Employee Unpaid Time Off: Tips, Facts & Legal Obligations

Unpaid time off can be tough to manage. It includes any absence from work not covered by existing employee benefits such as sick leave, paid vacations, and paid time off.

Although outside of FMLA, there is not necessarily any legal obligation to agree to unpaid leave, many companies offer a leave of absence in the event of exceptional circumstances such as moving house or attending a funeral. 

In this post, we will discuss what an unpaid leave of absence is, and how offering it to employees could benefit your company.

Also, we will look at employee eligibility, legal issues, and unpaid time off laws. We will also share a few tips for creating an effective absence management policy and answer a few frequently asked questions.

• What is Unpaid Leave?
• PTO vs. Unpaid Time Off
• Part Time vs Full Time
• Time Off Calculations
• Applying For Unpaid Leave
• Exempt Employees
• Unpaid Leave and Employee Furlough
• ✅ Time off Management Software
• Requesting Time Off from Work Laws
• Unpaid Time Off Policy Samples
• UTO Essential FAQs

What is Unpaid Time Off?

Employers may pay employees for time off taken as part of their paid time off (PTO) policy. Many organizations will offer accrued or lump sum paid leave for vacation, sickness, or medical leave. If an employee is absent for any other reason, it is often up to the company to decide whether the time will be paid or not.

Employers may offer unpaid time off (UTO) in addition to paid time off. There are three main avenues through which employees receive unpaid time off:

Unpaid time off policy

Employers may develop an unpaid time off policy to support employees with more flexibility. They may offer UTO to hourly workers, part-time employees, or the entire staff.

Each organization’s UTO policy may differ. Some may stipulate that employees must use all of their paid time off before they can start to use unpaid time off. Some may insist that employees seek coverage from FMLA in order to be eligible for UTO.

Family and Medical Leave Act

Even if a business does not offer unpaid time off, employees will be able to claim unpaid leave through the Family and Medical Leave Act (FMLA). First passed in 1993, this law provides certain employees up to 12 weeks of unpaid, job-protected leave a year, with preserved medical benefits. This time off can be used:

• for the birth of a child
• in the case of the placement an adoption or foster child
• to care for an immediate family member with a health condition
• in the case of serious health condition on the part of the employee

In order to qualify for this leave, employees must have worked for their employer for at least 12 months, at least 1,250 hours over the past 12 months, and work at a location where the company employs 50 or more employees within 75 miles.

Various states, such as California, Connecticut, Hawaii, Maine, Minnesota, New Jersey, Oregon, Rhode Island, Vermont, Washington and Wisconsin, as well as Washington, D.C. also have their own versions of FMLA. These laws may offer more UTO for employees residing there.

Furlough

A furlough is a mandatory leave of absence and is usually expected to be temporary. Furloughs may be used when an employer does not have enough cash for payroll (for example, government shutdowns due to lack of budget approval) or when there is not enough work for all employees. Employers may reduce employee hours in order to avoid terminating employees.

Paid Time Off vs. Unpaid Time Off

Personal time off or Paid time off (PTO) refers to time away from work that is compensated by the employer. A PTO policy clearly outlines guidelines for requesting time off. It details when employees can request PTO, what the process is, and if there is a limit (such as a maximum of two days per year for moving house). 

Employees may request unpaid time off (UTO) for the following reasons:

• To care for dependents
• As an extension of parental leave
• To attend a course/professional development
• As a career break
• For voluntary work
• To carry out public duties such as jury service
• New employee relocations, or time off to move house
• Leave related to domestic violence
• Jury duty in certain states (although most require it to be paid time off)

Employees may also use time in lieu, and use extra hours to make up for time off taken.

How Does Unpaid Time Off Work?

Unpaid time off works differently depending on your company’s policies and the type of contract that an employee has.

However, the Affordable Care Act (ACA) defines part-time workers as employees who work fewer than 30 hours per week. Part-time positions usually consist of fewer responsibilities, and more limited benefits, including paid time off, although this can vary by company.

Generally speaking, distinguishing full-time vs. part-time employees comes down to the benefits you offer. 

Full-time employees are more likely to receive the following benefits:

• Vacation time
• Paid Time Off
• Unpaid Time Off benefits
• Health insurance
• Employer retirement plans
• Overtime pay for non-exempt employees

As a company, you may decide to limit your PTO policy to full-time staff.

If that is the case, then you need to outline this in your time off policy. You also need to clarify whether part-time employees are entitled to request unpaid time off work, or whether this benefit will be limited to full-time staff only, too. 

✅ Download our PTO accrual calculator

How to Calculate Paid and Unpaid Time Off for Salaried Employees

Payroll calculations for time off paid and unpaid can be confusing. As a company, you need to establish calculations for all absences, including sickness, vacations, UTO, and PTO.

If a non-exempt employee takes an unpaid leave of absence, the number of days they are absent from work needs to be reflected on their payslip.

As non-exempt employees work on an hourly basis, usually managed with timesheets, and they are usually not entitled to PTO, then adjusting their wages and payslip for unpaid time away from work should be pretty straightforward.

Time Off Calculations for Exempt Employees

In the case of exempt employees, this can be a little more complicated. If your company has a PTO policy that covers the absence, then no adjustments need to be made.

However, if you decide that time off will not be paid by your company then you have a few options.

You might decide to enforce the use of accrued time or vacation days for absences due to personal reasons, or you might decide that absences of this type will be classes as Unpaid Time Off. 

In this case, in the event of an absence, you would need to calculate the employee’s hourly rate by dividing their gross salary by the number of hours worked each month.

You would then need to calculate the actual hours worked in that specific month, then multiply it by the employee’s calculated “hourly rate”. This adjusted gross amount would then be subject to the usual tax deductions.

Keep in mind that when an employee works fewer hours and earns lower wages, their tax liability decreases.

How Can Employees Apply for Unpaid Time Off? 

If you have decided to include an unpaid leave policy in your internal procedures then you need to clearly define the process for applying for unpaid time off.

Your policy should address how employees can request time off, how much notice they need to give, how many days they are entitled to in a given period, and what happens if two people from the same department request UTO at the same time.

As a guide, the general process should be as follows:

1. An employee submits a written request for unpaid time off, within the required notice period. This would usually be done through a direct manager or supervisor and using the process or a system defined in the absence or time off policy.
2. The manager or supervisor consults with HR and/or department heads. The impact of the absence is assessed (will it cause staffing or production issues?)
3. The manager or HR approves or denies the request. Requests are prioritized based on a first-come, first-served basis.
4. The employee ensures all their duties will be covered during their absence, arranging cover and/or training if necessary.

Want an easier option? Use HR software with time off management features. Approving or denying time off requests will be a single click, and calculating wages and hours worked will be much easier.

Can an Employer Deny Unpaid Time Off?

In many cases, unpaid time off will only be granted if all accrued time has been used up. Exceptions to this can include:

• Disability leave
• Parental leave
• Leave related to domestic violence, sexual assault, or stalking
• Leave designated as FMLA
• A PFML leave of absence (Paid Family and Medical Leave)

Make sure you clearly define all this information in your internal policy.

Unpaid Time off for Exempt Employees

Before you write your policy, you also need to establish if your employees are exempt or non-exempt.

Asking the question of whether unpaid time off for exempt employees is going to be key.

Under the FLSA, an employee is considered exempt if they are paid a salary and receive a minimum of $455 per week. An employee is also considered exempt if they perform executive, administrative, or professional duties.

Whilst exempt employees receive a full salary for any week in which they work regardless of the hours or days worked, non-exempt employees receive an hourly wage so they only get paid when they work. This means that any time off should, theoretically, be paid for exempt employees.

If time off is not paid, a company runs the risk of contravening paid time off laws such as the FLSA. Often, a company will insist that exempt employees used accrued time and vacation days to get around this problem. The Department of Labor (DOL) favors this option. 

Unpaid Leave and Employee Furlough

Employee furlough is a temporary, involuntary leave of absence. Furloughs are most commonly used in the seasonal industry to allow a company to close business during quiet periods.

However, they have become common practice in many other sectors around the world since the start of the current Covid-19 pandemic.

A company can furlough its employees for days, weeks, or months, and employees usually return to their positions after the furlough period has ended.

Most employees that are furloughed do not get paid, but they do keep employment benefits such as health insurance. Many companies use furloughs as temporary cost-saving solutions that are an alternative to permanently laying off employees.

Requesting Time Off from Work Laws

Generally speaking, it is up to you as the employer to decide whether employees are offered paid and/or unpaid time off. However, there are certain situations where a company is legally required to abide by the employment laws, at a state or federal level, to authorize time off. 

Here are a few examples of employment and wage and hour laws:

• The Fair Labor Standards Act (FLSA) does not require payment for time not worked in the private sector, such as vacations, sick leave or federal holidays. These benefits are provided at the discretion of each company. 
• The Family and Medical Leave Act (FMLA) requires companies with a staff of over 50 to give employees unpaid time off for intermittent leave, or to care for a family member. If an employer qualifies for FMLA, employees can take up to 12 weeks of unpaid time off work.
• Federal law requires federal government employers to allow their employees to take paid/unpaid time off on designated holidays such as New Year’s Day and Memorial Day. 
• Employees that attend jury duty are protected by most states. And in states such as  Massachusetts, Nebraska, and New York, employees must be paid for their time off. 
• Maine passed a new sick leave policy in 2019 to cover paid sick leave and other personal time off. It will require companies with a staff of over 10 to provide employees with paid time off for any reason. The new law takes effect on January 1, 2021, and it means employers in Maine may no longer be able to offer unpaid time off to employees.  

Learn more about HR Legal Issues & HR Law

Unpaid Time off Policy Sample for Small Business

Research has shown that employers with detailed time off policies experience lower levels of employee absence from sickness, vacation, and personal days. 

In a nutshell, company culture with clear guidelines for taking time off, whether paid or unpaid, fosters an environment with increased employee motivation, wellness, and loyalty.

Using unpaid time off policy samples to get you started is a great way to speed up the process of managing these requests.

However, before offering employees unpaid time off, you need to know if you legally can. And whether you decide to offer employees UTO, PTO, or both, you need to have a clear absence policy in place. 

The unpaid time off policy should specify:

• If you offer paid and unpaid leave. If you offer both, you need a separate policy for each category.
• Which employees have access to paid and unpaid time off. For example, if you are offering PTO to some employees (full-time employees) and UTO to others (part-time employees).
• The number of unpaid days employees can take.
• How employees can request time off.
• Whether there is a cap for paid and unpaid days away from work.
• What happens when an employee reaches that cap (for example, if an employee uses up their allocated PTO, are they entitled to UTO?).
• How employee hours and absences will be tracked (access cards, timesheets, attendance software, etc.).
• If PTO and UTO will affect an employee’s attendance record.

If you use employee attendance tracker software you can integrate your policy to help streamline your processes. It is important that you choose the best PTO Tracking Software.

For example, if your policy defines how many days off can be taken each year (paid and/or unpaid) then you can share this information with employees through the software. This could reduce potential conflict and make employees accountable for their absences.

✅ Download our time off tracker template

Essential Unpaid Time Off FAQs 

Here are a few answers to common questions. Let us know in the comments if you have any other questions.

Do I need an unpaid time off policy in my company?

Whether you decide to pay employees for time off is up to your company.

Although there is no legal obligation, many companies decide it is good practice under certain conditions. If you do decide to offer unpaid time off, then you need a clear UTO policy that sets out your internal guidelines and procedures.

How much time off should new employees receive?

In the U.S., most employers give new employees an average of ten paid days of time off per year (once they have completed their probationary period). If you offer PTO, you need to establish whether you will allocate days at the start of each year, or if employees must accrue them.

How far in advance should employees request time off?

Again, this will depend on your company’s time-off policy and the process for requesting time off.

Keep in mind that the more notice you require, the longer your managers will have to assess the impact of the absence and approve or refuse the request. 

What if an employee reaches the cap for paid time off?

If you have a PTO policy then you need to decide if there is a limit to how many days off an employee can request. And if they reach their PTO cap, will they be entitled to UTO? Or will they have to take it from their vacation days or accrued time? 

What is the best way to manage time-off requests?

You can significantly improve how you manage employee time off requests by using either free human resources templates or with a time off management software. Simplify paid and unpaid time off management with Factorial.

Written by Cat Symonds.