Shift Differential: What It Is & How It Works (+ Free Policy Template)

Shift differential is non-mandatory premium pay companies offer to eligible employees who work certain shifts (i.e., those outside their normal schedule or considered less desirable such as overnight or holidays). Although there are no federal or state laws that require shift differential pay, some businesses offer this premium pay to employees in various situations as an added benefit for working under certain conditions.

A shift differential policy clearly spells out the details surrounding who is eligible, how much pay will be added, and any exceptions. Download our free shift differential policy template and customize it to meet your specific needs.

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How Shift Differential Works

Because shift differential isn’t required by law, employers have flexibility within their policies. You may choose to offer employees a flat dollar amount per hour or a percentage, depending on their classification. No matter what, your policy should clearly outline eligibility requirements. Through detailed time-keeping records, you can calculate the total pay due to an employee eligible for shift differential pay.

If your business is considering a shift differential policy for your employees, you may benefit from time tracking software to help keep employee hours straight. To adhere to accurate pay calculations around shift differential consider using payroll software.

Determining Eligibility

In most cases, only hourly employees are eligible for shift differential. However, some companies want to offer this benefit to salaried employees as well. Companies are free to offer shift differentials to all or just certain classes of employees.

Be aware of employee classification as it relates to shift differentials. Your business may have two different classes of employees: exempt and nonexempt. Under the Fair Labor Standards Act (FLSA), exempt employees are not subject to overtime laws and, therefore, not eligible for overtime pay. Nonexempt employees are, however.

While all your employees can be eligible for shift differential, only nonexempt employees will be eligible for both overtime pay and shift differential. This requires a unique calculation to first determine shift differential pay and then overtime pay. We discuss this further in our calculating shift differential pay section below.

Salaried Employees

If you expect your salaried employees to regularly work odd or undesirable hours, you can add shift differentials to every paycheck (or as a quarterly or annual bonus), in the form of a flat rate or percentage. A percentage of the employee’s salary/hourly rate will be more difficult to calculate, whereas a flat supplement on every paycheck will make payroll easier on you.

You may also choose to offer premium pay based on the hours the salaried employee works, although this is more complicated and requires detailed timekeeping records, something salaried employees aren’t always ready to do. For example, if you need an employee who makes $15 per hour to work security overnight at an apartment complex, you may offer them an additional $3 per hour in shift differential pay for hours worked between 8 p.m. and 8 a.m.

Hourly Employees

Calculating shift differentials for hourly employees is not as difficult as it may seem. Because hourly employees already record their hours in your time keeping system, you will know exactly how much shift differential pay they’re entitled to.

Where it can become confusing is in calculating overtime. In addition to the FLSA’s strict rules, some states even go further, mandating additional overtime pay in certain situations. Under the FLSA, overtime pay is calculated at one and a half times the employee’s regular hourly rate. So, if an employee is paid $10 per hour, they must receive an additional $5 per overtime hour worked ($15 per hour overtime pay).

Eligible Work Hours

Your policy should specify the hours that are eligible for premium pay. Many companies designate overnight hours as eligible for shift differential pay (8 p.m. until 8 a.m.). List all hours that your business is open and tag them as either eligible or ineligible in your policy to avoid confusion.

Calculating Shift Differential Pay

To calculate total pay due for an employee entitled to shift differential pay, you need to determine their base rate for regular hours, overtime hours, and shift differential hours.

Determine Regular Hours – Number of hours worked x hourly rate
Determine Overtime Hours – Number of overtime hours worked x hourly rate x 1.5
Determine Shift Differential Hours – Number of shift differential hours worked x adjusted hourly rate (including premium pay)
Determine Shift Differential Overtime Hours – Number of shift differential hours worked x adjusted hourly rate (including premium pay) x 1.5
Calculate Total Due – Regular Hours + Overtime Hours + Shift Differential Hours

EXAMPLE:

An employee worked 50 hours last week. They make a regular rate of $10 per hour and five of their 50 hours were eligible for shift differential at $2 per hour.

Here’s how to calculate what you owe the employee:

Forty hours of regular pay (40 x $10 = $400).
Five hours of overtime pay (5 x $15 = $75).
Five hours of shift differential pay, calculated at $10 + $2. The shift differential hours were subject to overtime pay as well (1.5 x $12 = $18).The total rate for those five hours (5 x $18 = $90).
Add it all together ($400 + $75 + $90 = $565). For these 50 hours worked, you would owe the employee $565.

Day	Regular Hours	Overtime Hours	Eligible Shift Differential Hours
Monday	10	0	0
Tuesday	10	0	0
Wednesday	10	0	0
Thursday	10	0	0
Friday	0	5	5 (OT)
Totals	40	5	5 (OT)
Rate per Hour	$10	$15	$18
Total Pay	$400	$75	$90

Because the employee worked overtime during a period where they were entitled to shift differential pay, they are getting time and a half for the shift differential period. This creates even more incentive for the employee to help you cover those less desirable hours.

You may be interested in learning how to calculate overtime for hourly and salaried employees. Also, check out our related guide to the exemptions from minimum wage and overtime rules.

Types of Shift Differential

There are several common types of differential pay to understand:

Common in manufacturing, shift differential and overnight pay offer premium pay to people working shifts other than the traditional day shift. Typically during daylight hours, the day shift is considered the regular shift, or first shift, for workers. Second and third shifts, covering the late evenings and overnight, are less desirable times to work.

To reward employees who work second and third shifts, many companies will offer shift differential pay. This ends up adding additional pay to an employee’s hourly rate. It’s a win-win because the company gets to keep operating at full capacity 24/7, and the workers can make more money for the same work they would have done during the first shift.

Weekends and holidays are prime examples of less desirable working times. Companies may offer a higher rate of pay to employees who agree to work over a weekend or holiday when those days are not part of the employee’s regular working schedule. Note that some states require premium pay for employees who work during holidays, so check your local state regulations.

Hazard pay is typically offered to highly specialized employees like doctors who go to work in a war zone. It is generally offered as either a bonus or a percentage increase in their salary. This additional sum may incentivize employees to work in hazardous conditions.

During the COVID-19 pandemic, many employers offered essential workers hazard pay to help keep their businesses running. Some grocery stores, for example, offered workers hazard pay to help them keep the shelves stocked during the tumultuous time.

In some types of industry, call-backs happen frequently. For work performed after a shift or during a workplace emergency, a company may have a policy of paying employees a call-back premium for the work they do.

Technology companies may offer a call-back premium to a database administrator, for example. If the network goes down overnight, a company may call the employee in to fix the problem. For their efforts, the company may have a policy of paying them an additional rate for the call-back.

Pros & Cons of Paying Shift Differential

Shift differential pay has historically been a significant benefit to offer that helps set your business apart from the competition. By providing premium pay, you can attract and retain top talent in your industry, reducing your hiring and retention costs.

You’re probably thinking that all of this is great but, ultimately, it’s going to cost your company more money. Initially, it will. Higher salaries mean more outgoing payroll and taxes, cutting into your margins. But don’t look at this increased cost in a vacuum. You can save money in other areas—such as hiring, employee retention, and employee engagement, just to name a few.


PROS	CONS
Gain a competitive advantage and attract better talent	Higher payroll costs
Improve morale and reduce turnover	Resentment from ineligible employees
Increase employee productivity	Operational challenges in complying with city and state overtime laws

Industries That Commonly Offer Shift Differentials

Any company may choose to offer shift differentials, but they are not common in every industry. Businesses that operate during normal business hours rarely need to offer shift differential pay.

This type of premium pay is commonly offered in four industries: restaurants and retail, manufacturing, customer service, and healthcare. If your company operates in one of these industries, you would be wise to consider what your competitors offer. Even if none of your competitors offer shift differential pay, offering it to your employees might be a way to set yourself apart from your competition and make yourself a best-in-class employer.

Restaurants and Retail: Many restaurants and retail establishments are open late, some 24 hours a day. To keep the shop running smoothly overnight or into the late evening hours, many businesses offer shift differential pay to employees working late and overnight hours.
Manufacturing: Factories rarely close; they are usually open 24/7 and most holidays, even on Christmas. Factory workers can make extra money at a company that offers shift differentials for working second and third shifts and/or holidays.
Customer Service: Companies that operate in the customer service industry need to have a full staff during peak hours. For many businesses, peak hours can be early evenings and weekends. By offering shift differential pay to employees who work later hours and weekends, customer service companies can ensure a full staff and happy customers.
Healthcare: Healthcare is another 24/7 industry. While your family doctor’s office probably won’t offer shift differential pay, many hospitals do to incentivize doctors, nurses, and administration staff to work nights and weekends. Other examples include healthcare professionals working in natural disaster areas and war zones. These salaried employees may be offered shift differentials to help these areas of the country and world get the medical attention that’s needed.

Bottom Line

When your company operates beyond the traditional 9 to 5, you may look for ways to incentivize employees to work outside those hours. Shift differential policies are a great way for you to recognize your employees who work less desirable hours and attract high-quality employees. It also helps set yourself apart from your competition. With no laws requiring shift differential, you have a lot of flexibility. The key is creating a clear, comprehensive policy.

Shift Differential: What It Is & How It Works (+ Free Policy Template)

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