What is unpaid time off

Unpaid time off (UTO) is an employee’s absence from work that is not compensated by the employer. The unpaid leave of absence from work may be a short or extended period of time, depending on the policy permissions.

Employees may choose to take unpaid time off for various reasons, such as recovery from an illness, a funeral, medical appointments, or other personal reasons. 

What is unpaid time off?

Employers can offer both unpaid time off and paid time off, but it is not a legal requirement in all American states.

Employers usually stipulate a predetermined number of hours employees may take as paid leave off throughout the year. When these days are used, an employee may choose to take unpaid time off, also known as unpaid leave.

Common reasons for taking UTO include;

• Looking after dependents or a family member
• Parental leave
• Medical appointments
• Recovery from an illness or serious health condition
• Career break or sabbatical
• Compassionate leave
• Bereavement leave
• Volunteer work
• Studying
• Public duties (such as jury service)
• Extended vacation time

Pros of unpaid time off

UTO can be tricky to navigate in the modern working world, including increased remote work and flexible schedules. However, including UTO in your policy can be a perk when attracting talent while benefiting the business as well.

Consider the following benefits;

• Save money by allocating unused wages to other resources and projects
• Build strong relationships with employees
• Flexibility leads to lower absenteeism and increased retention 
• Improved morale when working

Note that the policy must be properly governed to prevent employees from taking advantage or leading to reduced productivity and financial harm. HR software helps leaders manage UTO among a global workforce. 

PTO vs. unpaid time off

Paid time off (PTO) is a benefit program offered by companies that allow employees to take a leave of absence without compromising pay. 

The employment contract will outline a specific number of days that an employee can take away from work and still receive compensation. These days can be used for vacation, sick days, a break from work, or other personal reasons.

In contrast, unpaid time off does not include compensation for time off of work. While the employee will not receive compensation for the time off, the individual’s position and responsibilities will not be affected.

Laws/rules for unpaid leave

In the United States, specific state laws may require employers to offer paid time off, but there is no blanket rule to offer UTO.

The details of paid and unpaid sick leave laws differ from one state to another. For example, 12 states (and Washington D.C) demand qualifying employers offer employees a certain number of paid sick days. 

Compliance demands that human resources and business leaders stay updated on relevant laws.

Additional laws that impact employee leave policies include;

• Family and Medical Leave Act (FMLA) — helps workers balance their job and family responsibilities by giving employees up to 12 weeks of unpaid leave for specific situations.
• Paid family leave — certain states require paid family leave.
• Pregnancy disability leave — considered in addition to FMLA
• Uniformed Services Employment and Reemployment Rights Act (USERRA) — governs leave for employees who are military service members
• Americans with Disabilities Act (ADA) — covered employees make reasonable accommodations for qualified employees with disabilities

How does unpaid time off work?

Including UTO in your company policy impacts various aspects of business, including the payroll. When conducting payroll, the following details must be updated.

Wages for the pay period

Payroll should reflect that fewer hours were worked during the pay period. 

For salaried employees, the hourly rate should be calculated by dividing their gross wages in a pay period by the number of hours they usually work. Once the hourly rate is determined, they are multiplied by the number of hours worked.

Correct taxes for hours worked

Employers usually withhold a set amount of taxes for salaried employees, but unpaid time off will impact this figure. When employees work fewer hours, their tax liability decreases, and their payroll taxes must be recalculated.

Remaining UTO if there is a limit

If the policy stipulates a cap on the number of unpaid days available, the remaining days should be consistently updated to show the number of UTO hours available.

Drafting an unpaid time off policy

An unpaid leave policy helps to protect employers and employees, preventing leave related issues from becoming major problems. 

Just like all company policies, the UTO policy should include specific information.

UTO vs. paid time off

The policy should stipulate whether or not the company offers UTO and paid time off. Employees often use UTO when they run out of sick days and vacation days but still need time away from work.

Which employees are eligible for UTO

Not all employees need to have access to UTO. Some companies offer UTO for full-time employees but not part-time employees, which must be outlined in the policy. 

Total numbers of days available

The number of unpaid days available should be restricted to a set number per calendar year. Alternatively, a business may choose to offer unlimited UTO, but the repercussions should be considered. Whichever the business chooses, it’s important to state the details in the policy.

Process for requesting UTO

Each employee’s request for UTO should follow the same process. Outlining the process for requesting unpaid time off in the policy helps to save time and effort when needed. It also helps to include details on accrual, the amount of warning time needed, and conditions if other team members are on leave. 

Additional UTO policy guidelines to consider

While some state laws, such as New York and Colorado, guide the UTO policy, it also helps to follow strict guidelines internally. Consider the following tips and recommendations for successfully managing unpaid time off;

• Establish a benchmark for acceptable reasons for taking unpaid leave
• The manager has the discretion to approve the leave request or not
• All employees should be treated fairly
• Create a seamless process for requesting and approving UTO (workflow software offers many benefits) to streamline request time
• Keep strict records of both PTO and UTO

Do you need additional help to navigate the modern world of work and UTO policies? Learn more in Deel’s global hiring guide.