Shift Differential Pay: What It Is And How To Calculate It

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.

Table Of Contents

• What Is A Shift Differential?
• How To Calculate Shift Differential Pay
• How To Calculate Shift Differential Pay With Overtime
• How To Calculate Two Different Shifts With Overtime
• Frequently Asked Questions About Shift Differential Pay
• How To Set A Rate That Works For Your Business
• Tips For Implementing Shift Differential Pay Effectively

What Is A Shift Differential?

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.

A Type Of Differential Pay

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).

Is Differential Pay Required By Law?

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.

How To Calculate Shift Differential Pay

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.

How To Calculate Shift Differential With Overtime

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.

How To Calculate Two Different Shifts With Overtime

For this calculation, we’ll use the variables from the previous set of examples:

• First-shift pay (base pay) = $11.50/hour
• Second-shift pay (differential pay) = $13.23/hour

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.

1) Calculate Straight-Time Pay

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.

2) Calculate Regular Rate

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.

3) Calculate Overtime Wage

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.

4) Calculate Total Earnings

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

Frequently Asked Questions About Shift Differential Pay

1) Are All Employees Eligible?

If you decide to offer a shift differential in your business, then, yes, all employees are eligible to receive that pay.

That said, you get to set the rules, so you may decide to reserve it for specific shifts or for employees who volunteer to work more than their normal scheduled hours.

However you choose to structure the program, do your best to treat all employees equally unless there’s a non-discriminatory reason not to.

For example, you may encounter a situation where an employee volunteers to stay on after their regular shift ends. You may choose to offer that employee — and only that employee — differential pay while the other employees on that shift receive their regular rate.

2) Does Shift Differential Pay Affect Payroll Taxes?

Payroll taxes are calculated on all gross wages an employee earns, so any higher (or lower) rate you offer in addition to their hourly rate will be taxed at the same level as their regular pay.

As a result, you’ll need to withhold:

• Social Security
• Medicare
• Federal income tax
• State income tax
• Local income tax (where applicable)
• Disability insurance (where applicable)

In addition to those withholdings, your business will also be responsible for matching the Social Security and Medicare taxes as well as paying into the federal and state unemployment fund (where applicable).

Be sure to talk to an attorney or an accountant if you have any questions about the taxes your business will owe at the end of the year.

3) What Is A Good Rate?

Because this type of pay is voluntary — meaning you don’t have to offer it if you don’t want to — your business can set whatever rate works best.

While such rates can be anywhere from 5% to 20%, your business may find that a lower percentage (e.g., 2.5%) or a higher percentage (e.g., 30%) is the most effective.

That said, many businesses choose to set their differential pay between 10% and 15%.

Thus, if you pay an employee a base rate (or regular rate) of $20 per hour and offer them a 10% shift differential pay, their rate for the extra work would be $22 per hour ($20 + ($20 x 0.10)).

4) Can Employees Negotiate Shift Differential Pay?

As a general rule, no, employees cannot negotiate their shift differential pay — the business offers a standard rate that the employee can accept or reject according to whether they are willing and able to work extra.

On the other hand, some companies allow employees to negotiate the differential pay rate on a case by case basis (i.e., when their manager asks them to work another shift).

This arrangement isn’t for everyone so be sure to calculate the benefits and drawbacks before putting such a policy into place.

In addition, if your business negotiates contracts with the employees collectively, they may bring up the differential pay rate as part of those talks. In that case, you would have to reach an agreement on the numbers before finalizing the contract.

5) Can You Rescind Shift Differential Pay?

Yes, your business can rescind shift differential pay at any time.

For the vast majority of businesses, this type of pay structure is voluntary, meaning that management is in complete control of the program and can run it however they choose (as long as there’s no discrimination involved)

The only caveat to that is if the company is subject to a collective bargaining agreement with an employee union. In that case, the shift differential pay is likely codified in the contract, so it can’t be taken away without first renegotiating said contract.

6) What Jobs Typically Offer It?

Shift differential pay is common in industries with work that extends outside of normal business hours (i.e., 9:00 a.m. to 5:00 p.m. Monday through Friday), including:

• Hotels
• Factories
• Call centers
• Law enforcement agencies
• Hospitals
• Restaurants
• Retail establishments
• Transportation companies

Even businesses that are not within these common niches can benefit from a differential pay program if said program is structured correctly.

7) What Is A Night Shift Differential?

A night shift differential is premium pay for work done typically between the hours of 5:00 p.m. and 8:00 a.m.

In many cases, the second or third shift spans these hours, so your business may choose to implement a higher pay rate if employees work between those times.

How To Set A Rate That Works For Your Business

As we’ve mentioned throughout this article, the rate you choose to implement — if you choose to implement one at all — is entirely up to you.

In most cases, setting a rate that works for your business starts with considering a number of different factors, including:

• Job function
• Level of responsibility
• Geographic location (i.e., where the work occurs)
• Type of shift (e.g., weekend or overnight)
• Labor union input (where applicable)

Based on those variables, for example, you may choose to pay a manager at a higher differential rate than other employees working the same shift because of the level of responsibility those managers take on.

In many cases, you can start with a low rate (e.g., 5%) and increase it by small amounts until you find a number that gets the best results.

Before setting the differential rate for your company, check with your local department of labor or an attorney who is familiar with your industry to find out if there are caps or other restrictions on the shift differential rate you can offer your employees.

Tips For Implementing Shift Differential Pay Effectively

1) Examine The Responsibilities Of Each Shift

One of the best things you can do when implementing a shift differential pay program is to examine the responsibilities of each shift.

Some jobs come with “more important” or “more crucial” roles that you may need to take into consideration when planning the rate you will offer.

Setting a higher differential for the line person operating a machine and a lower differential for the person sweeping the floor may be a better way to attract high-performing team members to work those more complicated jobs.

2) Harness the Power Of Technology

Whether you implement a shift differential program or not, using the right technology to track and process work hours can make your job much easier.

Software such as Inch gives you the power to monitor, control, and effect positive change on every aspect of the way your team works.

It also makes processing complicated pay rates — such as overtime, shift differential, double time, flex time, and comp time — much easier and straightforward thanks to automation and reporting.

The right technology may be able to help your business in other ways as well.

For example, Inch includes advanced task management, comprehensive team communication, and in-depth labor cost management tools that can help you improve the foundational activities that your business relies on to get ahead.

3) Train Your Team

Getting your team accustomed to any new pay rate system requires that you:

• Communicate with everyone involved
• Train your team so they understand all the details of the process

First and foremost, communication is all about transparency. To that end, publish all the details of the program in your employee handbook well in advance of when the rate goes into effect.

Then, meet with your team and familiarize them with the ins and outs of the process, answer any questions, and transfer anything you learn back into the handbook.

With good communication and effective training, you can then point your employees back to the handbook if, in the future, they have any questions.

4) Ask For Feedback

Once the program gets going — or even before it starts — ask for feedback from your team.

In some cases, putting a shift differential pay rate into place may not completely solve the employee engagement or productivity issues that your business is facing.

You may find that some other solution or benefit is a better fix for the problem.

Asking for feedback before putting a differential pay program in place can help you identify what might work best to motivate your team and help you avoid implementing something that has more drawbacks than benefits.

5) Avoid Under Or Overstaffing

Avoid situations where your business needs shift differential pay because of under or overstaffing issues.

This often requires that you analyze your labor data and engage in a bit of forecasting so that you can then schedule the right number of employees for the work on hand or the time of the year.

Use past shift data, seasonal trends, work demands, and even weather information to paint as accurate a picture as possible about the labor requirements your business may face in the future.

Control Shifts And Overtime With Inch

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!