How to Calculate Night Shift Differential Pay

How to Calculate Night Shift Differential Pay

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If you intend to operate your company 24/7, you must be ready to use the pay differential for the night shift. This makes the night shifts more appealing and tolerable, as most employees prefer working the daytime. So, how will you calculate the night shift differential pay?

You calculate the night shift differential pay by multiplying the hourly rate with an agreed percentage and the total number of night shift hours. The rate is usually an agreement between an employer and employee, but according to the night differential pay law, it should be at least 10%.

This article will help you understand night shift differential pay, the formulae for calculating it, and provide a real-life example. It’ll also give you theories that justify night shift differential pay. Let’s dive in.

What Is a Pay Differential?

Pay differential refers to an additional amount an employee receives above the regular wage for working in uncomfortable situations. Essentially, the added amount functions as compensation for working despite unfavorable circumstances.

The pay differential amount relates directly to the factor making work unfavorable. Some of the factors that may give rise to pay differential include:

  • Working hours
  • Product manufactured
  • Company location
  • Working environment

While the labor pool is always full, most laborers are usually reluctant to compromise their safety and comfort for a job. As a result, most jobs with demanding requirements end up in low demand.

However, the pay differential helps to make such positions more enticing because it would mean earning more. It also motivates the employees by showing them you recognize the variances in working conditions.

Types of Pay Differential

  • Shift differential: It’s additional pay given to employees for working undesirable hours, usually at night. Night shift hours, also known as graveyard shift, start from 11:00 p.m to 7:00 a.m.
  • Hazard pay differential: This is the additional wage a worker receives for accepting duties with physical hardships that could result in injury or death. Examples of hazards are excess heat, light, darkness, and chemicals.
  • Location pay differential: Employees receive this type of pay when they work in a location with a high cost of living. The salary for such a job is usually lower in places where the living standards are not high.

Pay Differential vs.Overtime

Though pay differential and overtime pay may seem similar, they’re not. 

Overtime is legal and occurs when you work above the regular hours. However, the pay differential is not compulsory and varies from company to company. 

You can qualify for pay differential and overtime when you work the night shift for more than 40 hours.

Night Pay vs. Night Shift Differential Pay

Night pay is not the same as a night shift differential. Night pay is for employees who permanently work at night. On the other hand, night shift differential pay is for employees who usually work during the day but sometimes have to work at night.

For example, a doctor who contracts for night shifts receives night pay. But, the one who works during the day and has to work at night due to a change in schedule gets a night shift differential.

How Is Shift Differential Payment Calculated?

The Fair Labor Standards Act (FLSA) lacks provisions for night shift differential. As such, the employers decide the night shift pay rate. 

Shift differential is calculated as a flat amount or as a percentage of normal pay. Since this differential is not covered by the Fair Labor Standards ACT, it is generally up to employers to decide the extra pay.

There are two ways to calculate the pay differential for the night shift.

1. As a Percentage for the Hourly Rate

In this method, you must first determine the percentage to pay per hourly rate. After that, you multiply the ratio by the hourly rate and the number of hours worked on the night shift.

Shift differential = Hourly rate × Agreed on percentage × Total night hours worked. 

Night shift covers every hour between 10:00 p.m to 6:00 a.m. Though the employers decide the percentage to pay, it should not be below 10%

Real Life Scenario

Assume you are a night guard earning a basic hourly rate of $20. However, you qualify for a graveyard shift pay of 10%. How much will you make if you work from 10:00 p.m to 6 0’clock in the morning from Monday to Friday? 

Calculate the:

  • Number of night shift hours = 8 hours
  • Night shift differential = $20 × 0.10 × 8 hours = $16
  • Basic pay per day = $20 × 8 = $160
  • Total pay per day = $160 + $16 = $176
  • Total pay for five days = $176 × 5 = $880

2. As a Dollar Amount per Hour

In this scenario, you set the extra amount you’ll pay on top of the average hourly rate in dollars. For instance, if the hourly rate is $20, you can add a fixed $10 for working the night shift. So, an employee earns $30 per hour. 

However, while preparing payroll, you should account for the hourly and night shift rates separately and then aggregate them to find the total salary.

You determine the shift differential as follows:

Shift differential = Total night shift hours × Extra dollar amount per night shift hour

When you use the dollar amount approach, the night shift rate remains fixed for everyone working irregular hours. 

Real Life Example

Let’s assume you’re a healthcare professional, and your hourly rate is $50. Due to staff shortage at night, the hospital offers you an additional $15 to work at night from 10:00 p.m to 6:00 a.m. How much will you earn in a week working from Monday to Friday?

Determine the:

  • Number of hours between 10:00 p.m and 6:00 a.m = 8 hours
  • Night shift differential = 8 hours × $15 = $120
  • Base pay = 8 hours × $50 = $400
  • Total weekly pay= $400 + $120 = $520
  • Weekly pay = $520 × 5 = $2600 

Note if you don’t need to get the differential and simply want to know how much you earn you can simply add the extra hourly pay to your usual pay and multiply by the number of hours you plan to work.

For example, using a the example above and a 40-hour work week:

  • Total Hourly Pay = $15+ $50 = $65
  • Total Weekly Pay = $65  per hour x 40 hours = $520

Shift Differential and Overtime 

According to the FLSA, an employee should work 40 hours per week. This gives room for 8 hours of work and 8 hours of rest daily. If you work more than 8 hours daily or 4o hours weekly, you qualify for overtime pay irrespective of the role.

The amount paid for overtime is 1.5 times your hourly rate. You’ll earn more on pay differential and overtime if you work night shifts. 

Let’s apply overtime to the real-life scenarios above to learn how to calculate.

Example

Assume you are a night guard earning a basic hourly rate of $20. However, you qualify for a graveyard shift pay of 10%. How much will you make if you work from 10:00 p.m to 6 0’clock in the morning from Monday to Saturday?

If you work 8 hours from Monday to Saturday, the total hours you’ll have worked in a week are 48. Which means you have worked overtime for 8 hours. 

You calculate the total amount per week as follows:

Total pay per week = Basic pay + Shift differential + Overtime

  • Number of overtime hours = 8 hours
  • Overtime pay per hour = Hourly rate × 1.5 ($20 × 1.5 = $30)
  • Overtime pay for 8hours = $30 × 8 hours = $240
  • Total pay per week = Basic pay per week + Shift differential per week + Overtime 

We had calculated the basic weekly pay and shift differential, so we’ll add the amounts as follows:

  • Total weekly pay = ($160 × 5) + ($16 × 5) + $240 = $1120

Theories Supporting Pay Differential

  • Labor mobility. Employees have occupational mobility and can shift from one job to another. If a job is unfavorable or attached to risks, workers would quickly drop it for a safer one. So, if you’re an employer, you must use a differential rate to retain employees.
  • Labor market information. Most job seekers prefer working during the day, which brings a labor deficit for night workers—the wage rate increases when the demand for night workers is high, and the supply is low.
  • Utility maximization. According to this theory, job seekers always seek to maximize satisfaction, not income. Employees would settle for a job with low pay but pleasant working conditions. However, with a high cost of living, some employees would compromise satisfaction for a higher wage.  

Does Night Shift Differential Rate Change Payroll Processing?

Implementing night shift pay in your business might be challenging if you’re doing it for the first time. However, it only calls for a little organization to stay on track of employees’ shift hours. Maintain a basic wage and shift rate record column and only aggregate during payment.

Night shift differential does not affect payroll processing significantly. Generally the shift total is combined with the regular total and is taken as the employees total taxable income. 

Final Thoughts

You’ll need employees to fill night shift positions to keep your business operating in a 24/7 economy. The only way to make such a position appealing is using night shift differential. You can determine it as a percentage of the hourly rate or a dollar amount. Whichever you choose, it’s crucial to keep good payroll records to help you calculate pay differential fairly. 

Sources

About The Author

Nathan Brunner
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Nathan Brunner is a mathematician who cares about the job market.

He is the owner of Salarship, a job search engine where less-skilled candidates can find accessible employment opportunities.