What is a shift differential?

Shift differential means that an employee receives extra pay for working a specific schedule, such as evenings. This schedule usually involves working hours that are longer than what is considered normal for the job.

For example, a customer service job may consider any hours other than federal holidays and a 9 a.m. to 5 p.m. schedule eligible for 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 for hours that are outside of the norm 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 it can be:

• Percentage of an employee's hourly rate
• Fixed amount per hour
• Flat wage rate for all eligible hours

 Overtime pay is mandatory 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,"" pay for overtime must be at least 1.5 times the employee's regular rate.

When is a shift differential most often used?

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

• The time of day (e.g., nights and evenings)
• The type of day (e.g., weekends and holidays)
• bad weather conditions
• Inconvenient work space

Here are examples of workplaces that often have outside-the-standard working hours:

• Healthcare facilities
• Law enforcement agencies
• Security Personnel Services
• Warehouses
• Hotel
• restaurant
• retail stores
• Call Center

Employers in these and similar businesses often use shift differential pay to encourage workers to take shifts that most employees do not want to work or do not have the flexibility to work.

Benefits of Offering Shift Differential Pay

When calculating payroll for shift differential, many employers quickly realize that it is a large expense. However, the benefits often outweigh the costs. This is because shift differential pay positively impacts the business in several ways, including:

• Obtaining coverage for seasonal or temporary surges in demand 
•  Motivating employees to be more productive
•  Attracting qualified talent with high salary incentives
• Increasing loyalty and engagement among existing employees who enjoy income flexibility 

If shift differential pay isn't a way to keep employees satisfied while allowing your business to increase revenue and customer satisfaction, what's the point of it? These results may make the higher salary expense 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 want. It is best practice to create 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:

• Number of hours worked
• Basic Pay of the employee
• Shift differential rate

For example, an employee earning $15 per hour may have worked 40 hours in a week, 10 of which were overnight shifts, a 6% difference. Here's how you can use an employee's salary to calculate how much he or she earned working a regular day and night shift:

1. Multiply their hourly wage by the number of hours normally 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 higher pay rate by the number of differential hours worked in the shift ($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 also include wages earned based on shift differentials in your overtime pay calculation.

How overtime affects shift differentials

Employers  are required to pay non-exempt employees  covered under the FLSA  1.5 times their regular pay rate for any hours worked above the standard 40-hour work week. According to the FLSA, the regular rate  represents the total non-overtime compensation per hour worked. To do this correctly, employers must include shift differential pay in setting their rates.

For example, suppose an employee earns $20 per hour with a 10% differential. This employee works a 45-hour week, working 35 hours on the standard day shift and 10 hours on the night shift. Differential pay applies to night shifts. 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 the number of hours worked in a day ($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 the hourly rate ($20 + $2 = $22 shift differential rate)
4. Multiply the shift differential rate by the number of hours of the overnight shift ($22 x 10 = $220 shift premium pay)
5. Add straight-time pay to shift premium pay ($700 + $220 = $920 total non-overtime compensation)

Step 2:  Find the employee's new regular pay rate.

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

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

1. Multiply the regular pay rate 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 total non-overtime compensation to total overtime pay ($920 + $51.10 = $971.10 gross pay)

 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 differentials are not considered any different than the normal income an employee receives from his or her paycheck. No matter what pay is earned, both you and your employee are subject to all applicable taxes at the federal, state, and local levels.