What Is a Shift Differential, and How Is it Calculated?

If your business is open more than eight or nine hours, you know how difficult it can be to find team members to work the early morning and late night time slots. But, with a shift differential in place, you may actually find that those hours become the ones everyone clamors for.

In this article, we discuss exactly what shift differential pay is and demonstrate how to calculate it so you can make the process work for your business.

What is a shift differential?
How can you decide which shift differential rate to use?
How do you calculate a shift differential?
What about shift differential and overtime?

What is a shift differential?

To fully understand shift differential, it’s helpful to examine one component of the concept individually because it makes up the foundation of everything that comes after it.

Differential

A differential is a pay structure in which an employee makes more than their base pay because they take on more responsibilities, perform work that others don’t want to (or can’t) do, or work abnormal hours.

An easy illustration of a differential is hazard pay in which a high-tension power-line worker, for example, gets paid one rate for work done on the ground and another, higher rate for work done off the ground.

When you understand that a differential is just a higher pay rate for different types of work, the concept of a shift differential becomes easier to understand.

Shift differential

A shift differential (sometimes referred to as shift differential pay or shift differential rate) is an increase in an employee’s hourly or salary rate when that employee works a shift outside the “normal” business hours that typically run from 8 or 9 a.m. to 5 p.m.

So, for example, if your restaurant is open from 6 a.m. to 10 p.m., you may break work hours into two shifts of eight hours each (i.e., 6 a.m. to 2 p.m. and 2 p.m. to 10 p.m.) and offer a shift differential to those who work the early morning slot.

How can you decide which shift differential rate to use?

The shift differential rate you use is entirely up to you and can be whatever number works best for your team and your business.

When considering how much to increase pay, consider factors such as:

Job function
Level of responsibility
Geographic location (i.e., where the work occurs)
Hazards involved
Knowledge and skill required
Type of shift (e.g., weekend, early morning, or overnight)
Labor union input (if applicable)

Many businesses find it effective to start with a low rate — 5% or less — and increase by one or two percent until they find a number that motivates employees to volunteer for the shift or shifts in question.

For example, you may start your shift differential at 5% for the early morning shift. That means an employee whose base pay is $10 per hour would make $10.50 per hour for any time worked before 8 a.m.

If that doesn’t get you the number of employees you need, you may decide to try 8% for a few weeks, bump it up to 10% for a few weeks, and then finally settle on 12% so that your team sees the value in working those shifts.

Once you’ve set the rate that works best for your business, the next big step is to learn how to calculate the shift differential when it comes time to cut checks.

How do you calculate a shift differential?

Let’s say that your business decided to offer a shift differential for an early morning shift. How would you go about calculating the dollar amount you would pay each employee?

Here are two options.

Start with a percentage

As we mentioned earlier, you could set your differential pay rate at any percentage that works for your business and your team.

To help you understand the calculations to come, we’ll set the following variables as an example:

Our hypothetical employee’s name is Rebekah
Rebekah’s base pay is $15 per hour
Your business set its shift differential at 20%

With that information in mind, here’s how to calculate shift differential pay starting with the percentage.

Differential Pay Rate = Base Pay + (Base Pay x (Shift Differential Percentage))

Differential Pay Rate = $15/hour + ($15/hour x (20/100))
Differential Pay Rate = $15/hour + ($15/hour x 0.20)
Differential Pay Rate = $15/hour + $3
Differential Pay Rate = $18/hour

So, if Rebekah comes in from 5 a.m. to 8 a.m. to prep for your restaurant, she would earn $18 per hour for that early morning work.

Start with a dollar amount

As an alternative to the percentage method outlined in the previous section, you could also start with a dollar amount and figure out the percentage from there.

Here are the details for that calculation:

Our hypothetical employee’s name is Rebekah
Rebekah’s base pay is $15 per hour
Your business set its shift differential at $17 per hour

With that information, we can then crunch the numbers using the following equation:

Percentage Of Base Pay = ((Differential Pay – Base Pay) / Base Pay) x 100

It looks a lot more complicated than it actually is and will make more sense once we plug in the numbers.

Percentage Of Base Pay = (($17/hour – $15/hour) / $15/hour) x 100
Percentage Of Base Pay = (($2/hour / $15/hour) x 100
Percentage Of Base Pay = 0.133 x 100
Percentage Of Base Pay = 13.3

So, if Rebekah comes in from 5 a.m. to 8 a.m. to prep for your restaurant, she would earn an extra 13.3% of her base pay for that early morning work.

What about shift differential and overtime?

What if an employee works a shift with a higher rate and accrues overtime during those hours? The calculation isn’t as difficult as it may seem at first.

Here are the details we’ll use:

Rebekah works 48 hours in a shift that pays a 20% shift differential
Rebekah’s base pay rate is $15 per hour

To figure out her paycheck, first calculate the 40 hours of “regular” time worked with the following equation:

Regular Pay = Hours Worked x (Base Rate + (Base Rate x Shift Differential)
Regular Pay = 40 x ($15/hour + ($15/hour x 20%)
Regular Pay = 40 x ($15/hour + $3)
Regular Pay = 40 x $18/hour
Regular Pay = $720

Next, calculate Rebekah’s overtime pay based on the eight hours of overtime she worked, the higher shift differential rate, and the legally mandated time-and-a-half metric.

Here’s the equation:

Overtime Pay = Overtime Hours Worked x ((Base Rate x Shift Differential) x 1.5)
Overtime Pay = 8 overtime hours x (($15/hour + ($15/hour x 20% shift differential)) x 1.5)
Overtime Pay = 8 overtime hours x (($15/hour + $3) x 1.5))
Overtime Pay = 8 overtime hours x ($18/hour x 1.5)
Overtime Pay = 8 overtime hours x $27/hour
Overtime Pay = $216

Finally, add Rebekah’s regular pay and overtime pay together to find her gross pay for the week.

Gross Pay = Regular Pay + Overtime Pay
Gross Pay = $720 + $216
Gross Pay = $936

For more on calculating overtime, check out this step-by-step guide from the Sling Blog.

Manage your employees’ time with Sling

Offering shift differential pay (or not) is just one variable in a much larger workforce management strategy. How can you best execute this strategy and keep your team and your business organized? With help from Sling.

The Sling app is a suite of advanced tools that can help make managing shift differential and teams of any size as efficient and productive as possible.

Those tools include:

Advanced employee scheduling
Labor cost management
Integrated time clock
Comprehensive communication
Flexible task management
And much more

Try Sling for free today to experience firsthand how the software can help you get control of your shift differential pay and all of your workforce activities.

Then, for more business management resources, help scheduling your employees, and tips for leading a successful team, visit GetSling.com today.

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This content is for informational purposes and is not intended as legal, tax, HR, or any other professional advice. Please contact an attorney or other professional for specific advice.

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