Shift differential refers to the extra, or premium, pay that certain employees receive for working outside normal business hours. For example, if normal business hours run from 8 a.m. to 5 p.m., shift differential would apply to hours worked between 5 p.m. and 8 a.m.
Shift differentials are more common in jobs where employees work “undesirable” shifts, such as in manufacturing, customer support, transportation, distribution, information technology and health care. In many cases, shift differential is used to incentivize employees to work evening or overnight shifts or on weekends or holidays.
Because the government does not mandate shift differentials, employers are free to set their own policies as long as those standards conform to minimum wage and overtime laws. Typically, employers pay shift differential at a percentage of the employee’s regular hourly rate.
Shift Differential + Overtime
According to the Fair Labor Standards Act (FLSA), nonexempt employees must receive overtime pay — at one-and-one-half times their regular rate — for work hours exceeding 40 for the week.
If an employee works outside normal business hours but does not work more than 40 hours for the week, you can pay him or her shift differential. However, under the FLSA, you do not owe him or her overtime.
If the employee works outside normal business hours and works more than 40 hours for the week, you must pay him or her shift differential and overtime.
A nonexempt employee earns $10 per hour and works three eight-hour day shifts and three eight-hour night shifts for the week, amounting to 48 hours for the week. You may pay for the 24 hours worked during normal business hours at the regular rate, the 24 hours worked during the nights at the shift differential rate and the eight extra hours at the overtime rate.
If the shift differential is 10 percent, which is $1 per hour, the calculation goes like this:
- 3 days x 8 hours per day x $10 per hour = $240
- 3 nights x 8 hours per night x $10 per hour = $240
- 3 nights x 8 hours per night x $1 per hour = $24 (shift differential)
- $240 + $240 + $24 = $504 (total wages without overtime)
- $504 / 48 = $10.50 (regular rate)
- $10.50 x 1.5 = $15.75 (overtime rate)
- 40 hours x $10.50 = $420
- 8 hours x $15.75 = $126
- $420 + $126 = $546 (total gross pay for the week)
If the employee receives more than one shift differential for the pay period, you must take all of them into account when calculating overtime pay. For example, a production worker may receive shift differential of $1 for working the evening shift and shift differential of $2 for working the night shift.
Except for “statutory exclusions,” as defined by the FLSA, all forms of compensation given to the employee must be included when calculating the regular rate of pay.