How To Set Up Shift Differential Compensation

Shift Differential Compensation comes in many different flavors.  One company that I know of simply paid their employees an extra hour for working the 12:00am shift to 8:00am shift. However, there are a few basic steps that are normally followed by most industries.

  1. Deciding what are normal business hours: Normal can mean anything to everyone, but traditionally 8am to 5pm is what is considered to be normal business hours.
  2. Now that you have defined normal business hours, you have a basis to decide what sort of differential compensation to offer.  Most companies calculate a fraction of the hourly or weekly wage and add that to the hourly wage, depending upon which schedule is to be worked. Example: let's take an hourly wage for normal business hours of $10.00 per hour; at this point the company offers an hourly shift differential compensation of 10% for hours worked between 4pm and 12am, which would make it $11.00 per hour worked between what is normally called the "swing" shift. Obviously, the percentage and rate ratio will increase for hours worked from 12am to 8am.

But what if the differential applies to hours worked on the weekend or during holidays?

Hours worked that are not traditionally scheduled for are dealt with in many different ways depending on the industry and type of pay structure.  Some companies use a variation on the above or calculate a weekly earned income for differential compensation.

Calculating weekly earned income involves two steps.

  1. What is the average amount of hours worked per week by said employee? Example: full/part time or seasonal. Traditionally, full time equals 40 hours per week, where part time can be anywhere from 15 to 30 hours per week.
  2. After determining the amount of hours worked per week, most companies use a smaller fraction of the weekly income earned as compensation for working out of scheduled hours. Example: Again, let's start with an average hourly income of $10.00 per hour. $10x40=400 average income per week. Most companies pay between 1% to 5% of the weekly income for hours worked outside of normal scheduled hours; which in this case taking 1% would equal $10.00 plus the differential compensation payment of $4.00 making it a total of an hourly wage of $14.00.

Naturally, there are several laws that govern overtime, and in some local and state cases laws and regulations govern which hours require differential compensation. It is always best to consult with local employment boards before instituting any form of alternative compensation.


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