What is differential pay?
Differential pay is compensation paid to employees for working outside their normal hours or taking on additional work. It is a useful pay tool for employers to compensate employees in unusual circumstances or unfavorable working conditions.
The term "differential" indicates that the pay is at a higher rate than normal.
For example, differential pay could motivate employees to work during the holiday season to restock the shelves overnight while providing fair compensation.
A differential rate has to be significant enough to encourage employees to take on the shift or additional work. For example, a 3% increase will likely be too low to motivate an employee to take on undesirable tasks or shifts.
Types of differential pay
The most common type of differential pay is shift differential, usually based on unconventional working hours, such as holidays or weekends. Although not mandated by federal law, many employers use shift differential pay to encourage employees to take on undesirable shifts.
There are additionally different types of differential pay, including:
- Shift differential pay: The most frequent type of differential pay. Employees working later than usual or in uncommon shift patterns may be eligible for differential pay. For example, an employee usually works from 8 am to 5 pm but is asked to work from 3 pm to 11 pm. Shift differential pay could be offered to encourage the employee to work the shift hours.
- Weekend differential pay: Employees may be eligible for differential pay if they are asked or volunteer to work on a weekend when it is not part of their usual work schedule.
- Night differential pay: Applies when employees volunteer or are asked to work a night shift that does not usually fall within their work schedule.
- Hazard pay: Compensation for when an employee works in hazardous circumstances (working in tough conditions or with chemical substances) or when they perform dangerous work.
- Location pay: For instances where an employee needs to work in locations that differ from their usual location.
- Additional project work: Paid to employees who take on additional work that other employees don't want to complete.
How is differential pay calculated?
Let's take the scenario of employees in a call center. The first shift is from 7 am to 3 pm and pays $12.50 per hour. The second shift is from 6 pm to 2 am.
Most employees prefer to work the first shift so they can get home earlier. The company decides to implement a pay differential for the second shift at a 17.5% increase from the usual rate.
To calculate differential pay:
Current rate of $12.50 x differential rate of 17.5% = $2.19.
So, the hourly differential rate would equal $12.50 + $2.19 = $14.69.
Which jobs and industries use differential pay?
Some sectors and jobs that typically implement differential pay are:
- Manufacturing (such as manual laborers)
- Retail work (call center, shopkeepers)
- Construction (builders)
- Domestic work (cleaners, housekeeping)
- Hospitality (waitstaff, cleaners)