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Shift Differential Policies: Exploring the Options

written by: N. Plowman•edited by: Michele McDonough•updated: 5/31/2011

Many companies use shift differential policies to attract and retain qualified employees to work undesirable hours, but fail to implement the most effective policy. This article identifies what a shift differential is, different types of shift differential policies, and the pros and cons for each.

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    The Significance of Shift Differentials

    When people think of shift differential policies, typically only one comes to mind – the standard premium that is added to an employee’s base compensation rate for hours worked between 8:00 p.m. and 6:00 a.m. However, there are a variety of shift differential policies available to businesses who want to compensate employees for working undesirable or flexible hours.

    A shift differential policy is highly recommended for businesses in customer service and manufacturing industries because of the extended hours of operation that must be staffed. Shift differentials provide an opportunity for businesses to entice well-qualified and skilled employees to work undesirable and/or flexible hours to ensure all hours of operation are staffed with the most qualified and trained employees.

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    Differences Between Shifts and Schedules

    When evaluating different shift differential policies, the first thing to discuss is the difference between a shift and a schedule. A shift often refers to the time of day an employee works at one point in time. There are three standard shifts; however, a company can specify other shift policies and distinctions, as appropriate for their business needs. Regardless of the shift distinctions, businesses must document these distinctions and implement them consistently for all non-exempt employees (Exempt employees are also eligible for shift differentials, but this is less common because they are typically paid a salary rather than hourly.).

    • Clock First Shift—The first shift is a standard day shift that typically spans between the hours of 8:00 a.m. and 4:00 p.m. According to the Bureau of Labor Statistics, for an employee to be considered a first shift worker, at least half of his or her hours must fall between these hours.
    • Second Shift—The second shift is an evening shift, where a work period begins in the late afternoon or early evening. Most second shifts end between 11:00 p.m. and midnight.
    • Third Shift—The third shift is also referred to as the night or graveyard shift, and it typically starts around midnight and runs until the first shift employees start in the morning.

    The second concern, when discussing shift differential policies, is an employee’s typical schedule. A schedule differs from a shift in such that the schedule identifies an employee’s typical expectation or pattern of work. These agreed upon patterns or expectations are often discussed upon hire and can include:

    • Fixed Schedule—An employee works the same shift each week for long periods of time.
    • Rotating Schedule—An employee works one shift for a short period of time, such as a pay period or month, before switching to another shift for the same period of time.
    • Flexible Schedule—An employee works all shifts as needed and directed by the scheduling manager.

    Image Credit: morgueFile.com/imelenchon

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    Types of Shift Differential Policies

    Now that the distinction between a shift and a schedule is clear, the different types of shift differential policies can be explained. Generally speaking, second and third shifts pay higher rates than the first shift, and rotating and flexible schedules are compensated more than fixed schedules. The following list identifies different shift differential policies that a business can implement, along with the pros and cons for each.

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    1. Fixed Premium for Second and Third Shift Hours

    The most common shift differential policy is when companies pay employees a premium for hours worked during the second and third shift. A company can pay the same premium for both shifts, or the premium can be offered in a tiered approach, wherein the second shift premium is lower than the third shift premium.

    Pros

    • The premium rate is only applied towards those hours that qualify (fall between specified time periods).
    • The premium rate is fixed for all employees.

    Cons

    • This policy does not account for individual differences in schedules, base rates, and responsibilities.
    • This policy requires a close observation of hours worked during specified time periods.
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    2. Flexible Premium for Second and Third Shift Hours

    This policy is very similar to the first policy; however, companies that implement this policy account for individual differences in schedules, responsibility levels, and base rates. A company typically negotiates with the employee the premium that it will pay, and it is often dependent upon the scheduling expectations and amount of base rate the employee earns.

    Calculator Pros

    • The premium rate is individually-driven, which can increase employee satisfaction and morale.
    • The premium rate is negotiated, which can be a cost-saving mechanism for companies.

    Cons

    • The policy is advanced and requires a sophisticated time tracking system, usually one where employees clock in and out of a computer.
    • This policy can lead to employee resentment and unfavorable working relationships if one employee learns of another employee’s higher premium rate.

    Image Credit: morgueFile.com/cohdra

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    3. Fixed Premium for Rotating and Flexible Schedule Employees

    This policy is similar to the first policy; however, a company compensates an employee for agreeing to work a rotating or flexible schedule. Because this often requires more flexibility on an employee’s part, the company offers a fixed base rate that is higher than the employee would receive if hired to work a fixed schedule.

    Pros

    • The company can better estimate payroll operating costs.
    • The company can better adjust to staffing needs without using temporary staffing agencies because a regular employee is available to work flexible shifts and schedules on short notice.

    Cons

    • When the employee works a standard shift, the company still has to pay the employee a higher rate (than what other employees working a first shift and/or fixed schedule are earning).
    • The employee can get burnt out if excessive scheduling and shift variations occur, and the employee can become aggravated if the schedule is not communicated well in advance (for extracurricular planning purposes).
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    4. Flexible Premium for Rotating and Flexible Schedule Employees

    In this shift differential policy, a company pays an employee a higher base rate for agreeing to work a rotating or flexible schedule; however, the employee is also still eligible for a shift differential premium. The shift differential premium is typically lower than the standard premium because the employee is already earning a higher base rate for working a non-fixed schedule.

    Pros

    • The company does not have to pay a significantly higher schedule premium, but retains the flexibility to react to immediate staffing needs.
    • The company can assign a rotating employee to a first shift for a long period of time without having a significant increase in payroll expenses, comparative to other first shift employees.

    Cons

    • This policy requires a well-documented shift differential policy and a sophisticated time keeping system.
    • This policy requires significant planning and analysis on behalf of scheduling managers.
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    References

    The Bureau of Labor Statistics, Shift Work Pay Differentials In Manufacturing: Glossary of Shift Terms, http://www.bls.gov/opub/mlr/1985/12/art6full.pdf.