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Shift differentials guide: what they are and how they work

Updated: September 28, 2022

By: Jon Davis

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Although the night shift (also known as the graveyard shift) can provide some unexpected perks and flexibility, many employers find it can be a struggle to fill these late evening and early morning time slots. Furthermore, labor shortages and rising demand for workers adds an extra wrinkle to the recruiting efforts for businesses that rely on this type of talent. Even for companies where nighttime schedules might not be the norm, there can often be the occasional need for staffers to pick up hours on holidays and weekends — sometimes referred to as the third shift.

 

The reality is that unconventional hours aren’t always at the top of an employee’s wishlist. So, offering a shift differential — and the potential for extra wages that comes with it — can help attract talent while keeping your current employees from wondering if the grass is greener elsewhere.

 

Before we get into the details, consider the following scenario as an example where an employer might offer a shift differential.

A shift differential scenario

Imagine that you own a small but rapidly expanding brand that makes niche laptop bags when some positive (and unexpected) news coverage puts your product in front of thousands of business owners. As a result, orders are skyrocketing and beginning to outpace production. You decide to expand factory operations and add a third shift to increase output. The only challenge? Existing employees are unwilling to work the third shift for the same pay.

 

Offering a shift differential is one way to close the talent gap — and keep work hours covered — whether you own a manufacturing company or a 24-hour diner. Let’s find out more about them.

What is a shift differential?

A shift differential is additional compensation an employer pays employees who agree to work traditionally less desirable shifts on a company schedule — such as nights, weekends, and holidays. Though not required by federal law, many employers find that the pay bump a shift differential provides makes it easier to fill these time slots, which may not appeal to most job seekers or current employees.

 

A shift differential is not offered on an individual employee basis, but should be consistent for everyone working the shift. In other words, if you have two employees working the graveyard shift, both are eligible to receive a shift differential if one is in place.

 

For example, you have two employees: Sue and James, who currently work the graveyard shift. As the shift supervisor, Sue’s regular pay is $15 per hour, while James’ rate of pay as an operations coordinator is $12 an hour. But because they are both working the graveyard shift, they each receive a 10% shift differential. The differential brings Sue’s pay to $16.50 per hour, while James’ pay is $13.20 per hour. Even though the employee’s hourly rate is different, the differential pay remains the same at 10%.

 

If you want to avoid going the percentages route, another option is to express your differential pay as a dollar amount. For example, because she’s a supervisor, you could pay Sue an extra $2 per hour, while paying James an extra $1 per hour as a shift differential, since he’s in a less demanding position.

Did you know?

In addition to offering your employees a shift differential as a percentage of their hourly rate or a percentage of wages, employers can also offer a lump sum payment for working the third shift.

 

Brandon Perry, OnPay Payroll Product Consultant

Why do employers use shift differentials?

Simply put, the most common reason why employers use shift differentials is that they can be a difference-maker when attracting (and retaining) employees for what’s commonly considered to be the harder-to-fill work shifts. Even if your business doesn’t offer a third shift, you may still want to consider shift differential pay if you usually need employees to work holidays or occasional weekends. Employees will feel better about working these less-popular time slots, and it will let them know that you appreciate their efforts.

What types of employers can benefit from using shift differentials? 

Businesses that work around the clock benefit the most from offering shift differentials. These businesses include, but are not limited to:

  • Manufacturing companies
  • Customer support and call centers
  • Transportation
  • Hotel and motel operations
  • Airports
  • Hospitals

 

While some businesses may use shift differentials on occasion, such as a retailer who decides to launch a 48-hour sale and needs staff to work overnight, the industries listed above are where shift differentials most often come into play.

 

And though shift differentials can move the needle on staffing efforts, it’s important to do your homework before making them a part of your operations or new hire outreach.

What are some of the pros and cons to offering shift differentials?

Shift differentials have pros and cons that affect budgets and time management, similar to most decisions that business owners must make. Here are a few to think about:

 

Pros

  • Ability to fill jobs on less desirable shifts
  • Attract higher quality candidates
  • Reduce employee turnover
  • Increase productivity

 

Cons

  • Higher payroll expenses
  • Potentially more time spent processing payroll
  • Required to abide by state and federal regulations for overtime payment

 

That’s not to say any of the cons listed above are necessarily bad. For example, even though the cost of running payroll may go up, investments in hiring and onboarding should drop. And by reducing employee turnover, you can focus on priorities to scale your business and spend less time interviewing candidates.

 

You may find the extra wages that shift differentials require far outweigh the additional costs of running payroll or the time and energy spent looking for new hires. Think of it as a long-term investment that can have a lasting impact on the health of your organization.

How does shift differential pay work?

To illustrate how a shift differential could work during a pay period, let’s walk through an example:

  • Alice and Joe are registered nurses and both work at the same hospital. Alice works the day shift and earns $35 per hour.
  • Joe works the night shift, which offers a 15% shift differential, so Joe’s hourly pay is $40.25, or $5.25 more per hour than Alice’s.

 

Let’s see how the pay works out:

 

Alice (Regular pay): $35 per hour x 40 hours = $1,400

Joe (Regular pay plus the shift differential): $40.25 per hour x 40 hours = $1,610

 

So, in this example, Joe earns $210 more than Alice for the same amount of hours.

 

Employees will look closer at these shifts when they see how the dollars and cents can work in their favor. While the calculation above is straightforward, let’s cover some other situations businesses may run into.

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How do you calculate shift differentials?

Calculating shift differentials is simple if your employee regularly works the shift that offers a differential. For example, Joe worked 40 hours for the week on the third shift, which offers a 15% shift differential. His pay would be calculated as follows:

  • Regular pay: 40 hours x $35 per hour = $1,400.00
  • Shift differential: $35 per hour x 15% = $5.25 per hour in addition to regular pay
  • 40 hours x $5.25 = $210.00
  • $1,400 + $210 = $1,610.00

 

Joe’s total check would be $1,610.00.

 

 

It could get a little tricky if Joe were to work only one night shift during the week. Using the shift differential above, we would calculate Joe’s pay as follows:

  • Regular pay: 40 hours x $35 per hour = $1,400.00
  • Shift differential (for one night shift): 8 hours x $5.25 = $42.00
  • $1,400 + $42 = $1,442.00

 

Joe’s total check would be $1,442.00.

 

Since Joe worked 8 hours on the third shift, he gets 8 hours worth of differential pay, making his premium rate $40.25 per hour for the shift.

 

Calculating overtime with a shift differential

What happens when Joe goes the extra mile? Joe worked 48 hours total for the week; his regular 8 hours per day on the day shift and an 8-hour night shift on his regularly scheduled day off.

 

Let’s calculate Joe’s pay.

  • Regular pay: 40 hours x $35 = $1,400.00
  • Shift differential: 8 hours x $5.25 = $42.00

 

Now remember, Joe’s premium pay on the third shift is $40.25. Since he worked on a Saturday (usually his day off) he will need to be paid overtime using his premium rate. Since overtime is calculated at 1.5% times the regular rate, Joe’s overtime would be calculated as follows:

  • Overtime rate: $40.25 x 1.5% = $60.38

 

Next we’ll calculate Joe’s overtime:

  • Overtime pay: 8 hours x $60.38 = $483.04

 

Finally, we’ll add the overtime pay to Joe’s regular pay schedule:

  • Regular pay: 40 hours x $35 = $1,400.00
  • Overtime pay: 8 hours x $60.38 = $483.04
  • $1,400 + $483.04 = $1,883.04 

 

So, Joe’s total check for the week would be $1,883.04.

Common policies for shift differentials

If you offer shift differentials, it’s important that you have a written policy in place that explains eligibility and other guidelines. You can include the details in your employee handbook, so staffers are aware of the policy.

 

Here are a few things that should be spelled out in a shift differential policy.

  • The shift(s) that are available to receive differential pay
  • Whether all employees are eligible or only non-exempt employees
  • Whether sick or vacation pay is paid at a regular rate or includes shift differential
  • Whether holiday pay includes the shift differential
  • Whether the differential is a percentage or an hourly rate

Pro tip:

Remember that you are not required to offer your employees a shift differential, but you are still required to pay overtime, even if it occurs on a shift that is receiving shift differential pay.

Bottom line: shift differentials can help when staffing tricky schedules

If you run a business that operates beyond the typical 9 to 5 work schedule, you may want to consider offering shift differentials. This small bump in pay can help you attract quality employees who are willing to work less than optimal hours. While offering a shift differential will raise your payroll expenses, the trade-off is a more stable workforce, higher productivity, and less time (and money) spent recruiting employees, making it well worth the cost for many employers.

 

Please note all material in this article is for educational purposes only and does not constitute tax or legal advice. You should always contact a qualified tax, legal or financial professional, in your area for comprehensive tax or legal advice.

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Jon Davis is the Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.