized pay is calculated, like a percentage of their paycheck or a flat dollar amount.
- Conditions for eligibility: Overtime pay takes effect after an employee has worked more than 40 hours in one week. Every hour afterward pays at the adjusted time-and-a-half rate. Shift differential modifies compensation on a more selective, shift-by-shift basis.
Even though they are different, shift differential and overtime intersect, which is something employers should know how to notate.
For instance, suppose an employee who’s hit overtime also picks up a night shift with shift differential pay. Payroll would need to factor in both the overtime rate and shift differential pay.
Example
Jonathan is at 40 hours for the week but decides to pick up an eight-hour Saturday shift with shift differential pay of 10 dollars an hour. His basic hourly rate is 20 an hour.
First, calculate the first 40 hours and the additional eight at a straight time: His regular rate: (40 + 8) x 20 = 960.
Next, factor in the shift differential pay for the eight hours: 8 x 10 = 80.
Add the shift differential pay to the straight time to determine the employee’s regular rate for the total hours worked: (960 + 80) / 48 = 21.667 an hour.
To find the overtime pay, multiply the established regular rate by .5, then multiply that by the number of overtime hours worked: 21.667 x .05 x 8 = 86.67
All told, Jonathan is paid his straight time, the shift differential, and the OT pay: 960 + 80 + 86.67. His gross total pay for the week is 1,126.67.
Shift differentials and payroll taxes
Filing taxes from an employee’s wages is an important part of payroll. Don’t worry about shift differentials making it any more complicated.
Like pay-for-performance compensation strategies like commission, shift differential pay is taxed like regular wages. Any and all modified compensation from shift differentials on your employee’s W-4 will be subject to standard tax, such as Social Security tax, Medicaid/Medicare, and federal and state income.
What to include in a shift differential policy
For your and your employees’ sakes, it’s best to have a clear shift differential policy to outline how payroll factors in shift differential pay.
Remember, shift differential rates are left to the employer. That being the case, leaving shift differential policy ambiguous opens the door to obstacles down the road.
Here are a few recommendations of what to include in your shift differential policy:
- Define shift differential pay: Provide your employees with a clear definition of and guidelines for how shift differential pay works. This way, you ensure you’re all on the same page;
- Eligible shifts: Clearly specify which shifts are eligible for shift differential pay to your employees, such as holiday shifts, second shift, or third shift;
- How you calculate shift differential pay: Let your employees know how you intend to pay out shift differentials: as a percent of their hourly, on a dollar-on-the-hour basis, on a dollar-per-shift basis;
- Salary accommodations: If salaried employees participate in modified shift differential pay, make it clear how their salary affects your offer shift differential.
Across industries like healthcare, customer support, and more, shift differential policies have proven to be an effective tool for maintaining a complete schedule year-round. Learn more about how agile compensation strategies can help your organization thrive.
Sources:
About Form W-4, Employee’s Withholding Certificate | IRS
Overtime Pay | U.S. Department of Labor
Wages and the Fair Labor Standards Act | U.S. Department of Labor
