The terms 'premium overtime' and 'differential pay' are sometimes used interchangeably. This is not a problem most of the time. However, the terms represent two different kinds of pay that do matter when it comes to calculating employee pay. Therefore, it is important that payroll department staff understand what premium overtime and differential pay actually are.
To explain the difference, we will rely on the definition of premium overtime pay as found in the Code of Federal Regulations (CFR). The definition of differential pay is not as solid, so we will use the most common definition in use today. If you have any questions about how either kind of pay may affect your payroll processing with BenefitMall, do not hesitate to contact us.
Premium Overtime Pay
In 29 CFR 778.115, federal law defines premium overtime pay as follows:
"Certain premium payments made by employers for work in excess of or outside of specified daily or weekly standard work periods or on certain special days are regarded as overtime premiums. In such case, the extra compensation provided by the premium rates need not be included in the employee’s regular rate of pay for the purpose of computing overtime compensation due under... the [Fair Labor Standards] Act."
In more simple terms, premium overtime pay is the extra pay given to an employee for working overtime. As an employer, you already know that you are required to pay nonexempt employees 1.5 times their regular rate of pay for all overtime hours worked. That extra half of the employee's regular rate constitutes the premium pay.
If you have an employee earning a standard rate of $10 per hour, you would pay $15 per hour for every overtime hour. The difference of five dollars between the two rates is the premium overtime pay. That's pretty simple, right? Now let's move on to differential pay.
The most common definition of differential pay is extra pay given to an employee for working certain shifts or on special days. As an example, a hospital may pay a differential rate of 10% to nurses willing to work the B shift. They may pay a 20% differential rate for working C shift.
A nurse earning $35 per hour during a regular A shift assignment would earn 10% more for working the B shift. That would amount to $38.50 per hour. The 20% rate for C shift work would amount to $42 per hour. That is simple enough to understand.
Differential pay gets confusing when it has to be used to calculate overtime pay. Let's say the B shift nurse works 50 hours in a given week, exclusively on the B shift. Her regular rate of pay is $38.50 per hour as a normal B shift worker. She would be paid time-and-a-half based on that rate. But what if she worked five overtime hours on the B shift and the other five hours on C shift?
Rather than paying different amounts of overtime based on shift differentials, the payroll department would first calculate the total amount of money earned before overtime is applied. That amount would then be divided by 50 to get the standard rate of pay for the pay period. Whatever number is returned by that calculation is the standard rate of pay used for calculating overtime.
Taken separately, overtime premium and differential pay are pretty simple to understand. Combining them together is another matter. If you are having trouble with either of these calculations on a regular basis, perhaps it's time to talk to one of our payroll professionals about outsourcing with BenefitMall.