What Is Shift Differential & How Does It Work

The standard full-time employee works 40 hours per week between 8 am—5 pm. However, many businesses operate outside of these hours. Some must provide customer service at unusual hours or operate during holidays. Though it’s not mandatory, employees working abnormal hours will be much more likely to agree to them if employers offer incentives. Shift differential is your answer.

Defining Shift Differential

Shift differential is additional employee compensation based on working hours outside of the regular schedule. Examples of outside hours include overnight, weekends, or holidays. This bonus pay acts as an incentive due to its higher rate.

Shift differential is common in industries like manufacturing, healthcare, and customer service work. While there are 8-5 roles, these industries also operate around the clock. Things like product launches, customer demand, and recall efforts create extra hours. The need for healthcare never stops. There’s a necessity for staff day and night, every day of the week.

Shift Differential vs. Overtime

At this point shift differential may just sound like overtime to you. However, they are entirely different.

To start with, overtime is a legal requirement. Employers must pay overtime for hourly employees who clock more than 40 hours in a workweek. The key here is exceeding 40 hours. The US Department of Labor oversees this legislation. Click here for more information.

On the other hand, there are no legal requirements for pay differential. Shift differential is at the employer's discretion. It simply acts to incentivize employees to work outside of their normal working hours or ‘undesirable’ hours.

Calculating Shift Differential

As there are no legal regulations with shift differential, there are several choices when it comes to setting a policy. Each has benefits and drawbacks. No matter what, there should always be clear eligibility requirements and a breakdown of how the organization will calculate this pay.

• Flat Rate – A flat rate means a fixed amount of money added to an employee’s base pay for every hour worked in the differential period. It’s an easy calculation, but might not be incentive enough for high-income earners.
• Base Pay Percentage – A different approach is to pay a percentage of an employee’s base pay for every hour worked in the differential period. It may be more complicated to administer, but the offer is more equitable across pay levels.
• Variable Rate – This approach involves paying differently depending on the shift the employee works. Overnight or holiday shifts may have higher rates. Variable rates can also be more complicated to administer, but they do entice workers when the shift is less desirable.

Pros vs. Cons of Shift Differential

There are no state or federal laws that insist on differential pay, but many employers choose to offer it because of the benefits. Obviously, it can be difficult to convince staff to work on public holidays or in the middle of the night. The major benefit of shift differential is making less desirable shifts more attractive. This allows for around the clock production and increased profits.

There are drawbacks, too. Offering shift differential gives HR and finance teams more admin. It can also increase labor costs. With living costs rising, more people are willing to perform “less desirable” because of the higher rates. It could cause conflicts if there are more willing employees than available differential hours.

Final Comments

Shift differential can be a valuable tool for employers. It offers an incentive for employees to work outside of their regular schedule. In an industry that has constant demand, this is a great way to ensure around-the-clock production and services. Employers must consider whether this option is viable for them. Without regulations, it’s up to you to set a clear and comprehensive policy.

Check out how our Compensation Management software can help your business.