Unpaid time off (UTO) is time away from work that employees are allowed to take, but for which they will not be compensated.
UTO is distinct from paid time off (PTO), like sick time or vacation time, which is compensated at an employee’s normal wage rate. Although most companies offer some form of PTO, many companies do not offer unpaid time off or have inconsistent unpaid time off policies.
Offering unpaid time off does not mean that employees can simply choose to not show up for work. Most companies that allow employees to take unpaid time off will require them to schedule it ahead of time and have it approved by a manager, similar to how an employee would request PTO.
Are Companies Required To Offer Unpaid Time Off?
All public companies and all companies with 50 or more employees are required by federal law to offer unpaid leave under the Family and Medical Leave Act (FMLA). It’s important to understand whether the FMLA applies to your company and to clearly document how your company handles FMLA requests.
In addition, some states have their own laws, similar to the FMLA, that impose greater requirements on companies to offer unpaid medical leave. These include California, Connecticut, Hawaii, Maine, Minnesota, New Jersey, Oregon, Rhode Island, Vermont, Washington, and Wisconsin, as well as Washington, D.C.
In this article, we will discuss UTO as a form of time off distinct from unpaid leave taken under the FMLA or related state laws.
There are currently no laws requiring companies to offer unpaid vacation time or similar unpaid time off. So, it’s up to companies to decide whether this is a benefit that they want to offer employees and to create their own UTO policies.
Benefits of Offering Unpaid Time Off
Unpaid time off policies are often viewed as one piece of a more comprehensive set of employee benefits. Giving employees the ability to take UTO gives them more flexibility to achieve a work–life balance.
As an example, say an employee wants to go on a 2-week vacation but has only 8 days of accrued PTO. Without the ability to take unpaid time off, the employee would have to choose between shortening their vacation or waiting until they have accrued more PTO. With unpaid time off as an option, the employee has another choice: use their PTO for 8 days (or fewer) of their vacation and use unpaid time off for the remainder.
More broadly, offering unpaid time off gives employees some level of choice between working and earning money or taking time off without compensation. Of course, employers have the option to limit unpaid time off or turn down UTO requests but, in general, employees get more freedom to choose what’s best for them.
One of the advantages of offering unpaid time off as opposed to unlimited vacation or more PTO is that an unpaid time off policy can actually save your company money. If an employee takes UTO, they don’t receive pay—so your business ends up paying less in payroll than it would if the employee only used PTO.
Having a UTO policy can also help your company attract and retain talent. Employees who prioritize their work–life balance may find an unpaid time off policy very appealing.
Drawbacks to Offering Unpaid Time Off
There are some disadvantages to offering unpaid time off, especially if your company’s UTO policy is implemented poorly.
The most common problem that companies run into is reduced productivity if employees take too much unpaid time off. This can be especially problematic if many employees take UTO (or PTO) at the same time, or if a key employee takes UTO for long stretches at a time. Implementing limits on unpaid time off or requiring managers’ approval for UTO requests can help mitigate this issue.
A less common but important issue is that if employees take a lot of UTO during a single pay period, they may not earn sufficient wages to cover the costs of their benefits during that pay period. This means that the employee could end up having to pay for health insurance costs or life insurance costs out of pocket. Many employees won’t think of this ahead of time, and it could cause negative feelings when your payroll administrators have to send them a bill.
Some employees may also have negative feelings about not being paid for UTO, even though the time off is explicitly categorized as unpaid. Many employees are used to using PTO and may not realize the potential financial impacts they will incur when they use UTO. They may feel this particularly keenly when the unpaid time off is for something outside of their control, such as dealing with a plumbing emergency at home, rather than for a vacation.
Implementing Unpaid Time Off at Your Business
If your company decides to offer UTO, it’s important to lay out a clear and consistent policy. Thinking through a policy also helps ensure that allowing unpaid time off won’t negatively impact your business’s operations.
If your business already offers PTO, you can model your unpaid time off policy on your PTO policy. For example, if employees are required to have PTO approved by a manager, you could offer a parallel process for unpaid time off approvals. Requiring managerial approval can minimize the degree to which too many employees take PTO or UTO at the same time.
Your company may also choose to put a cap on how much UTO an employee can use during a specific time period. This prevents employees from abusing a UTO policy or taking excessive time off work. If your company has a busy season, such as around the holidays, you may consider limiting or disallowing unpaid time off during that period each year.
Some other things to consider include whether all employees should have the ability to take UTO and whether all employees should have the same UTO cap.
Communicating your UTO policy
Once you have a formal unpaid time off policy, it’s important to communicate it clearly to employees. Companies that are instituting a UTO policy for the first time may consider holding a question-and-answer session for employees. In addition, your UTO policy should be written down in your company’s employee handbook so that employees can refer back to it at any time.
Creating a system for UTO requests
There are a few different systems your company can use to manage employees’ UTO requests and track their total unpaid time off.
The easiest solution is to use Human Resources Management System (HRMS) software. Most HRMS platforms have tracking tools specifically for UTO that make it easy to segregate UTO, PTO, and medical leave. HRMS platforms also make it simple to see how much unpaid time off your employees have taken over the course of a year.
Another option is to track UTO requests manually, using either paper or digital forms. These forms can be sent to your company’s HR department and stored in a general UTO file or in employees’ files. (Note that there are no legal record-keeping requirements around UTO requests that employers must follow.)
Smaller companies may find that an informal system of unpaid time off requests and approvals works for them. In this case, employees may simply ask their manager for unpaid time off and it can be approved verbally. It’s still a good idea for managers to monitor how much unpaid time off each employee takes so that they can track trends in UTO usage or quantify the impact of UTO on productivity if needed.
Unpaid time off is time away from work that employees can take without compensation. It can be used in combination with paid time off to give employees more flexibility to manage their work–life balance.
If implemented properly, UTO can be a benefit for employees that reduces employers’ payroll costs without having too much impact on productivity. However, when creating a UTO policy, it’s important for your business to create clear-cut rules around when and how UTO can be taken.
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