Complete Payroll Solutions Logo

What Employers Should Know About Shift Differential Pay

by David Broyles on Jun 23, 2022 9:44:48 AM

If your business has hourly employees, then you may already be paying your team a shift differential. But if you don’t, then you may be missing out on an opportunity to effectively recruit and retain workers who are willing to work beyond standard day shifts. What do you need to know about shift differentials to implement this type of incentive plan in your workplace? We’ll help you find out!  

Here we’ll explain what shift differentials are, how they’re calculated, factors that may impact the premiums, and eligibility. After reading this, you’ll understand the fundamentals for providing higher pay to your employees who work more undesirable shifts.

 What is shift differential pay?

Shift differential pay refers to additional compensation for employees who work outside their normal work hours. It is particularly common in certain industries such as customer service, retail, healthcare, and manufacturing that need 24/7 staffing coverage.

The idea behind shift differential pay is to incent workers to pick up graveyard or weekend shifts by offering them a premium hourly rate. You as the employer set the rate of pay.

How do I decide on a shift differential amount?

The amount of premium you decide to offer workers is up to you. Typically, businesses will consider a number of different factors when deciding on a premium. These include:

  • Job function and level of responsibility
  • Geographic location
  • Type of shift such as overnight or weekend
  • When applicable, the influence of labor unions

So, for example, you may decide to pay a manager a higher shift differential than other employees working the same shift.

Keep in mind, there may be caps in some states or industries on the amount of money employees can earn with shift differential pay so you’ll want to check with your local department of labor to find out if there are any restrictions on the premium amount you select.

Once you’ve settled on what you’re going to pay workers for taking on unpopular or “off” shifts, the next step is to figure out how you want to calculate the premium. We’ll discuss your choices next.

How do I calculate shift differentials?

When it comes to calculating an employee’s shift differential pay, you have a few different options.

  1. Dollar amount per hour: You may decide to offer an extra flat amount per hour, such as $5 more during a graveyard shift.
  2. Dollar amount per shift: Your business may provide workers an extra lump sum payment for the shift, such as $100.
  3. Percentage of regular hourly pay: Lastly, you could choose to give workers a percentage such as 10% for working a third shift.

No matter which approach you select, you’ll calculate their differential pay and add it to their hourly wage to find out the total earned each hour during the off shift. So, for example, if an employee earns $20 an hour with differential pay of $2 an hour, that would make their total $22 per hour during their shift.

How do shift differentials work with overtime?

One thing you’ll want to consider when calculating shift differential pay is the impact of overtime. That’s because, if you have hourly employees and they work more than 40 hours in a workweek, they are generally entitled to “time and a half” overtime pay under the Fair Labor Standards Act (FLSA). And that’s where things can get a little complicated.

Instead of calculating overtime at a straight 1.5 times a worker’s hourly rate, if you also pay them a shift differential, you’ll need to calculate that into their regular rate first. That’s because the law considers shift differential pay to be part of an employee’s regular pay rate. Here’s an example from the Department of Labor (DOL).

A personal care assistant at an assisted living facility is paid $8 an hour and overtime for hours worked over 40. She also receives a $1 shift differential for each hour she works on an evening shift. In a given week, she works 3 8-hour day shifts at $8 an hour and 3 8-hour evening shifts at $9 an hour.

Straight-time Computation

3 days x 8 hours/day x $8/hour

$192

3 evenings x 8 hours/evening x $8/hour

$192

3 evenings x 8 hours/evening x $1/hour (shift differential)

$24

Total Straight-time Earnings

$408

Regular Rate and Half-time Premium Computation

$408 (total straight-time compensation) / 48 hours

$8.50 (regular rate)

$8.50 (regular rate) x ½ (premium)

$4.25 (half-time)

$8.50 (regular rate) / $4.25 (half-time premium) 

$12.75 (overtime rate)

Total Compensation Calculation

40 hours x $8.50 (regular rate)

$350 (straight-time earnings)

8 overtime hours x $12.75 (overtime rate)

$102 (overtime earnings)

Total Earnings

$442

Are all employees eligible for shift differential pay?

Just like the premium you decide to pay workers for off shifts, you also get to set the rules for who is eligible for shift differential pay. So, you may decide to offer it for only specific shifts or only to employees who volunteered to work doubles. Keep in mind, you’ll need to extend the same pay to workers on the same shift unless there is a nondiscriminatory reason for not paying them the same. For example, the workers receiving the pay volunteered to work doubles, staying on from afternoon through the night.

Do shift differentials affect my payroll taxes?

Since payroll taxes are calculated on gross wages an employee earns, shift differentials will be taxed the same as regular pay. That means you’ll withhold Social Security tax, Medicare tax, federal income tax, state income tax, where applicable, and any additional state or local tax like temporary disability insurance. You’ll also have the same payroll tax obligations for shift differential pay and must match the Social Security and Medicare taxes and also pay into the federal and state unemployment fund, if applicable.

How to Best Implement Shift Differentials at My Company

Shift differentials can be a good way to incentivize your workforce to work off shifts so you can keep your business running optimally at all hours. If you’re considering this perk to help attract and keep workers at your company, you may be wondering how to implement a plan.

The first step is to create a shift differential pay policy that addresses which shifts are covered and the amount you’ll increase pay for those shifts. You’ll then want to include this policy in your employee handbook and communicate it to all staff.

If you’re looking for help with creating policies for your pay practices that you can include in your handbook, read our next article on Complete Payroll Solutions’ handbook services to see if we may be a good partner for your business.

Subscribe

Enter your email address to subscribe to this blog and receive notifications of new posts by email.

HR Cast