Is unpaid time off a bad idea for employers and employees? What are the downsides and advantages for businesses and their workers?
According to the US Bureau of Labor Statistics, 11 days is the average number of vacation days for private industry workers who have worked for one year. It’s 13 days for public sector employees.
The numbers show that workers need unpaid leave to balance time needed off work to handle personal situations. Thankfully, some laws mandate employers to approve weeks of unpaid time off in specific circumstances.
In this article, we’ll cover all you need to know about unpaid time off.
We’ll explain everything from calculating UTO to laws governing unpaid time off.
What is Unpaid Time Off?
Unpaid time off refers to short or long work breaks employees take without pay. It’s also called unpaid leave.
It is seen as the opposite of paid time off (PTO), which involves employees receiving compensation when they’re away from work.
Most employees take unpaid time off when they want to go on leave that is not covered in their PTO package. The UTO could be due to:
- A serious medical situation
- Family emergency
- Parental leave for childbirth or adoption
- An employees’ (or their spouse’s) transition to active military duty
- Jury service
- Personal obligation
Employers could choose to offer only unpaid time off, and even deny some requests, unless covered by law. Part time, full-time, and contract employees can enjoy UTO benefits from employers.
Your unpaid time off ensures you’re still employed but removes the possibility of getting compensation. This way, you’re confident your job is still secure. Workers can still maintain some benefits, such as health insurers, while off work.
Let’s give you an example.
Imagine you took your paid vacation leave to get some rest. Then during your travel, you discover a property you’d love to purchase. Once the paid time off elapses, you may need some more time to complete the new property’s paperwork and other details. So, you may apply for extra time off, which your company will not cover financially.
Organizations provide unpaid time off in different situations. Let’s cover them.
Companies can create defined unpaid time off policies. They do that to offer workers more flexibility and regulate how much time people stay away from work.
The UTO could be restricted to full-time workers or also extended to hourly and part-time employees.
A company’s structure and leadership determine its UTO structure. As such, UTO policies differ from organization to organization.
For example, some firms may require employees to exhaust all their unused paid time off before requesting any unpaid leave of absence. Also, they could leave UTO eligibility to legal situations such as the FMLA and voting.
Most times, workers request unpaid time off. But there are times when employers mandate it. One of those situations is furlough. Employee furlough is mandatory time away from work without pay. It involves employers laying workers off temporarily, with a good chance of rehiring them.
Furloughs are mainly part of an employee’s cost-reduction measures. They may introduce the measure to:
- Survive an economic setback
- Rebalance company budget
- Reduce expenses in the face of low revenues
Some companies may also lay-off workers temporarily when there’s little to no work. In this case, they may call workers back when they secure another project or contract. For example, ski resorts are mainly active during the winter. So, employees could be notified that they’ll only be on compulsory unpaid leave during off seasons.
Not all furloughs completely put employees out of work. Sometimes employers may reduce work days and hours, cutting down the employee’s salary. The company could also implement rotating furloughs, making employees take turns in going for mandatory unpaid leaves.
Labor Laws Governing UTO
Employers in the United States are not mandated by any federal law to provide paid or unpaid vacation time off to employees. So they have the discretion to reject or approve any requested time off that isn’t covered by the FMLA.
The Family and Medical Leave Act (FMLA)
Whether an organization implements a UTO policy or not, the Family and Medical Leave Act (FMLA) enables workers to claim leave if they meet specific criteria. The law was passed in 1993 and allows workers to claim unpaid leave for up to 12 weeks. Their jobs will be protected and their medical benefits will be preserved.
Here are situations covered by the FMLA:
- The birth of a child
- Placement of adoption or foster child
- When the employee has a serious medical condition
- When employees are to act as primary caregivers to an immediate family member who has a serious medical condition
Important Note: The FMLA applies to employees and employers in the United States.
Who Does the FMLA Cover?
The FMLA covers local education agencies and public agencies, including, federal, state, and local employers.
In the private sector, it covers employers with more than 50 employees who have worked for at least 20 workweeks in the preceding or current calendar year. It also applies to successors of covered employers and joint employers.
Who is Eligible for the FMLA
As an employee, you must meet the following criteria to be eligible for unpaid time off under the FMLA:
- Must work for an employer that the act covers
- Must have worked at least 1,250 hours (paid and unpaid leave not included) during the past 12 months before the proposed leave should start
- Must work within 75 miles of a location where the company or employer has at least 50 employees.
- Must have worked 12 months (mustn’t be consecutive) for the employer
Here are things you should know about the FMLA:
- Eligible employees are allowed to claim leave of absence of up to 12 workweeks.
- While the time off is unpaid, an employee’s job is protected and they’ll maintain their health benefits and retain their position at the end of the leave.
- The FMLA only mandates unpaid leave.
- Employees are also allowed up to 26 workweeks of job-protected, unpaid time off in a single 12-month period to provide care to a covered servicemember with serious illness or injury.
- Employees are not mandated to take the permitted number of days off when going for a medical leave. In some cases, like bonding with a newborn, the employer has to approve intermittent leave.
- The FMLA permits employers to request certification or proof of serious medical illness from the employee.
While the FMLA requires unpaid leave, some states mandate covered employers to provide a specific number of paid time off for illness. The states and jurisdictions are:
- Washington DC
- Rhode Island
- New York
- New Jersey
There are other measures that these and other states include in their various family and medical leave laws that you should look at. From measuring leave to compensation requirements, state laws often have slight differences with the FMLA.
The US Congress updated the FMLA to cover parental leave for federal civil servants. According to the new law, federal employees who welcome a new child through adoption, foster care placement, or birth on or after October 1, 2020 are allowed time off.
Other federal and state provisions also mandate employers to provide time off for employees in situations such as jury duty, court witnessing, voting, and active military duty.
Other countries, such as the UK, France, and Spain have different maternity leave and require employers to pay some form of benefit during family-related leave.
UTO vs PTO: What’s the Difference?
The main difference between paid time off and unpaid time off is compensation.
However, in some jurisdictions like the US, paid time off policies are completely controlled by the employers, especially in states without mandated paid sick leave.
On the flip side, federal (and some state) laws favor the employee in situations like serious personal and immediate family medical conditions, and bonding with a newborn, foster or adopted child.
Most paid leaves cover things like vacation, illness, or personal circumstances.
When not covered by the law, employees can take unpaid leave of absence if the employer grants the request. That’s because they may have exhausted their allocated paid time off.
These unpaid leaves could be for personal time off or to take care of a friend (not an immediate family member) who has suffered a serious illness or injury.
In some cases, employers may allow workers to take unpaid time off even if they’ve not exhausted their allotted paid time off. However, that’s entirely up to the employer when the unpaid time off is not covered by law.
How to Create a Favorable UTO Policy
You need a policy in place if you’re going to offer UTO to your workers. A great UTO Policy ensures you’re taking advantage of all the benefits of unpaid time off and regulating it properly for employees.
Your policy should answer questions such as:
- Will you also offer paid time off?
- If you offer paid time off, should employees get unpaid time off and how?
- Which employees will be eligible for unpaid time off and paid time off (if provided)
- Which situations qualify employees for unpaid time off?
- How many unpaid days or hours can employees take?
- What’s the procedure for requesting unpaid time off?
Are You Offering Paid Time Off?
You must consider your PTO policy when developing your UTO policy. That’s because both time off periods could overlap at some point. For example, must an employee use up their paid time off before asking for unpaid leave?
What Makes an Employee Eligible?
Your UTO policy should clearly define employees who can claim unpaid time off. For instance, are you offering the benefit to one or two of full-time, part time, or contract workers or your entire staff?
You can also specify things like:
- How many hours or days they must have worked during a particular period to be eligible.
- How many years of work qualifies them for specific unpaid time off days or hours
What Situations Qualify Employees for Unpaid Time Off?
You should also clearly state the situations that must apply for UTO requests to be approved. Apart from conditions that fall under the FMLA and applicable labor regulations, you’re allowed to define these circumstances. This way, workers will likely know if their requests will be approved before handing it in.
You should also outline situations that will prompt the organization to consider special cases.
How Many Days are You Offering?
Your policy can also state how many days employees get for their unpaid time off. The number of specified days could be determined by the situation prompting the leave request.
How Employees Will Apply for UTO
While you’re not paying workers who don’t come to work, there should be a procedure for taking leave, even an unpaid one.
Things like an application window, method of application, and submission to the right channels should be included in your UTO policy.
For example, how many days’, weeks’ or months’ notice should they provide when requesting for unpaid leave? Should they put the request in writing, send it over an email, request in person, or use the employee management software application?
Can You Deny UTO?
Employers are mandated by law to approve UTO requests if:
- They are covered by relevant labor regulations: Most labor laws like the FMLA have certain criteria that qualify employers for coverage.
- Their employees are eligible for leave under labor regulations: Federal and state laws also have criteria that employees must meet to qualify for UTO.
You can choose to deny UTO requests if your employees violate your policy and don’t meet the standard for eligibility under state and federal laws.
That said, it will be wise to consider an employee’s situation before denying their requests. For example, they may be in dire need of time off to handle some critical personal affairs not covered by law and your UTO policy.
Unpaid Time Off and Exempt Employees
Handling unpaid time off for exempt employees is more complex and challenging than dealing with the process for non-exempt workers.
The US department of labor defines exempt employees as workers paid on a “salary basis.” The department further explains the meaning of “salary basis”:
“Being paid on a “salary basis” means an employee regularly receives a predetermined amount of compensation each pay period on a weekly, or less frequent, basis. The predetermined amount cannot be reduced because of variations in the quality or quantity of the employee’s work.”
The law suggests that exempt employees must be paid their full salaries for the workweek regardless of how many hours they worked.
So, refusing to pay exempt employees without careful consideration could jeopardize their exempt status and expose you to costly legal situations.
However, the DOL permits you to count partial day absences of exempt employees toward their paid time off.
But it’s still tricky. Some court decisions say taking exempt employees’ paid time off from workday absences means they’re being treated as non-exempt, hourly workers.
So, you must understand the laws governing your Jurisdiction regarding this practice.
Where Unpaid Leave Applies for Exempt Employees
Employees are not completely immune to unpaid leave. The FLSA permits employers to deduct an exempt worker’s pay if they’re absent from work for one or more full days for personal reasons not covered in the FMLA. Their salaries can also be deducted if they leave work for one full day or more if their reasons don’t include illness or disability.
Employers are also not mandated to pay an exempt employee’s full wages for weeks in which they took time under the Family and Medical Leave Act.
Calculating unpaid time off for employees can be confusing, especially when you have to deal with salaried, exempt workers.
That said, leaves that qualify as “unpaid” should reflect in your employee’s payslip.
The process should be pretty straightforward for non-exempt employees that work on an hourly basis and aren’t entitled to paid leave.
To calculate UTO, you have to consider wages for paid workers, taxes, and allocated time off.
Wages for the Paid Working Days/Hours
As we mentioned, calculating UTO for workers you pay by the hour is easy. You have to determine their pay by multiplying work hours (without adding unpaid time off) by their hourly rate.
So, if you pay them $30 per hour and they worked 10 hours for the week instead of their regular 40 hours, then their weekly wage would be:
$30 x 10 = $300
If the worker is a non-exempt employee but you use a structured weekly wage of $1200 while expecting them to log 40 hours a week, then their hourly rate would be:
$1200/40 = 30
So, since they earn $30 per hour, their payment for working 20 hours that week would be $600 ($30 x 20).
Employee’s Working Hours Taxes
You have to make provisions for the missed working hours in the taxes you withhold for the worker. That’s because the employee’s tax liability will decrease alongside their reduced working hours and wages. So, use the new wage to calculate the tax deduction.
Worker’s Allocated Unpaid Time Off
If your UTO policy sets a limit for unpaid time off, make sure you deduct it from the work hours claimed over any period.
How to Calculate UTO for Exempt Employees
Calculating UTO for exempt employees can be complicated. You won’t have to make adjustments if your organization has a PTO policy that covers the work absences.
However, you can choose to deduct absentee hours from paid time off allowances. While the FSLA allows this move, some states don’t. So make sure you’re up to date with your state laws.
If the exempt worker takes time off for reasons outside the FMLA’s coverage, you have to calculate their hourly rate to determine what to deduct.
In this case, you have to work out their hourly rates by dividing their gross salary by the number of hours worked each payment cycle.
After that, determine how many hours they’ve worked for the month, then multiply it by their hourly rates. Their newly adjusted salary for that particular time period will be subject to corresponding tax deductions.
You won’t have to pay for whole week absences when the employee takes time off under the FMLA.
Why Time Tracking is Important
Using a time tracker helps you to accurately calculate billable hours so you can make correct UTO deductions for workers paid by the hour. Time tracking data can also help you determine work hours and hourly rates for salaried workers.
How is Unpaid Time Off Favorable to the Employer?
If you’re an employer, the obvious benefit of unpaid time off is cost reduction, especially if you run a seasonal business. But that’s not all.
Employers will enjoy an increase in employee engagement and satisfaction if workers are allowed some unpaid time off, especially if they’re not covered by the FMLA. And as you know, an engaged workforce means higher productivity and more profits for your business.
According to Gallup, organizations with highly engaged employees enjoy 17% more productivity and 21% more profitability than companies with disengaged workers.
The poll also found that companies with highly engaged employees enjoy 41% reduced absenteeism and 10% higher customer ratings.
Absenteeism can also reduce since taking time off can reduce the stress that causes employees to skip work.
As it turns out absenteeism can cause companies lots of issues including:
- Wasted admin time because executive attention will be diverted
- Disrupted workflow
- Increased workload and stress for employees who have to cover for their absent colleagues
- Reduced productivity
- Higher operating costs since companies may have to hire extra hands and pay overtime
- Higher rates of costly mistakes
Another Harvard Business Review survey found that 71% of surveyed experts believe that employee engagement is critical to business outcomes.
Workers are also less likely to leave if they’re engaged. That means unpaid time off can boost your business’ retention and reduce turnover.
What are the Downsides of Unpaid Time Off for the Employer?
The cons of unpaid time leave include complicated payroll processes, reduced employee morale, and reduced productivity.
Getting UTO calculations wrong can lead to incorrect payment that could affect the employer or employee.
Employee morale can reduce when they depend too much on the wages they’re missing out on due to unpaid time off they can’t avoid. The reduced morale can lead to low productivity and voluntary resignation.
Frustrations could also be directed at the employer if the worker considers the UTO policy to be unfair.
How Does UTO Impact the Employee?
Sometimes, workers are forced to take unpaid leave, whether it’s for medical or parental reasons. In other situations, an employee may choose to go on extra leave without pay to sort out personal obligations or take time to rest.
But there are pros and cons on the part of the employee. Let’s cover them.
Let’s start with the pros
For starters, most workers require time off to recharge and de-stress. Resting is important for the employee’s health and career.
The World Health Organization and International Labor Organization linked long working hours to heart-related diseases that claimed more than 170,000 lives in 2016.
Also, an employee’s focus and sharpness will start declining if they overwork without resting and recovering.
More Autonomy and Options
Having an unpaid leave policy grants employees more options to choose from. Even if they have paid time off, knowing they have more unpaid time off allows them to plan towards personal obligations.
Knowing that they can get more time to handle things even after they exhaust their paid time off gives them the peace of mind to focus on work.
Better Work-Life Balance
A Gartner study revealed that the majority of respondents preferred a great work-life balance over health benefits. That’s because workers would still love to maintain a good social life and healthy bond with their family.
A work and family research journal reported that women whose partners work 35+ hours a week have higher relationship satisfaction and lower stress compared to women whose partners work 50+ hours a week.
With more unpaid leave benefits, workers can be more present for family activities and personal engagements. This way, they can build their social bond and lead a healthier, happier life all round.
No one likes to lose wages, especially when they live paycheck to paycheck. According to the 2022 Global Benefits Attitudes Survey conducted by Willis Towers Watson (WTW), about 41% US workers admitted to depending on their paychecks.
So, workers will feel uncomfortable to lose any paid work hours. It gets worse when they believe the situation taking them away from work isn’t their fault.
For example they may have to fix a broken car or tend to a friend (not a family member) who is going through a painful medical procedure.
Employers Can Make Unpaid Time Off Work for Everyone
While workers would prefer to get compensated when they’re off work, a good unpaid time off policy has its perks. For example, the lack of compensation is the reason why UTOs are traditionally longer than PTOs in most companies.
As an employee, always make sure your employees feel welcome after returning from their leave. You should also take measures to get them settled with full updates that will ease them back into work.