What is Unpaid Leave? Your Complete Guide in 2024

Although common leave options like paid sick leave and annual leave are typically discussed with team members upfront, unpaid leave is often overlooked. However, understanding unpaid time off is important for maintaining compliance and providing a complete range of employee benefits.

Thanks to Salary.com's Compensation Consulting Services, backed up by over 70 years of compensation and total rewards experience, companies can develop unpaid time off policies and other benefits that will make them stand out in the job market.

What is unpaid leave?

Unpaid leave is a leave of absence that allows an employee to take time off from work without receiving pay. Although the employee isn't paid, they usually retain their job and benefits, making it a form of job-protected leave under federal law.

How does unpaid leave work?

Employers may provide unpaid leave for employees as required by law in certain instances. The Family and Medical Leave Act (FMLA) offers 12 weeks of unpaid and job-protected leave.

For example, an employee may request unpaid leave to care for a family member with a medical condition, however, they're ensured that their position is protected upon return.

Paid time off vs. unpaid time off

Paid time off (PTO) allows employees to take time off work while still receiving their salary, often for reasons like paid sick leave, medical treatment, or self-care.

On the other hand, unpaid leave means an employee can take time off without pay, typically for serious health conditions or personal reasons like taking care of a child.

While companies are legally required to provide unpaid job-protected leave in most instances, paid leave is at the discretion of the employer and may vary depending on the employee’s eligibility and company policies.

Compensation and Benefits Program Design can improve the strategic value of your pay programs and design benefit packages that deliver a clear competitive advantage while containing costs.

Types of unpaid leave

Here are the different types of unpaid leave:

1. Unpaid parental leave

   Employees can take unpaid time off after having a child or adopting, providing time for bonding and care.

2. Unpaid medical leave

   Employees may request unpaid time off for serious health conditions or to care for family members with medical issues.

3. Mandatory unpaid leave (Furloughs)

   Employers may impose unpaid furloughs to reduce salary costs during financial challenges.

4. Unpaid administrative leave

   An employee may be placed on unpaid administrative leave during investigations for misconduct.

5. Voluntary unpaid leave

   Employees can request unpaid leave for personal reasons like education, moving, or extended vacations.

Who’s entitled to unpaid leave?

Eligibility

To be eligible for uncompensated leave under the FMLA, an employee must:

• have worked at least 1,250 hours in the past 12 months for the company;

• work at a business with 50 or more employees within 75 miles;

• have been employed by the company for at least 12 months. But these months do not need to be consecutive to qualify for FMLA leave. Typically, only employment within the last seven years is considered, unless the service break is (1) due to military duties or (2) specified in a collective bargaining agreement or other written arrangement;

• The company must be a covered employer under FMLA laws.

Qualifying conditions

• A covered employer is required to provide an eligible employee with up to 12 weeks of unpaid, job-protected leave within a 12-month period for one or more of the following reasons:

• to take time off for the birth of a son or daughter and to bond with the newborn;

• for the adoption or foster placement of a child and to establish a bond with that child;

• to care for an immediate family member (spouse, child, or parent – but not a parent-in-law) with a serious health condition;

• to take medical leave when the employee is unable to work due to a serious health condition; or

• for qualifying exigencies related to the employee’s spouse, son, daughter, or parent being on active duty or called to active-duty status in the National Guard, Reserves, or Regular Armed Forces.

Can an employer deny unpaid time off?

Employers generally have the authority to approve or deny requests for unpaid leave, but certain employee circumstances may be protected under laws like the FMLA. However, outside of these statutory rights, businesses can decline such requests based on operational needs, and employees should be aware of the outcomes either way.

Benefits Program Evaluation can help review how employees currently perceive your benefits offerings and develop competitive new benefits plans that fit your budget.

How to calculate unpaid leave?

For non-exempt employees, unpaid time off is calculated by deducting the hours or days the employee is absent from their total hours worked. Since they are usually paid hourly and often not entitled to paid leave, the employer simply adjusts their pay to reflect the period of absence based on the hours or days they missed.

Example: If an employee works 40 hours a week and earns $20 per hour, but takes 2 days (16 hours) of unpaid leave, the calculation would be:

• Regular weekly pay: 40 hours × $20 = $800

• Uncompensated leave deduction: 16 hours × $20 = $320

• Adjusted pay: $800 - $320 = $480 for that week.

For exempt employees, calculating unpaid leave involves dividing their annual salary by the number of hours worked in a month to find their hourly rate. If the absence isn’t covered by accrued time, vacation days, or company policy, employers multiply the unpaid hours by this rate and adjust the employee's salary accordingly for the unpaid period.

Example: If an employee has a yearly salary of $60,000 and works 40 hours per week (160 hours per month), their hourly rate would be:

• Hourly rate: $60,000 ÷ 12 months ÷ 160 hours = $31.25 per hour

• If they take 1 day (8 hours) of unpaid leave, the deduction would be: 8 hours × $31.25 = $250 deduction from their monthly salary.

With Competitive Pay Assessment, organizations can assess the market competitiveness of their pay and benefits programs to identify any existing pay gaps and recommend what changes, if any, need to be made.

Tips for implementing unpaid leave policy

To effectively implement uncompensated leave policies, keep these tips in mind:

1. Clarify employee eligibility: Ensure employees understand their eligibility for voluntary leave.

2. Outline legal obligations: Clearly state the company’s legal obligations under laws like the Uniformed Services Employment and Reemployment Rights Act for military service.

3. Provide examples: Give a few examples of when unpaid time may be allowed, such as for sick leave and military caregiver leave.

4. Ensure job security: Assure employees that they will return to an equivalent job after their unpaid time off.

FAQs

Let's go over some frequently asked questions about uncompensated leave.

How much time off should new employees receive?

New employees in the U.S. typically receive around ten paid days off annually after completing their probation. As part of an employer's legal obligation, it's important to clarify if these days will be granted upfront or earned gradually

How far in advance should employees request time off?

Employees should request time off as early as possible, depending on the company’s time-off policy. The earlier an employee's request is forwarded, the more time managers assess its impact and decide whether to approve or refuse, especially a reasonable unpaid leave.

With Workforce Planning, you can create a future-ready workforce and move your business forward.

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

If an employee reaches their paid time off (PTO) limit, the next step depends on your company's policy. You can either allow them to take unpaid time off (UTO) or require them to use any remaining vacation days or accrued time for additional time off.