Unpaid time off (UTO) refers to an employee’s time away from work without pay. UTO is also called unpaid leave.
Employers typically provide statutory or supplemental paid time off to their employees throughout the year and may allow their employees to take unpaid time off once they run out of allotted paid leave.
Unpaid time off is also a statutory entitlement for qualifying employees in certain jurisdictions. Depending on the employer’s policies and jurisdiction, unpaid leave may be a short or extended period offered in addition to or instead of paid time off.
Employees may take unpaid time off for various reasons, such as a family emergency, illness, additional parental leave, jury duty, sabbatical, or other personal obligations.
During their time away from work under unpaid leave, employees do not receive pay, but their time away should not impact their job security.
PTO vs. unpaid time off
Unpaid time off refers to taking time away from work without compensation. In contrast, paid time off (PTO) is when employees receive compensation during their time away from work.
Most countries have mandatory PTO requirements for employee annual leave, holidays, illness, and other circumstances. Statutory benefits vary worldwide, but local employment laws typically mandate a minimum number of hours or days an employee can take away from work while still receiving compensation from their employer.
Depending on local laws and employer policies, an employee might take unpaid time off when they have used all of their PTO hours or days.
For instance, suppose an employee wants to take 10 days of vacation but only has five days of PTO remaining for the year. Instead of shortening their vacation or waiting to accrue more PTO days, the employee could request to use UTO for the remaining five days of their vacation if they’re entitled to UTO or if their employer offers it as a benefit.
Are employers required to offer unpaid time off?
As with PTO, unpaid time off laws vary between states and countries.
For example, U.S. companies with 50 or more employees must offer unpaid time off under the Family and Medical Leave Act (FMLA). The FMLA entitles eligible employees to up to 12 weeks of unpaid, job-protected leave to bond with a new child, care for a family member with a serious health condition or their own serious health condition, and address military family needs.
U.S. employers may approve or reject any requested time not covered under the FMLA. However, some U.S. states have additional requirements for companies to offer unpaid leave beyond the federal FMLA requirement.
Read also: Guide to Employee Benefits in the U.S.
Because UTO allows employees more schedule flexibility, employers often offer additional unpaid time off as a supplemental benefit to attract and retain talent.
Benefits of offering unpaid time off
Employers enjoy many benefits by offering unpaid time off to employees, including:
Because employees don’t receive compensation when they take UTO, employers save money by paying less payroll. Companies can redirect those savings toward hiring additional talent or for other company resources.
Increased employee morale and engagement
Unpaid time off provides employees more flexibility to achieve a better work-life balance. This flexibility increases employee engagement and satisfaction, which leads to higher productivity and company loyalty.
Employee attraction and retention
Companies that provide UTO as a perk outside of potential statutory requirements may attract talent seeking more work-life freedom. Additionally, employers may reduce employee turnover and retain top talent by giving employees more choices in their leave opportunities.
Downsides of offering unpaid time off
Despite the benefits, there are also challenges to offering unpaid time off. These downsides include the following:
Calculating unpaid time off for employees can be confusing and, if done incorrectly, may lead to incorrect employee payments or benefits administration that can pose payroll compliance risks for HR teams.
Reduced employee morale
Employees may have negative feelings about not being paid for their time away. They may experience frustration when they can’t avoid unpaid time off and miss out on wages they depend on.
Also, if an employee takes a lot of unpaid time off during a single pay period, they may not earn enough to cover the costs of their benefits during that time.
UTO can result in low productivity if employees take too much time off. Unpaid time off also poses team productivity and scheduling challenges if many employees are away from work simultaneously.
Employers should implement strict UTO policies that specify how much unpaid time off employees may take outside of their PTO or statutory UTO entitlements.
How unpaid time off impacts payroll
Unpaid time off impacts an employee’s payroll calculations. When an employee takes unpaid time off, HR teams managing payroll must consider the following:
- Employee’s wages for the pay period. The pay should reflect that the employee worked fewer hours.
- Taxes on the employee’s total hours worked. An employee’s payroll tax liabilities potentially decrease if they work fewer hours.
- Employee’s available unpaid time off. If company policy sets a limit to the amount of unpaid time off employees may take outside of any statutory UTO, HR teams must track and update the number of UTO hours or days an employee has used and has remaining.
What to include in an unpaid time off policy
An employer offering unpaid time off to their employees should have a UTO policy in place.
An effective UTO policy protects employers and employees, ensures proper management and regulation of UTO, and prevents leave-related issues.
An unpaid time off policy should include the following:
- UTO vs. PTO. The policy should specify whether the company offers supplemental unpaid time off and paid time off outside of statutory regulations. State which situations qualify employees for UTO and keep records to ensure correct payroll processes.
- Eligibility. Determine which employees qualify for supplemental unpaid time off and ensure eligible employees receive fair UTO allowances. Some companies may only offer UTO to full-time employees and not to part-time employees.
- Amount of UTO. The policy should include the number of unpaid hours or days an employee may take per calendar year. The amount of allowed supplemental unpaid time off depends on the unique company policy.
- Process for requesting UTO. Outline the process employees must take for requesting unpaid time off, which may include the amount of notice needed, employer discretion for approving UTO, and conditions and procedures while the employee is away.
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