Shift Differential Pay | Definition & Calculation

Kaitlin Edwards | Mar 6, 2024

Shift Differential Pay | Definition & Calculation

It’s usually easy for employers to find employees who are willing to work the day shift or second shift. It can be challenging for employers to find people willing to work the graveyard shift. Many employees express feeling dissatisfied with the shifts they’re asked to work. Shift differential pay can be an enticing draw for employees who may not otherwise feel inclined to work unconventional shifts, like evening shifts.

If your business decides to utilize a differential pay policy, you have several things to consider. The first step is to calculate shift differential rates that work best for your business, and the second step is to consider the tax implications that may come with raises in pay. Here’s what employers need to know about building a shift differential incentive program that works for everyone.

What Is Shift Differential Pay?

Shift differential pay is an optional method of wage or salary assignment that a company can use to compensate employees who work outside of traditional “9 to 5” style workday hours or employees who work at times when many businesses are usually closed, like on major holidays.

Shift differential pay is most commonly offered by businesses or organizations that generally operate 24 hours a day, 7 days a week. Pay perks can be used to make less desirable shifts, like overnight shifts, more appealing to employees who may be less eager to fill them.

When Is Shift Differential Pay Applicable?

Shift differential pay can technically be applicable whenever an employer wants it to apply, but it’s typically utilized to make less appealing shifts more attractive.

Employers who use shift differential pay tend to offer pay premiums during these shifts:

  • Night shifts
  • Second shift
  • Third shift
  • Weekend shifts
  • Holiday shifts
  • Working during an emergency (i.e., a hurricane)

Employers often have the option to offer shift differential pay when the need for employees to work a certain shift or pick up additional shifts is greater than normal. Undesirable hours or undesirable shifts can vary from industry to industry. Shift differential pay can incentivize employees who usually work less than full time hours to pick up more hours in order to assist with a busy season, important sale event, or rush project.

Do Shift Differentials Impact Payroll Taxes?

Shift differential pay is considered the same as standard employee compensation, and all employee compensation is eligible for normal payroll taxes. Employees won’t receive the full dollar amount of their premium pay because necessary taxes must still be deducted from their paychecks for the total amount of dollars earned.

Employers may want to consider how shift differential pay will impact payroll taxes. If an employee won’t notice a meaningful difference in their paycheck after taxes are deducted, they may not feel as though shift differential pay is a meaningful incentive. It may be worth entertaining the option of accounting for tax related deductions when determining a shift differential pay rate.

How Is Shift Differential Pay Calculated?

Differential pay rates are calculated as a percentage of hourly pay added to an employee’s straight time hourly rate. There is no specific amount an employee is required to offer. It can technically be as little as 1%, although 1% is not likely to be a motivator.

Most employers offer 10% or 15% shift differential pay. Small businesses may find that 5% is more financially feasible. Depending on the scope of the work necessary and flexibility within the payroll budget, some employers may choose to go as high as 20% shift differential pay.

Since shift differential pay is a business decision, it’s important to review your options and consider what works best for your business. The goal is to find a “sweet spot” that is enough to motivate employees without damaging your bottom line.

Most employees would prefer that shift differential pay start at a lower rate and increase with time if it becomes financially feasible to do so. Starting shift differential pay at a higher rate and later reducing it is more likely to be demoralizing to employees.

Does Shift Differential Pay Account for Overtime Hours?

Shift differential pay can stack with overtime pay if both occur at the same time. For example, if an employee works 45 hours a week during a holiday, filling third shift hours or weekend shifts, the two rates can combine. The two only combine when an employer decides to offer shift differential pay.

How Are Overtime Pay and Shift Differential Pay Different?

Shift differential pay is a premium hourly rate awarded to employees for working a normal workweek of hours at unconventional times. Overtime pay is pay awarded to employees who work more hours than a standard workweek within a week or more hours than a standard workday within a day.

Overtime rates are usually time and a half, which means the normal dollar amount of the employee’s base pay plus an additional 50%. Overtime laws can vary by state and only apply to non-exempt employees.

Exempt employees are administrative or executive professionals, employees who earn a salary, and employees who make a minimum of $684 per week (or $35,568 per year). Anyone who makes an hourly wage is still eligible to receive shift differential pay, even if they aren’t eligible to receive overtime.

Shift differential pay isn’t required by law. It’s a voluntary step that employers take to make positions more appealing or to provide better compensation for workers who agree to take on difficult or untraditional schedules that allow a business to utilize a round-the-clock operating structure.

Healthcare industry organizations, customer support agencies, and businesses that provide emergency on-call services sometimes utilize shift differential pay, but it isn’t a mandated practice. If you choose not to provide premium pay to employees who choose certain shifts, there are no penalties for opting out.

What Is the Fair Labor Standards Act (FLSA)?

The Fair Labor Standards Act (FLSA) governs minimum wage and overtime pay, defines work hours, requires work hours and pay recordkeeping, and establishes child labor laws. While employers are mandated to award employees minimum wage and overtime pay, they aren’t legally required to award shift differential pay. Shift differential pay is considered a perk rather than a right, as per the Department of Labor.

Manage Payroll Compliance With Mosey

Most hourly employees will appreciate additional compensation beyond their regular rate, but additional pay means additional taxes. Payroll compliance is a major concern for businesses of all sizes, including paying the correct amount of payroll taxes at the proper time. Your human resources team is busy putting a plan in place — let Mosey handle payroll compliance checks for you.

Mosey’s automated compliance tools help employers keep track of important compliance issues that impact their businesses. You can focus on growing your business while Mosey works in the background to monitor compliance concerns on your behalf. Schedule a demo with Mosey to learn how we can help to simplify your business.

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