A shift differential, or shift pay, is a premium employers pay to employees who work outside of normal business hours. For example, if a restaurant is open past midnight, employees working the night shift may receive an extra $2 an hour. Legally, employers must include this premium in any overtime calculations, or they’ll face penalties.
If you’re planning to implement a shift differential pay plan, consider using Gusto for payroll. You can create different job types to separate your employees’ shift differentials from their regular hourly pay rates. Wage and tax calculations are automatic, and all documentation is stored within the payroll system. Start your 30-day free trial today.
How Shift Differential Pay Works
Employers should have a shift pay policy in place that outlines which hours are eligible for premium pay. These could be any hours after 5 p.m., on the weekend, or even during holidays. Shift differentials are usually calculated as a percentage of an employee’s pay rate, for instance 25% of a regular $10-per-hour shift equals an extra $2.50 premium, but some employers add a flat premium across the board, like $3 extra per hour.
Employees receive shift pay only when they work the eligible hours set by their employer, and the practice is optional. Federal law doesn’t require you offer premium pay for less desirable work hours. It does, however, dictate that you conform with all overtime rules if you choose to implement a shift differential policy. This means you must add the overtime rate into regular hourly rates for all employees who earn shift pay and work over 40 hours a week.
Industries That Pay Shift Differentials
If you’re wondering whether you should offer shift pay, consider your industry norm. Some industries, like banking, don’t offer premium shift pay because their hours fall within “normal business hours.” If your business operates late in the afternoon or overnight and you’re having trouble finding staff to work during those hours, you should consider offering an incentive like shift pay.
Here are the industries that offer shift pay:
- Restaurants: Restaurants that are open past midnight or 24 hours benefit from offering shift pay. Depending on the staffing challenges they face and their budget, some even pay extra to employees who work on Sundays.
- Manufacturing: Manufacturing companies are usually open 24 hours a day and most holidays. It’s customary for employees to seek jobs in this industry for the extra pay opportunities. Work hours are typically divided into shifts, and the first shift (from around 7 a.m. or 8 a.m. until 3 p.m. or 4 p.m.) is considered normal and ineligible for shift pay.
- Customer service: The customer service industry tends to offer flat premium amounts for shift differentials. Employees can usually receive extra pay for working on weekends or in the afternoon (for some, it’s after 2:00 p.m.).
- Healthcare: Healthcare is around the clock, especially for hospitals. Doctors’ offices don’t fall within this category, but some home health centers and urgent care facilities are good candidates for shift pay.
Any company can choose to pay employees a premium in an effort to resolve staffing issues during second (around 4 p.m. to midnight) or third (from midnight to 8 a.m.) shifts. It’s a good idea to research how your competitors handle it before implementing. Offering differential pay could give your company an edge on hiring, as long as it makes sense in terms of your business operating hours.
Calculating Shift Differentials
Typically, non-exempt hourly employees are the only workers eligible for shift pay. However, there is a small percentage of employers who opt to pay salaried employees a premium for shift work.
Before you can calculate a shift differential, you must decide whether it will be offered as a percentage of your employees’ hourly rates or a flat amount. Either way, once you determine how much the premium is, you pay all hours eligible for shift pay at that rate. Normal work hours are paid at their regular rate; you’ll add regular pay and shift pay together to determine the employee’s total gross pay.
Calculating Shift Differentials for Salaried Employees
If you’re in the small percentage of employers who want to offer shift pay to your salaried personnel, like restaurant kitchen managers, consider offering it as a percentage of their annual base salary or a separate flat supplement. If you opt for the percentage method, you can pay it out evenly over 12 months, especially if the employees are expected to regularly work outside of normal business hours.
You can also calculate an hourly rate based on the employees’ salaries and the total average full-time hours worked in the year; once you determine an hourly rate, you find the differential pay rate using the same method recommended for hourly workers. Alternatively, some employers will offer a supplemental premium that’s paid out once in the year, similar to a bonus.
Shift Differential & Paid Time Off
When employees use paid time off (PTO), they’re usually paid at their regular hourly pay rates. However, you can opt to make holiday work hours eligible for shift pay. When employees use paid vacation or sick time, they’re usually compensated at their regular hourly pay rates. If their primary work schedule is outside of normal business hours and their pay rate always includes a shift differential, it’s a good idea to pay their PTO at the same rate.
Shift Differential Overtime
The Federal Labor Standards Act (FLSA) has strict regulations regarding overtime. You must integrate shift differential pay into any overtime pay worked in the same period. Keep in mind that overtime rates are generally paid at 1.5 times (or time and a half) the “regular base pay rate.” So, if you have an employee who works 50 hours in the week, with five of those being eligible for shift pay, you’ll need to combine the employee’s regular and shift pay rates to form a new base rate before determining your overtime rate.
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Shift Pay Laws
When paying shift differentials, employee scheduling is very important. To ensure compliance with overtime laws, you need to track hours worked consistently. You also need to be aware that some states, for example, California, have their own overtime laws. Consider your state requirements when performing pay calculations that involve shift pay and overtime. Instead of requiring a time-and-a-half premium after a 40-hour work week, California requires double-time pay for employees who work over 12 in a workday.
Best Practices for Creating a Shift Differential Policy
It’s best to set up a policy to ensure you and your employees are always on the same page about what a shift differential is and how much shift pay they’re entitled to. Try to keep it down to a maximum of one full page, so employees can easily digest the information. Be clear, succinct, and consistent.
Ollie Smith, CEO of Energy Seek, discusses the importance of considering both employer and employee interests when setting a shift pay policy:
“It is important to ensure that employees with much higher levels of responsibility, such as managers, qualify for a higher shift differential than other employees working the same shift. Additionally, employers may need to factor in different shifts and differential payments when jobs are covered by labor unions, as well as differences in time and length of shift worked. It is also vital that a balance between employees having the ability to make as much money from their shift schedule as possible and protection for the company from increased labor costs caused by incorrect policies is achieved.”
– Ollie Smith, CEO, Energy Seek
Include the following in your shift pay policy:
- Eligible work hours: Specify the hours that are eligible for premium pay. Be sure to classify all business operating hours as eligible or ineligible to eliminate room for confusion.
- How shift pay is calculated: Describe the method you use to calculate each shift differential. If you plan to use multiple methods for different situations, state it within the policy.
- Eligible employees: Make it clear who is eligible for shift pay, such as hourly employees or employee types, like servers. If salaried employees aren’t included, be sure this is reflected.
- Exceptions: If you know of any exceptions to the rules you outlined in the policy, describe them as well. Employees need a full picture of what a shift differential is and how the system will work.
Invest the time you need on the front-end to create a solid shift pay policy. Although you can make changes later, it’s much easier to achieve buy-in from new employees when the policy is set in the beginning; people are reluctant to change.
Pros & Cons of Shift Pay
Shift pay has historically been implemented to help employers hire and retain staff for work shifts that aren’t attractive to the majority of employees, and it has worked well. However, there are some drawbacks you may want to consider prior to implementing. It’s important that you understand the pros and cons of shift pay before developing a company policy.
Pros of Paying a Shift Differential
Here are the pros of offering shift pay:
- Simplifies staffing: It’s easier to sell an overnight position if you’re paying an extra $5 per hour. This simplifies staffing for employers who might otherwise spend weeks trying to fill a position that works outside of normal business hours.
- Improves morale: Higher pay tends to make employees feel more appreciated, even if they’re working an odd shift. This increases morale, which improves loyalty and dedication to the company and its goals.
- Increases productivity: When employees feel appreciated and are paid more, they’re usually more productive. Higher pay creates greater opportunities for employees outside of their jobs, so it motivates them to work hard at keeping it.
Cons of Shift Pay
Here are the cons of offering shift pay:
- More expensive: Shift pay creates an additional expense. If your profit margins are already struggling, adding a shift differential policy could make them worse.
- Could cause resentment: Staff who work during regular business hours might begin to feel resentful that their coworkers are paid more, especially if they’re performing the same job.
- Higher risk: Federal law requires employers to follow strict overtime calculation rules when paying shift differentials. Any violations can result in thousands of dollars in fines and back pay.
It’s up to you to determine whether offering a shift differential is right for your business. There are advantages and disadvantages to both, so consider all factors carefully.
Alternative Options to Offering Shift Pay
If the cons of offering shift pay outweighs the pros for your business but you still need a way to improve hiring for your second or third work shift, you should consider an alternative.
You can offer other incentives aside from shift pay to encourage more interest in your open positions.
Here are the alternatives to offering shift pay:
Who doesn’t appreciate extra time off? Instead of paying a differential premium, you can offer extra PTO to employees who will consider working at night. With this alternative, you won’t have to perform any complex shift pay and overtime calculations. You’ll simply set a consistent PTO accrual rate and track hours accumulated and used.
Carolyn Denman, Finance Director of The Tolan Group, discusses the challenges and benefits that come along with offering paid time off:
“Tracking paid time off (PTO) can cause challenges, especially in our business, as we have salaried employees as well as those on commission. Our employer started a new unlimited PTO policy for all full-time employees. This is a great benefit for young moms like me and it also takes out the guesswork when doing payroll.”
– Carolyn Denman, Director of Finance, The Tolan Group
Instead of explaining to employees what a shift differential is and paying extra money per hour, you can offer an annual bonus. This can be a one-time payment to employees on a specific shift. If you want to avoid causing resentment among employees on the first shift, offer them a bonus as well, just for a smaller amount. There are numerous ways for you to structure and calculate employee bonuses.
Flexible Work Schedule
Another good alternative to shift pay is a flexible work schedule. This can be as lenient as you want. Some employers will allow workers to determine the days they want to work each week. Others make it easy for them to take off when needed by always having backup support.
Frequently Asked Questions (FAQs) About Shift Differential Pay
Here are some common questions that employers ask about using shift pay. If you have additional questions on shift differentials or other small business topics, submit them on our forum.
What is a shift differential?
A shift differential, or shift pay, is premium compensation employers pay to employees who work outside of normal business hours. Normal business hours are typically around 8:00 a.m. to 5:00 p.m.; however, some employers consider work after 2:00 p.m. to be eligible for shift pay. This premium is typically paid as a flat amount per hour or as an additional percentage of the employee’s hourly rate.
How do tips affect shift pay?
If an employer calculates shift pay as a percentage of an employee’s hourly wage rate, paying a tipped employee could lead to higher shift pay rates. Federal law requires all employees be paid at least the minimum wage, currently $7.25 an hour, but only $2.13 per hour has to be paid by the employer. When restaurateurs pay tipped minimum wage rates, they should still base the shift pay rate as a percentage of the $7.25 per hour rate versus anything less than that amount.
Do I have to pay a shift differential?
No, federal law doesn’t require shift differential pay. It only regulates minimum wage and overtime pay that is affected by paying shift differentials. You can decide the hours, days, and the amount of the shift pay you want to offer without justifying it to the Department of Labor.
Shift pay is best for employers that operate outside of the regular 9-to-5 schedule. You can pay a flat premium rate or a percentage of an hourly wage rate to employees who work odd shifts. Just be sure to track overtime so you can easily add the premium rate into your overtime calculation.
If you need a simple way to pay employees their regular wages, shift differentials, or alternative annual bonuses, consider Gusto for a payroll software service. You can pay hourly, salary, or flat rates, and payroll can be automated. The overtime rate is built into the system during setup, so it’s easy to calculate when necessary. Sign up for a free 30-day trial today.