Unless someone is a night owl or needs a second job, employees usually aren’t lining up for graveyard shifts. To incentivize people to work at these times and attract new talent, employers with 24/7 businesses often offer shift differential pay.

What is shift differential?

Shift differential is a premium pay rate for hours worked at untraditional times, such as nights, weekends or holidays. Although not required by the Fair Labor Standards Act (FLSA), many businesses with round-the-clock operations extend this type of compensation to their hourly employees. Salaried employees also may receive shift differential pay, though it’s less common.

How is shift differential pay determined?

Employers generally decide how much extra to pay an employee for working undesirable hours based on any of the following criteria:

  • Work location or hazardous conditions
  • Job responsibilities (manager vs. entry-level worker)
  • Shift type (overnight, holiday, etc.)
  • Collective bargaining agreements with unions

How to calculate shift differential

Shift differential is applied as either an additional flat sum or as a percentage of the hourly rate or base salary. Both calculations may be used with hourly workers, but the percentage method is usually preferred for salaried employees.

An example of calculating shift differential

During a given week, an employee works 30 hours on the day shift and another 10 hours on the graveyard shift. If the base pay is $12 an hour and the shift differential is 5%, how much gross pay is due to this worker?

  1. $12 x 30 hours = $360 base pay
  2. $12 x 0.5 = $6 shift differential
  3. ($12 + $6) x 10 = $180 premium pay
  4. $360 + $180 = $540 gross pay

How does overtime work with a shift differential?

When calculating overtime pay for employees who work a shift differential, employers must first determine the regular rate of pay. This step ensures that the overtime rate is properly based on both the straight time and premium wages.

For example, a non-exempt employee who makes $14 an hour works a total of 45 hours one week, 37 of which are on the day shift and eight are on the night shift, with a shift differential of 6%. How much gross pay did this worker earn?

  1. $14 x 37 = $518 straight-time pay
  2. ($14 x 0.06) + $14 x 8 = $118.72 premium pay
  3. ($518 + $118.72) / 45 = $14.15 regular rate of pay
  4. $14.15 x 0.5 = $7.08 overtime rate
  5. $7.08 x 5 = $35.40 overtime pay
  6. $518 + $118.72 + $35.40 = $672.12 gross pay

What jobs pay shift differentials?

Shift differential is a perk common to jobs that take place outside normal hours of operation, i.e., 9:00 a.m. to 5:00 p.m. on weekdays. Examples include the following places of business:

  • Hospitals
  • Retail stores
  • Call centers
  • Restaurants
  • Hotels
  • Factories
  • Law enforcement agencies
  • Transportation companies

Why employers offer shift differentials

While it’s true that having a shift differential policy may increase payroll costs in the short term, the long-term benefits may outweigh the initial expense. In fact, employers who offer premium pay for off-hour work may be able to:

  • Attract and retain talent
  • Enhance productivity
  • Keep employees engaged
  • Meet seasonal demands
  • Improve employee financial wellness

Frequently asked questions about shift differentials

What is a good shift differential?

Shift differentials that increase pay by a flat dollar amount per hour generally range between $0.50 to $1.25. Percentage-based premium pay ranges between 5% and 15%.

What is night shift differential?

A night shift differential is premium pay for work performed during a second or third shift. These shifts are sometimes called evening and graveyard shifts, respectively.

Is shift differential the same as overtime?

Although both shift differential and overtime increase pay rates, they are not the same. Overtime is based on how many total hours non-exempt employees work rather than when they work. It’s also required by federal and state laws, whereas shift differentials are not.

Is shift differential taxed?

Shift differential pay is considered employee compensation. As such, it’s subject to all applicable federal, state and local taxes.

What percent is night differential?

Shift differentials generally vary based on the job’s location and responsibilities, as well as the type of shift worked. Ultimately, unless there is an agreement with a union, the employer can choose how much premium pay to offer employees who work untraditional hours.

This article is intended to be used as a starting point in analyzing shift differentials and is not a comprehensive resource of requirements. It offers practical information concerning the subject matter and is provided with the understanding that ADP is not rendering legal or tax advice or other professional services.