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If you manage a business that’s open more than the usual 9-to-5, offering shift differential pay can be an effective way to motivate your employees to work the less-desirable time slots.
Come payday, though, figuring out a check that includes this type of compensation can be confusing, to say the least. We’re here to help.
In this article, we demonstrate all the calculations you’ll need to figure out even the most complicated instance of shift differential pay.
A shift differential (a.k.a. shift differential pay) is an increase in pay that your business can offer to team members for working outside of “normal” business hours. Normal, in this case, is the shift that most closely resembles the standard 9-to-5.
For example, if you run a factory that operates two shifts — one from 6 a.m. to 2 p.m. and another from 2 p.m. to 10 p.m. — the majority of your employees will likely want to work the first option because it’s the closest approximation of a regular 9-to-5 (or 8-to-5) workday.
To entice existing team members and new hires to work the latter shift, you may choose to offer them a higher hourly rate than they would get working on the other shift. The variation in pay from one set of work hours to another is a prime example of a shift differential in action.
So, if you pay your first-shift employees $10 per hour, you may choose to pay your second-shift employees $10.50 per hour as an incentive for working the irregular hours.
In reality, a shift differential is just one type of differential pay (or differential rate) — a pay structure where employees make more than they normally would if they take on additional responsibilities or those that other employees don’t want.
One of the most familiar types of differential rate is hazard pay. This option offers employees premium pay or a bonus for performing certain types of dangerous work.
For example, a wind turbine maintenance person may be paid at a certain rate for work performed inside the structure. But, if they have to venture outside the structure and are working off the ground, they may be paid at a higher rate (because the job is more hazardous).
Differential pay is not required by law, so your business can choose 1) to offer it or not, and 2) how much the variation between regular pay and whatever differential you implement should be.
As mentioned, many businesses choose to offer different pay rates as a way to encourage team members to volunteer for the less-than-desirable hour ranges, like the night shift or the weekend shift.
This is especially true in the manufacturing industry, where production lines may run 24 hours a day, seven days a week.
The most common shift differential calculation revolves around a percentage increase above base pay. So, for example, you may decide to offer a 15% premium for working the 2 p.m. to 6 p.m. shift (referred to as “second shift” for the remainder of this article).
For our purposes, that 15% increase will be over and above the base pay rate you offer for the 6 a.m. to 2 p.m. shift (referred to as “first shift” for the remainder of this article).
Here’s the formula for figuring out the exact dollar amount:
Differential Pay Rate = Base Pay + (Base Pay x 0.15)
If the base pay you offer for first shift is $11.50 per hour, here’s what your differential pay rate would be:
Differential Pay Rate = $11.50/hour + ($11.50/hour x 0.15)
Differential Pay Rate = $11.50/hour + $1.73
Differential Pay Rate = $13.23
As an alternative, you could decide the exact dollar amount you want to pay for the second shift and then calculate a percentage from that.
Let’s say you decide you want to pay those on second shift $12 per hour, here’s how to figure out what percentage of the base pay that is.
Percentage Of Base Pay = ((Differential Pay – Base Pay) / Base Pay) x 100
Percentage Of Base Pay = (($12/hour – $11.50/hour) / $11.50/hour) x 100
Percentage Of Base Pay = ($0.50 / $11.50/hour) x 100
Percentage Of Base Pay = 0.043478 x 100
Percentage Of Base Pay = 4.4
But what if an employee on the second shift works overtime? How does that factor into the equations? Read on to find out.
Calculating a shift differential with overtime is just like doing so for base pay: Multiply the pay rate by the legally mandated time-and-a-half for any hours over 40 that an employee worked.
Using the information in the previous section, you’d get:
Overtime Hourly Pay Rate = Differential Pay Rate x 1.5
Overtime Hourly Pay Rate = $13.23 x 1.5
Overtime Hourly Pay Rate = $19.85
(For more on calculating overtime, check out this step-by-step guide from the Inch blog.)
But what if an employee accumulates overtime working the first shift at the regular pay rate and the second shift at the differential pay rate? Let’s take a look.
For this calculation, we’ll use the variables from the previous set of examples:
In addition to that, we’ll establish that the employee (Rachel) worked Monday through Friday on the first shift for a total of 40 hours and then worked Saturday on the second shift for a total of eight hours (48 hours total for the week).
Here’s how to calculate the differential pay for two different shifts with overtime.
First, calculate Rachel’s straight-time pay, which is a combination of base pay and differential pay.
Straight-Time Pay = (First-Shift Hours x $11.50) + (Second-Shift Hours x $13.23)
Straight-Time Pay = (40 x $11.50) + (8 x $13.23)
Straight-Time Pay = $460 + $105.84
Straight-Time Pay = $565.84
Without overtime, Rachel would make $565.84 for the work week.
Second, calculate Rachel’s regular rate, which is based on her straight-time pay and the total number of hours worked.
Regular Rate = Straight-Time Pay / Total Hours Worked
Regular Rate = $565.84 / 48
Regular Rate = $11.79
Thus, without overtime, Rachel would make $11.79/hour for the 48 she worked.
Next, we’ll factor in overtime by applying the federal mandate that states that employers must pay any hours over 40 at a rate of 1.5 times the employee’s regular rate.
Overtime Wage Rate = Regular Rate x 1.5
Overtime Wage Rate = $11.79 x 1.5
Overtime Wage Rate = $17.69
With that number in mind, you’re ready to calculate Rachel’s total earnings for the first shift at regular pay, the second shift at differential pay, and the overtime.
To calculate total earnings, take the 40 hours Rachel worked on the first shift (which don’t get overtime pay) and multiply them by her regular rate.
First-Shift Pay = Total Hours Worked On First Shift x Regular Rate
First-Shift Pay = 40 x $11.79
First-Shift Pay = $471.60
Then, take the 8 hours Rachel worked on the second shift (which include the differential and do get overtime) and multiply them by her overtime wage rate.
Second-Shift Pay = Total Hours Worked On Second Shift x $17.69
Second-Shift Pay = 8 x $17.69
Second-Shift Pay = $141.52
Finally, add the first-shift pay to the second-shift pay to end with Rachel’s total pay for the week.
Total Pay = First-Shift Pay + Second-Shift Pay
Total Pay = $471.60 + $141.52
Total Pay = $613.12
With or without shift differential pay, planning schedules and coordinating team activity can often make or break your business.
The Inch app is here to help.
Inch provides a better way to create schedules and give your team a quality experience whether they’re on the clock or planning the weeks ahead.
As a voice-operated workforce management solution, Inch seamlessly combines communication, task management, and time tracking to ensure the most efficient and enjoyable work environment for every industry.
To find out how you can save countless hours each week managing your employees and streamline internal communication, visit Tryinch.com and get started for free today!
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