How to Correctly Calculate Shift Differentials and Overtime

September 22, 2022
Jerika Holton
August 10, 2022
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With the current inflation rate at 8.5%, our workforce is looking for ways to make extra money. We are amid “The Great Reshuffle” period where employees are leaving their jobs more than ever for a variety of reasons, one of those reasons including better pay. The Great Reshuffle has led employers across a wide range of industries to experience staffing shortages in healthcare and retail, as they try to fill the positions quickly as employees depart. Overtime and shift differentials are of great value to both employees and employers, employees have a way to make extra compensation to help them battle inflation, and employers can fill the gaps in their staffing needs by offering more compensation to their current employees. Let’s explore the difference between overtime and shift differentials, and how to accurately calculate both.

What is a Shift Differential?

A shift differential is extra money employees earn for working outside their normal working hours. Shift differentials can be a great incentive to get employees to work shifts that are not so popular, like night shifts or weekend shifts. Since shift differentials are not government mandated or required by federal law, there is no standard way to pay it, it is at your business’s discretion.  

Shift Differential Example

Here is an example of how shift differentials work.  

You have an employee who works 8-hour shifts and makes $15 an hour, and if they work the afternoon shift, they get a boost, and instead, they earn $18 an hour.

So, if the employee worked three-day time shifts, and two-afternoon shifts that total a 40-hour work week, the employee’s gross pay will be $648 for the week.  

What is overtime pay?

When hourly employees work more than 40 hours a week, with a few exceptions, they are entitled to overtime pay. Unlike shift differentials, overtime pay is government mandated so there is a standard for how it is paid. Overtime must be paid at least 1.5 times the employee’s regular pay rate or “time-and-a-half”, there is no maximum on how much you pay employees for overtime by federal law. The most common calculation used for overtime is base rate x 1.5 x hours worked, this calculation works for most circumstances because many workers make one base rate that does not change. Since there are circumstances, such as shift differentials or an employee working in a department that has a different base rate, the IRS standard method for calculating overtime is OT= (Base Rate + (0.5 x RROP)) x HoursWorked.  

Who is entitled to overtime pay?

  • Exempt Employees: Exempt employees have a base salary for the jobs they perform that is set by federal law, the salary cannot be below $684 a week, which equals $35,568 annually. Exempt employees are exempt from overtime pay.
  • Non-exempt employees: Non-exempt employees work for an hourly wage, that does not fall below the federal minimum wage payment of $7.25 per hour. If non-exempt employees work more than 40 hours, by federal law, the employer must pay the employees’ overtime.

How to calculate overtime:

OT Pay Calculation = (Base Rate + (0.5 x RROP)) x OT HoursWorked  

Base Rate: The pay rate used during the base part of the calculation

OT HoursWorked: The number of overtime hours worked

RROP: This value is a sum of all earning codes and their specified rates multiplied by hours worked for each of those rates in a work week, which are then divided by the total number of hours worked for the total work week. It is important to note that only codes marked as contributing to RROP will be considered for this calculation.  

Example:

In an individual work week, a restaurant employee works 20 hours making $15/hour as a server and 20 hours making $18/hour as a bartender. The employee has reached 40 hours of work for the week, making all new earned hours eligible to be included in OT calculations. The employee then works another 10 hours making $15/hour and 10 hours making $18/hour. This now equates to 20 hours making $15/hour, 20 hours making $18/hour, 10 hours of OT on the $15/hour rate, and 10 hours of OT on the $18/hour rate. It should be noted that since the employee is working in two different positions with different rates of pay, base pay must be calculated first.  

The calculation process will be as follows:

  1. Calculate Base Pay

Base Pay = (20h*15) + (20h*18) = $300 + $360 = $660

  1. Determine RROP

RROP = ((20h*15) + (20h*18) + (10h*15) + (10h*18)) / (20h+20h+10h+10h) = $16.5/hour

  1. Determine Overtime Pay for Code / Rate A

Overtime Pay for Code / Rate A = (Base Rate + (0.5 x RROP)) x HoursWorked = (15 + (0.5 x 16.5)) x 10h = $232.50

  1. Determine Overtime Pay for Code / Rate B

Overtime Pay for Code / Rate B = (Base Rate + (0.5 x RROP)) x HoursWorked = (18 + (0.5 x 16.5)) x 10 = $262.50

  1. Determine Total Overtime Pay

Total Overtime Pay = Overtime Code A + Overtime Code B = $232.50 + $262.50 = $495

  1. Calculate Total Pay

Total Pay = Base Pay + Total Overtime Pay = $660 + $495 = $1,155

In conclusion, the calculations for shift differentials and overtime seems complex if you must manually calculate them. If overtime calculations are not done correctly, you will fall out of compliance with federal law, and you may face claims from employees who were paid incorrectly. Greenshades, allow you to set up new earning codes, then we automatically apply the shift differentials to the hours worked and we calculate overtime using the equation set by the FLSA.

 

For more information about shift differentials and overtime, or if you're processing your payroll manually and want to ensure your calculations are correct; contact sales, sales@greenshades.com to learn about Greenshades Payroll Solutions.

Visit the website to keep up to date with blogs just like this one, go.greenshades.com/blog

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