How to Calculate Shift Differentials

Picture this: It’s the holiday season, and inventory is flying off the shelves at your store. You’ve extended your business hours for last-minute shoppers.

You ask three of your trusty employees to work an overnight shift to restock the store for the next day. They all just look at you with blank stares.

What can you do to make them raise their hands enthusiastically? Shift differential pay.

Overview: What is shift differential?

Shift differential refers to additional compensation for employees who work outside their normal work hours. Since it can be less desirable to work the graveyard shift or weekend shifts, employers incentivize their workforce with a premium hourly rate.

You calculate shift differentials in step three of the payroll process, which calculates gross wages.

Shift differentials are not legally required, but they’re a common perk given to employees who agree to work at odd hours or on holidays. Employers decide the amount of shift differential pay.

Shift differentials don’t differ by employee: When you offer differential pay, you offer it to all employees who work those hours.

Don’t confuse shift differentials with overtime pay, which is federally mandated and kicks in when a non-exempt employee works more than 40 hours in a standard workweek.

How to calculate shift differential

Shift differentials come in three forms: a percentage of basic hourly pay, a dollar amount per hour, or a dollar amount per shift.

Let’s say you own a jewelry store with a 24/7 security guard. Guards work in three shifts: 7 a.m. to 3 p.m., 3 p.m. to 11 p.m., and 11 p.m. to 7 a.m.

As a percentage of basic hourly pay

The jewelry store offers a 10% differential for second shift hours and a 20% differential for overnight hours (a night differential).

A guard who works from 3 p.m. to 11 p.m. earns $16.50 per hour ($15 basic rate x 1.1 shift differential). An overnight guard makes $18 per hour ($15 basic rate x 1.2 shift differential).

As a dollar amount per hour

While most businesses pay shift differentials as a percentage of an employee’s basic rate, you can express the differential as a dollar amount. That way, employees with different hourly rates receive the same premium on irregular shifts.

Let’s say your guards are paid at rates commensurate with experience. You can offer a standard $5 increase for second shift hours and a $10 increase on third shift hours.

The premium rate for a guard with a basic $15 per hour rate makes $20 per hour on the second shift. A guard whose basic rate is $25 per hour has a premium rate of $30 per hour.

As a dollar amount per shift

Finally, you can give a lump sum differential payment for second and third shifts. You add a flat payment to an employee’s pay without adjusting the basic hourly rate. This is the most common method for salaried employees.

For example, guards who work the second shift still earn $15 per hour, leaving them with $120 in gross pay ($15 x 8 hours). If you offer a lump sum differential, add $75 to their gross pay, bringing their shift earnings to $195.

What industries pay shift differentials?

Many industries pay shift differentials to employees who work outside regular hours, but differential amounts and when they’re offered vary by industry.

Though governments have no mandates on shift differentials, they’re common in the following industries:

• Security
• Healthcare
• Manufacturing
• Customer support

Most industries that offer shift differentials have employees working all hours of the day. You might find shift differentials in parts of the hospitality industry, such as hotels where the check-in desk must always be staffed.

Since regular hours of operation vary by industry, so do the hours that offer differential pay.

For example, some small businesses offer customer support from 9 a.m. to 5 p.m. Employers that add weekend hours during the holiday season might offer differential pay for those irregular hours.

A hospital is less likely to offer weekend differentials because weekend work is typical in the industry.

Industries that offer shift differentials often require 24-hour work. Image source: Author

How does overtime work with shift differential?

Hourly employees who work more than a 40-hour standard workweek are generally entitled to overtime pay, according to the Fair Labor Standards Act (FLSA).

The FLSA requires employers pay overtime hours at 150% of an employee’s hourly pay, also known as time and a half, after 40 hours of work in a week.

Check with your state’s labor department to know what constitutes overtime for your business. Some states require overtime pay when employees work more than eight, nine, or 10 hours in a day.

It can happen that you must pay an employee overtime on top of shift differential premium pay. Add in the differential pay before the overtime rate.

Many employers think you calculate FLSA overtime based on an employee’s basic hourly rate, but that’s incorrect and illegal. Overtime pay must be calculated as 1.5 times your employee’s hourly pay, including shift differential pay.

Let’s say a hospital nurse, Chris, is working the overnight shift with a 20% differential on his $45 basic hourly rate. Chris already worked 35 hours this week before going into the eight-hour shift.

First, calculate hourly pay for the overnight shift. Chris’s premium pay is $54 per hour ($45 basic hourly rate x 1.2 shift differential).

The FLSA requires overtime pay for the last three hours of his shift (35 hours worked + 8-hour shift = 43 hours). Chris earns overtime for those three hours, calculated based on premium rate, $54 per hour.

His overtime hourly rate is:

$81 ($54 premium rate x 1.5 overtime rate)

Chris’s gross pay for the night shift is:

$513 [($54 x 5 hours) + ($81 x 3 hours)]

Shift differentials and overtime together can significantly increase your payroll costs. Your payroll software payroll analytics can reveal ways to keep payroll costs within budget.

How does blended overtime work with shift differentials?

Some employees have multiple hourly rates depending on the task they’re performing. As with other hourly employees, they are entitled to overtime pay and may be offered differential pay.

Think of restaurant workers who might be both bartenders and waiters. They might have one hourly wage when bartending and another when waiting tables.

When employees with two hourly rates work overtime, their employers must calculate a blended overtime rate, also called a weighted average overtime rate.

Put multiple hourly rates, shift differentials, and overtime together, and you have a pretty complicated payroll calculation.

Let’s break it down:

1. Calculate the employee’s hourly rates with the shift differential.
2. Determine the employee’s gross pay for the shift by multiplying their premium hourly rate by the number of hours spent in each role.
3. Find the average hourly rate by dividing total gross pay before overtime by the number of hours worked.
4. Calculate the blended overtime rate by multiplying the average hourly rate by 1.5.
5. Multiply the overtime hourly rate by the number of hours in the shift to find gross pay.

Consider Melanie, a diner line cook, who’s responsible for cleaning the kitchen during slow times. She’s paid $20 per hour when she’s cooking and $15 per hour when she’s cleaning.

The diner is 24/7, so Melanie works the night shift sometimes. The diner pays a $10 shift differential.

Melanie has already worked 40 hours this week, and she’s about to work an eight-hour night shift. Her entire shift is subject to both shift differential and overtime pay.

First, calculate her night differential pay for each of her hourly rates.

Next, determine her gross pay without overtime by multiplying each premium hourly rate by the number of hours spent in each role.

Melanie’s gross pay before overtime is $230 ($180 cooking + $50 cleaning).

Then, find the average hourly rate by dividing total gross pay before overtime by the number of hours worked. For Melanie, that’s $28.75 ($230 / 8 hours).

Now you can calculate the blended overtime rate by multiplying the average hourly rate by 1.5. Melanie’s blended overtime rate is $43.13 ($28.75 x 1.5 overtime rate).

Melanie’s gross pay for the shift is $345 ($43.13 x 8 hours).

How do payroll taxes work with shift differentials?

Shift differentials don’t fundamentally change how payroll works. Payroll taxes are calculated on gross wages or taxable wages, depending on the tax. Shift differentials are taxed in the same way as regular wages.

Say that Scott earned $600 by working from 9 a.m. until 5 p.m. at $15 per hour for five days ($15 x 40 hours). Renee, who works at the same company, also earned $600. She worked 30 hours on the night shift, which offers a $5 hourly differential.

Scott and Renee are taxed the same way even though they earned $600 in different ways. As their employer, you can take the same payroll deductions for their wages.

Convince your employees with shift differentials

It’s hard to get employees to set their alarms for the middle of the night to get to work. Shift differentials can be a strong incentive and help employers keep their operations running at all hours.

Knowing that it won’t significantly affect how you do payroll, consider adding a shift differential the next time your business requires weekend or overnight work.