How to Calculate Night Shift Differential Pay

What is night shift differential pay?

Night shift differential pay — also called night differential — is an increase in an employee’s pay rate during second or third shifts. You can pay the employees working these shifts an additional flat rate per hour or an additional percentage based on their wages.

Night shift differential pay applies to employees who don’t typically work night shifts. It’s not the same as “night pay,” which describes the wages you pay employees who usually work a second or third shift. For example, your overnight security guard, who always works 10 p.m. to 6 a.m., earns night pay. Your employee who typically works daytime hours — or first shift — but instead takes a later shift earns night differentials.

How do you calculate night shift differential pay?

You can calculate night shift differential pay in two ways: 

• Universal wage increase: Giving the same wage increase to all your employees
• Percentage-based wage increase: Giving your employees who work overnight a percentage of their standard wages

Here’s more information about each method.

Universal wage increase

Let’s say you ask your employees, Kevin and Jennifer, to work at night this week. You offer them an additional $15 per hour to complete their overnight tasks. Kevin normally earns $30 per hour, and Jennifer earns $35. Both hourly employees worked 30 daytime hours and 10 nighttime hours this week. Here’s how you’d calculate their night shift differential pay:

• Kevin: 30 hours x $30/hr + 10 hours x ($30 + $15)/hr = $900 + $450 = $1,350 total
• Jennifer: 30 hours x $35/hr + 10 hours x ($35 + $15)/hr = $1,050 + $500 = $1,550 total

Based on this calculation, you’ll pay $450 in night shift pay to Kevin and $500 to Jennifer. However, your total night shift differential value is just $300: $15/hr x (10 hours + 10 hours). This is the extra money you’re paying Kevin and Jennifer for night work. The remaining $650 represents wages you’d pay anyway: $450 + $500 – $300.

Percentage-based wage increase

Using the same employees and standard wages, let’s say you offer each employee a 10 percent wage increase for nighttime work. In this case, Kevin’s nighttime rate would be $33 per hour: $30/hr x (1 + 0.1), while Jennifer’s overnight rate would be $38.50 per hour: $35/hr x (1 + 0.1). 

With the schedules above, you’d pay the following total wages:

• Kevin: 30 hours x $30/hr + 10 hours x $33/hr = $900 + $330 = $1,230
• Jennifer: 30 hours x $35/hr + 10 hours x $38.50/hr = $1,050 + $385 = $1,435

In this case, you’re spending $3 per hour on Kevin’s night differentials and $3.50 per hour on Jennifer’s differentials. That totals $65 in night differentials ($3 x 10 + $3.50 x 10), which is substantially less than the $300 you would spend using a $15 universal wage increase.

The best payroll software for calculating night shift differential pay

The math underlying night shift differentials isn’t complicated, but it can quickly become tedious. The best payroll software can take care of this math for you while streamlining employee payments. Consider choosing a popular platform that includes HR features to help you calculate and pay accurate night differentials, as well as handle other employee needs. 

Here are some of the best payroll services to use for this purpose. 

Gusto

Gusto’s Simple service plan integrates with the best time and attendance software; its higher tiers include integrated time tracking. Either way, the platform makes calculating night shift differential pay seamless. You can customize your system to recognize night shifts between specific hours and apply a different pay rate to all work done at that time. To learn more about Gusto’s time-tracking functionality, read our full review of Gusto. 

ADP Payroll

ADP is a robust payroll platform that supports multiple pay rates, including night shift differential pay. You can either apply specific pay rates company-wide or only in certain locations or divisions that have night shifts. Read our in-depth ADP Payroll review to learn how managers can run payroll from a mobile app, computer or phone. 

Paychex

Paychex is one of the few payroll services that includes time tracking, which enables you to apply night shift differential pay without integrating a third-party solution. Our Paychex review explains how the Paychex mobile app allows employees to monitor their pay and access documents. 

When does night shift differential pay apply?

Night shift differential pay applies when employees are needed to work atypical hours. Chances are, certain seasonal demands or projects will sometimes require these unusual schedules. However, night differentials are a suggestion, not a legal requirement.

The federal Fair Labor Standards Act (FLSA) requires overtime pay (and, by extension, blended overtime pay), but it does not mandate night differentials. No federal laws require nighttime differentials. Most states and localities lack second- and third-shift differential pay laws as well, though you may want to consult a local expert to be on the safe side.

When is it best practice to offer night shift differential pay?

Night differentials wouldn’t exist if they didn’t benefit your business. It’s generally best practice to offer night shift differentials to your employees in the following situations:

• Pressing projects: When you’re starting a business, all-nighters are typical and even necessary. If loyal employees assist you with urgent projects that require night shifts, night shift differential pay shows your appreciation for their commitment to your company.
• Travel: Let’s say an employee works a typical 9 a.m. to 5 p.m. shift and then immediately takes a cross-country flight for a conference. They arrive at their hotel close to midnight, immediately go to sleep, and start work at 9 a.m. the next day. You might want to cover this employee’s travel time with night differentials to compensate them for their personal time.
• Holidays: Holidays can lead to overwhelming increases in demand, particularly for retail businesses. If you can’t find temporary employees for these occasions, you might need to ask some daytime employees to work other shifts. Your employees will likely be more amenable if you offer pay differentials as an incentive.

Do alternatives to night shift differential pay exist?

Theoretically, yes. You can choose to offer employees vacation time or PTO instead of differentials for their nighttime work. For example, if an employee works 20 nighttime and 20 daytime hours during a week when they would typically work 40 first-shift hours, you could give them an additional 20 hours of vacation time. This way, you don’t spend extra money but still show your appreciation.

If you’re looking for ways to reward employees for working night shifts when they typically work during the day, there are plenty — night differentials are just one suggestion.

Why should you pay night shift differentials?

Showing gratitude through night shift differential pay is more than a kind gesture; it benefits your business in the following ways:

• Night shift differential pay stabilizes employee morale. Most employees who work daytime hours don’t want to work at night. If anything, nighttime work is among the most significant ways to drain daytime employees’ morale (whereas a simple initiative like flextime improves employee morale). If you do not provide an incentive for this extra work, it can be a reason why employees quit as their morale hits new lows.
• Night shift differential pay helps employees. You may find that some daytime employees are eager to work extra hours or a different schedule for the extra cash. This money can help them pay bills or more quickly reach their savings goals.
• Night shift differential pay makes staffing easier. If you seek nighttime help without offering incentives, you’ll likely struggle to find willing employees. When your staff is eager to work, your business will be more productive.

If you make your employees feel appreciated for the work they provide, you will reduce turnover, keep your company productive, and boost morale.

Jennifer Dublino contributed to this article.