What is Shift Differential & How Does it Work?

When your business needs coverage for the retail holiday rush, evening security, or healthcare on weekends, volunteers may be few and far between. After all, who wants to trade in a family holiday for a normal shift at work? But with consumer demand at an all-time high and a need for off-hours coverage in some industries, it’s sometimes necessary for employees to work unpopular shifts.

Fortunately, there’s a solution out there—shift differential pay is negotiated between employer and employee as a way of incentivizing the latter to work undesirable shifts. No matter your industry, shift differential pay could be a way of motivating your employees while getting those pesky graveyard shifts filled.

In this guide to shift differential pay, we’ll run through everything you need to know on the topic, from how to calculate it (even when overtime is a confounding factor) to the legal implications. Then, we’ll explore how certain business software can help streamline the logistical hurdles that come along with differential pay.

What is shift differential?

Shift differential is the extra pay employers may offer to employees who work outside of standard hours. It can be challenging to fill those overnight and weekend shifts, and many employers make use of shift differential pay to incentivize workers to take on these less-than-ideal shift times, even though it’s not a legal requirement.

In an effort to boost workplace morale and ensure constant coverage, studies have shown that up to 92% of companies pay shift differentials to hourly employees (compared to 36% for salaried employees). These pay premiums are key to retaining competent workers while fairly compensating them for their work. Shift differential pay is probably more diffused than you think; even companies like Amazon offer it to their holiday workers and warehouse employees.

Whether you’re anticipating off-peak hours for a special event or need to be open on Christmas Day, consider shift differentials. They could help you get the coverage you need to have reliable business operations year-round.

How to calculate shift differential

There are a few different ways of calculating shift differentials. The employer generally decides how much to offer, based on factors like whether their employees are salaried or not, how much experience they have, and what responsibilities are involved.

In most situations, hourly employees are offered shift differentials in the form of a percentage of their usual pay rate. Alternatively, they may receive an extra flat amount for each hour worked or for each shift worked. For salaried employees, on the other hand, the norm is usually the percentage-based approach. Some employers may even decide to cap the amount of differential pay an employee can earn, as is the policy of the Texas Department of Health.

To better understand how to calculate shift differential pay, let’s use an example: your tech company needs a nighttime security guard and is willing to offer a 20% differential for the graveyard shift. If the guard is normally paid $20 an hour for a day shift, they would net $24 an hour for the night shift. Calculating shift differential pay is nothing complicated, but there are some tools we’ll discuss later that can help ease your concerns around the pay calculation process.

How does overtime factor into shift differential?

Overtime is mandated by the Fair Labor Standards Act (FLSA) and is required for hourly employees who work more than the 40-hour standard week. For each hour beyond the traditional 40, employers are required to dole out time and a half pay. However, the particulars of the overtime rule do vary from state to state, so be sure to check with your local jurisdiction.

Sometimes, you may find yourself needing to pay both overtime and shift differential pay, in which case you’ll want to add in the differential pay before you calculate the overtime rate. In other words, legally, shift differential laws dictate that overtime pay must be calculated based on the differential pay rate where applicable, not the basic hourly rate.

How to easily manage shift differentials in your business

Your workplace might never sleep. If you need coverage 24/7, you’ll want to ensure you’re still fully staffed at all times. Otherwise, you run the risk of incurring workplace accidents, unexpected closures, or an overall decline in work performance.

Luckily, there are some time clock software vendors that make this process a breeze. They can also give you peace of mind when it comes to auditing and processing shift differential pay. Popular employee scheduling platform When I Work, for example, offers tools that allow employers to set up different pay rates for different shifts as well as calculate differential pay. With pay automated and out of the way, your team will be free to focus its attention on more important tasks.

Once you know how to calculate this payment structure and navigate shift differential laws regarding overtime, all you need to do is set up a time clock software to do the work for you. Stay fully staffed and keep your team content with shift differential pay. It’s certainly one of the most efficient ways of incentivizing and retaining your best employees.

Celita Summa
By day, Celita Summa is a Florida-based freelance writer specializing in technology, marketing, sustainability, and a plethora of other topics. Nothing makes her happier than reading and writing well-researched content. By night, Celita can be found developing her talents, which include her black belt in karate, her fluent Italian, and her knack for vegan cooking.

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