Why Shift Differentials Can Lead to Class Action Lawsuits

Hundreds of employers are hit with litigation every year over unpaid wages, due to errors in calculating overtime when shift differentials are involved. Employers incorrectly assume that overtime is one and a half times an employee’s base hourly rate and that is not true when overtime and shift differentials are paid in the same workweek.

When an employee is paid a shift differential and overtime in the same workweek, the overtime rate must be based upon the employee’s regular rate of pay, a  weighted average of the two rates of pay and the number of hours worked for each. These regulations are part of the 1938 Fair Labor Standards Act and are incorporated into California Wage Orders.

Incorrectly managing shift differential wages regularly results in the underpayment of overtime premium earnings  leading to one of the most costly generators of employer litigation. In these cases the employee is not paid all wages due and that leads to penalties that can include:

  • Wage Statement Penalties
    • In California, the first incorrect wage statement results in a $50 fine. Every incorrect wage statement thereafter results in a $100 fine. These penalties are assessed on a per-employee basis—the maximum fine amount per employee is $4,000.
  • The Private Attorney General Act, PAGA
    • PAGA allows attorneys to collect for the state another $250.00 per incorrect wage statement, with no cap.
  • Wait Time Penalties
    • The penalty is measured at the employee's daily rate of pay and is calculated by multiplying the daily wage by the number of days that the employee was not paid, up to a maximum of 30 days. This does not mean that the wages continue for a 30-day period, but that the employee is entitled to up to 30 actual days' worth of wages.

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How do you calculate overtime pay if an employee works some shifts where they are paid a shift differential?

Let’s use an example to break down how shift differentials impact overtime calculations: Andrew is an X-Ray Technician. When he works the day shift he earns $15.00 an hour. Occasionally, he works the night shift, for which he is paid a 20% shift differential. This means he earns $18.00 an hour during the night shift.

Andrew is paid weekly, and this week Andrew worked 3 day shifts and 3 night shifts, for a total of 48 hours. 

His total pay for the week, including overtime, is calculated as shown below: 

Step 1: Calculate Regular Wages

Regular wages are all wages earned before overtime premiums are added. . 

  • 8 hours x 3 days x $15.00 (day shift) = $360
  • 8 hours x 3 days x $18.00 (night shift) = $432

Adding these together, Andrew earns $792 in regular wages before being paid overtime premium pay.

Step 2: Calculate the Regular Rate of Pay

The “regular rate” is used to compute overtime and double time premiums and is not always an employee’s normal hourly amount. The computation of an employee’s regular rate must include almost all forms of pay that the employee receives. For example, the following payments are included in the regular rate of pay:

  • Hourly earnings.
  • Shift differential earnings.
  • Commissions.
  • Bonuses tied to performance.
  • Piece work earnings.

The Regular Rate of Pay is a weighted average and is computed by adding all regular wages earning in a defined workweek divided by all hours worked.   used to compute overtime premiums. It is computed by dividing all regular wages by total hours worked. 

  • $792 / 48 hours = $16.50

So, while his base pay is $15 an hour, his regular rate of pay for the week is $16.50. This is the figure used to calculate overtime premium pay.

Step 3: Calculating Overtime Premium Pay

Now multiply Andrew’s number of overtime hours worked by the regular rate of pay, then by 0.5 (remember we have already calculated his regular wages).

  • $16.50 x 0.5 = $8.25
  • $16.50 + $8.25 = $24.75

$24.75 is the rate Andrew earns per overtime hour worked. 

Step 4: Calculate Total Earnings

For the sake of simplicity, use the regular rate to calculate an employee’s straight and overtime pay. Even though an employee earns two different base rates, trying to calculate non-overtime pay, non-overtime pay plus shift differential pay, and overtime makes for a lot of math. This can be simplified by simply using the regular rate and applying it to all non-overtime hours, and the result is the same.  In the case of Andrew, his pay for the week is calculated as follows:

  • 40 non-overtime hours x $16.50 regular rate = $660
  • 8 overtime hours x $24.75 overtime pay = $198

Andrew’s total gross earnings for the week come to $858.

You can find out more information about calculating wages in the California Department of Labor Standards Enforcement Policies and Interpretations Manual.  

When an employer finds they paid out incorrect wages, their most common questions are, “How did this happen?,” and “How do we prevent it from happening again?”

Facing wage and hour litigation can be a shock to many employers and they want to know how they became vulnerable. Identifying the root cause(s) of wage and hour non-compliance requires identifying What was done incorrectly AND How these vulnerabilities were able to materialize. This is best achieved by having experts complete an in-depth review of your HR compliance processes, policies, systems, education, documentation, and execution such as the HR Evaluation available from Employer’s Guardian.

Developing a comprehensive employer compliance program won’t guarantee employees won’t file a claim. That said, strong compliance programs reduce the frequency and severity of claims faced by employers. Assessing the strengths, weaknesses, opportunities, and threats associated with your current compliance infrastructure is the best place to start. At Employer’s Guardian, we call it an HR Evaluation.

Employer’s Guardian provides a true third-party review of your HR compliance processes, policies, systems, education, documentation, and execution called an HR Evaluation. We have decades of hands-on experience in managing the shifting compliance requirements and litigation trends faced by employers.  We use this knowledge and experience to evaluate the strengths and weaknesses of your programs.

Attorneys are the leading source of HR Evaluation referrals at Employer’s Guardian. The final report is detailed, outlines our findings, the applicable laws being assessed, and offers recommendations to shore up any exposures.     

Want to ensure your company is in compliance? Contact the experts at Employer’s Guardian! We’ll take an in-depth look at your company and pinpoint areas of exposure. Give us a call or fill out our online contact form today!

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