What Is a Shift Differential?

When your business runs on a 24/7 operating schedule, finding employees to staff those “undesirable” hours can be a real challenge. 

So how do you convince your team that a second shift, or even a full night shift, is the place to be? You’re going to need to offer them additional compensation to make it worth their while. Depending on what industry your business is operating in, you may or may not have come across shift differentials before.

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Shift differentials refer to the premium pay rates that employees earn when they work outside of normal business hours.

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If your business is expanding and requires workers beyond your normal operational hours, shift differential pay can make the difference between keeping your staffing levels high and struggling to find people to work the evening shift.

What Is the Purpose of a Shift Differential?

Shift differentials aim to make shifts that are outside of normal business hours a little more appealing for workers.

You’ve probably heard of these hours referred to as “the graveyard shift”, but they can also include time worked on public holidays or other hours that the business wouldn’t ordinarily be open.

Around 4 percent of the American workforce are on duty only for the overnight shift, with another 12 percent working rotating shifts where occasional overnight or out-of-hours work is required. You’ll typically find people working second and third shift in:

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• Manufacturing 
• Transportation
• Customer support
• Healthcare

When Does a Business Need to Consider Shift Differential Pay?

Regardless of what type of work your company does, businesses who hire people on an hourly wage for holiday shifts, weekend hours, or anything beyond what’s considered a “desirable shift” should seriously consider implementing this practice. 

The vast majority (92 percent of companies) offer shift differential pay to their hourly employees, but only 36 percent offer this to salaried employees. For many business owners, the additional perks and security that come with a salaried position mean that, if some additional work is required, that’s simply part of the job. Additional time off or flexible working hours may be offered to salaried workers if working outside normal hours becomes more frequent.

Shift differential pay rates aren’t a legal requirement under the Fair Labor Standards Act (FLSA). That means that it’s completely up to employers how much and when they want to pay a differential rate. But that rate isn’t set on a per-employee basis. What the pay is for one employee on a weekend shift is the same as an employee in a comparable role and hours of work.

What Is the Average Shift Differential Pay? 

It depends. Amounts can range anywhere from five to 15 percent in extra wages. For hourly workers, their pay shift differentials are either a percentage (usually between five and 15 percent) of their hourly rate or as an additional flat fee, often ranging from 50 cents to $1.25.

How Is Shift Differential Pay Calculated?

When it comes to calculating shift differentials, most businesses start off with a base rate for all workers, then adjust this depending on the type of workweek they’re asking employees to do. Depending on what your business’s typical work hours are, there may be a set percentage for those working second shift and then a higher percentage for the full night shift differential. Essentially, the more undesirable the hours, the higher the pay should be.

For those who do offer additional pay to their salaried staff, this is usually calculated as a percentage of their typical salary. 

A Quick Example of Shift Differential Pay

Let’s say that your office requires two security guards at all times, thanks to the expensive equipment you’re using. Steve and Andy have a regular workday, from 8 a.m. until 5 p.m., Monday to Friday, and earn $21 per hour each.

Over the weekend, Tim and Mark are the guards in charge. As their work schedule is different from Steve and Andy, and outside of normal business hours, you pay them a weekend differential–10 percent more than the standard rate.

This means that Tim and Mark earn $23.10 per hour ($21 basic rate x 1.1 shift differential, or 10 percent) for working their shifts compared to Steve and Andy’s more desirable one.

Factoring in Overtime Pay

The FLSA does not require a different rate of pay between day shift and night shift workers. But it does mandate that covered, nonexempt employees must be paid at least time and a half of their regular rate for anything over 40 hours worked in a standard workweek. 

Salaried employees are, more often than not, considered exempt but be sure to clarify this with your human resources team and the Department of Labor when hiring new positions.

Putting this another way, any overtime hours that a nonexempt worker completes beyond 40 hours that week must be paid an overtime rate of no less than 1.5 times their usual hourly wage, or regular rate. You must include any shift differential pay when calculating an employee’s regular rate for that week. 

How This Works in Practice

Let’s go back to our office security guards. Tim works his normal weekend shift, but also steps in to cover for Andy while he’s on vacation. That means that Tim earns the regular base rate for work completed in normal business hours, as well as his shift differential for the weekend and overtime pay for working over 40 hours that week. 

In total, Tim earned:

• 40 hours from Monday to Friday at $21 per hour = $840
• 16 hours over the weekend at $23.10 per hour (shift differential of 10 percent) = $369.60
• Tim’s total before overtime is $840 + $369.60 = $1,209.60
• Tim’s regular rate is $1,209.60 / 56 = $21.60 
• Tim’s overtime rate is $21.60 x 1.5 = $32.40 

Adding it all up…

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• 40 hours at $21.60 = $864
• 16 hours at $32.40 = $518.40
• Total = $1,382.40 

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Tim’s gross pay for the week is $1,382.40

Considering Sick Leave, Paid Time off, and Holidays

What happens when a nightshift employee is sick? What rate do you pay them when they’re not actually doing work in undesirable hours? 

There’s no legal requirements here, so what you do is up to you. But for most businesses that offer shift differentials, it depends on what the employee’s normal shift hours are:

• If an employee is permanently on a later shift, any paid vacation or sick leave will be paid the average of the base rate and the differential that the employee typically receives.
• If the employee is on a day shift to night shift rota, their leave rate is usually the regular base rate.
• When it comes to holiday pay, many businesses choose to set a specific rate or differential for these, just as they would with overnight or weekend shifts.

Whichever method you choose to pay your team, the agreed upon rate should always be shared with the employee on their leave notice paperwork.

Working around Shift Differential in Your Business

It can be challenging to implement this way of paying your staff if you’ve never done it before. For you as the business owner, nothing should change how you run your payroll or organize your taxes. No matter what hours your employees are working, the payroll deductions stay the same and are fixed based on how much they’re earning, not when it was earned.

But having an organized and well-established framework, with clearly defined rates for different working hours, will keep your employees happy as they adjust to different working hours—plus it means that your business can now run around-the-clock.