Differential Pay: Types and Methods

How does differential pay work?

A worker receives differential pay if they put in extra time or effort beyond their regular shift. Employers can compensate employees in rare circumstances or when working conditions are unfavorable with this form of premium pay.

The word “differential” suggests that the pay rate is higher than average. You can get differential pay as a percentage of your base salary or as a flat premium per hour or shift.

During the holiday season, for instance, differential pay might incentivize workers to work overnights to replenish inventory while still paying them a fair wage.

In order to motivate workers to put in extra hours or shifts, a differential pay rate needs to be substantial. A 3% raise, for instance, probably won’t be enough to entice a worker to take on unappealing shifts or activities.

Differential pay types

Companies compensate their workers using a variety of differential compensation structures. Among them are:

• The most prevalent form of differential pay is shift differential pay. Workers that put in extra hours, have unusual shift patterns, or work on holidays could get a bonus. Take the case of an employee whose regular shift ends at 5 o’clock, but who is suddenly asked to work from 3 to 11 o’clock. Despite the fact that it is not required by law, many companies implement shift differential pay to motivate workers to work through shifts that they would otherwise dislike.

• Pay for working on the weekend: If an employee is asked to work on the weekend when it’s not normally part of their plan, they may be able to get extra money.

• When workers are required or asked to perform a night shift that is not often part of their regular schedule, they may be eligible for night differential pay.

• The term “hazard pay” refers to the financial compensation that employees receive for performing unsafe or otherwise risky labor, such as working in difficult environments or with chemicals.

• When a person is required to work in a different location than their typical place of employment, they may be eligible for location pay.

• Workers who volunteer to put in extra hours on projects that other workers would rather not do get a bonus.

• City, state, and national wage gaps: many companies pay different amounts for comparable work in different geographic regions. Local rules and regulations, market prices, and cost of living factors all play a role in this. Take the British grocery company Lidl as an example; outside of London, entry-level salary starts at 10.90 GBP/hour. This amounts to about $13.15. Salary at Lidl begins at $15 per hour in the United States.

Methods for determining differential pay

Here we will examine a retail employee as an example. For the second shift (weekdays, 3–11 pm), their employer provides a flat premium of $0.95 per hour. This position has a base rate of $14. Here is the breakdown of the calculation:

• Pay rate: $14 per hour
• Hourly differential pay rate equals $0.95
• The difference rate per hour is $14.95 (give or take $0.95)
• Total earnings for an 8-hour workday, including overtime pay: $14.95 times 8 is $119.60

Employees in call centers are another such example. Paying $12.50 per hour, the first weekend shift runs from 7 am to 3 pm. Time slots 2–11 are available on weekends.

Since it allows them to leave sooner, most workers choose to work the morning shift. The business has decided to raise the standard rate of compensation for the second weekend shift by 17.5 percent.

In order to determine differential pay:

• Starting price: $12.50
• Divide $12.50 by 0.175 to get $2.19 as a differential pay rate.
• Differential hourly rate = $12.50 + $2.19 = $14.69
• For an 8-hour workday, including differential pay, the gross wages amount to $117.52.

For what jobs and businesses does differential pay exist?

Industries and occupations that rely heavily on hourly workers are more likely to use differential pay:

• Workers in the manufacturing sector (including those doing physical labor)
• Service to customers (customer support, contact centers)
• Service industry jobs (store associates and supervisors)
• Working in the construction industry (construction)
• Household tasks (cleaners, housework)
• Service industry (waiters, housekeepers, etc.)

In addition to premium pay for the second shift, which typically runs from 3 pm to 11 pm on weekdays, 63% of businesses give shift differentials for the third shift, which often runs from 11 pm to 7 am.

How much does a shift differential typically pay?

Seventy percent of companies that pay differentials utilize flat premium rates per hour for the 2nd and 3rd shifts on weekdays, according to an ERC poll. This is a common method of rewarding workers for second and third shifts on weekends; 68% of companies use it for the former and 65% for the latter.

Most companies pay their employees a percentage of their hourly base rate for holiday hours and double-shift weekends.

An employee’s hourly rate could be up to 20% of their base pay with a shift differential. The range of 10% to 15% is usual for shift differential rates. Paid time off for holidays can be as high as two hundred percent of the normal hourly rate.

Remember: With multiple forms of compensation, including overtime and differential pay, your payroll process can get convoluted. To lessen the likelihood of payroll mistakes, you can implement an HR or payroll solution.