Paid vs. Unpaid Leave: Compliance Differences Every HR Team Should Know

10/22/2025

Paid leave keeps employees financially secure during absences; unpaid leave protects their job and benefits. But when do you have to pay—and when don’t you? The distinction sounds simple, but for HR, it’s anything but. Between the Family and Medical Leave Act's (FMLA) job protection, the Americans with Disabilities Act's (ADA) accommodation duties, and complex wage and hour laws, one policy mistake can cost your organization dearly. This guide breaks down the key compliance differences between paid and unpaid leave, showing how to apply federal and state rules correctly, handle pay questions confidently, and avoid costly legal missteps.

Understanding the Legal Framework Behind Paid and Unpaid Leave

The rules governing paid and unpaid leave come from a mix of federal, state, and local laws, plus an employer's own policies. A solid compliance strategy requires understanding how these layers interact.

Federal Laws That Set the Baseline

At the federal level, there is no universal mandate for paid leave. Instead, federal laws establish a baseline for job-protected unpaid leave and wage and hour rules.

• Family and Medical Leave Act (FMLA): This law provides up to 12 weeks of unpaid, job-protected leave. Its primary function is job and benefit security, not income replacement.
• Americans with Disabilities Act (ADA): The ADA requires employers to provide reasonable accommodations, which can include unpaid leave, even beyond FMLA entitlement.
• Fair Labor Standards Act (FLSA): This law governs wage and hour requirements, including how and when you can make deductions from an exempt employee's salary for absences, a critical aspect of managing unpaid leave.

State and Local Paid Leave Mandates

The paid leave landscape has become increasingly complex due to a growing number of state and local laws. Many states and cities now mandate paid sick leave, requiring employers to provide a certain number of paid hours off for health-related reasons. Some states have also established paid family and medical leave (PFML) insurance programs. For multi-state employers, HR must track and comply with varying accrual rates, usage rules, and documentation requirements for each location where they have employees.

Employer-Provided Paid Leave Benefits

Beyond legal mandates, most employers offer their own paid leave benefits, such as vacation time, personal days, or a combined paid time off (PTO) bank. While these are discretionary benefits, they become subject to compliance rules once established. Your company policies must clearly define how this "voluntary" paid leave interacts with legally required leaves like FMLA, and you must apply these policies consistently to avoid discrimination claims.

FMLA Leave Rules — What’s Paid, What’s Not

A common point of confusion is the relationship between FMLA and pay. HR professionals must be able to clearly explain to employees that FMLA is not a paid leave program itself, but a legal framework that interacts with paid benefits.

When FMLA Is Unpaid by Default

The FMLA only guarantees job protection and the continuation of health benefits; it does not require employers to pay employees during their leave. By default, FMLA leave is unpaid. Any wage replacement an employee receives during this time comes from other sources, such as the employer's paid leave policies (PTO, vacation, sick time), a short-term disability insurance plan, or a state-run program like paid family leave or Workers' Compensation.

Using Paid Time Off Concurrently With FMLA

Employers generally have the right to require an employee to use their accrued paid time off (like vacation or sick leave) concurrently with their unpaid FMLA leave. This means the employee receives a paycheck while on FMLA, but their PTO bank is depleted at the same time their FMLA entitlement is used. This practice is lawful and common, but it must be outlined in your employee handbook and applied consistently. The goal is to prevent "double-dipping"—where an employee could use 12 weeks of FMLA and then take all their accrued vacation time afterward, extending their absence.

Coordinating FMLA With Disability or Workers’ Compensation Pay

When an employee is on FMLA leave for their own serious health condition, they may also be eligible for wage replacement from a short-term disability (STD) plan or, if the injury is work-related, from Workers’ Compensation. In these cases, HR must coordinate payroll carefully. These insurance benefits typically pay a percentage of the employee's salary. Your policy may allow the employee to supplement this payment with their accrued PTO to receive their full wages. This coordination requires careful tracking to ensure proper payment, tax withholding, and benefit administration.

Paid Leave Categories and How They Differ in Compliance Terms

Different types of paid leave come with different compliance obligations. It's crucial to understand the rules for each category your organization offers.

Paid Sick Leave and State Mandates

Mandated paid sick leave laws are now common. These laws dictate minimum accrual rates (e.g., one hour of paid leave for every 30 hours worked), set caps on annual usage, and define permissible reasons for use (which often include caring for a family member). Employers must track accrual and usage precisely and are often limited in what documentation they can request to verify the need for leave.

Vacation and PTO

For vacation or general PTO policies not governed by a state mandate, employers have more flexibility. However, compliance risks still exist. Some states have "use-it-or-lose-it" laws that prohibit employers from forcing employees to forfeit unused, accrued vacation time at the end of the year. Additionally, many states require employers to pay out any unused, accrued vacation time upon an employee’s termination. Your policy must comply with the laws in every state where you operate.

Paid Parental or Family Leave

While the U.S. has no federal paid parental leave mandate, several states (like California, New York, and New Jersey) have created state-run insurance programs that provide partial wage replacement for employees to bond with a new child or care for a seriously ill family member. It is critical to understand that this paid benefit is separate from job-protected leave under the FMLA. An employee may be eligible for both, and the two leaves often run concurrently. HR must guide employees through applying for state benefits while simultaneously designating their FMLA leave.

Unpaid Leave Scenarios HR Must Handle Carefully

Beyond FMLA, several other types of unpaid leave come with their own legal protections and compliance requirements.

ADA and Reasonable Accommodation Leave

For an employee with a disability, unpaid leave can be a form of reasonable accommodation under the ADA. This obligation can arise after an employee has exhausted their 12 weeks of FMLA leave. HR must engage in the interactive process to determine if providing additional unpaid leave is a reasonable accommodation that does not pose an undue hardship on the organization. This requires a well-documented, case-by-case analysis.

Military and Jury Duty Leave

The Uniformed Services Employment and Reemployment Rights Act (USERRA) provides job-protected, unpaid leave for military service. Employers must reinstate service members upon their return and cannot discriminate against them based on their military obligations. Similarly, employers are generally required to provide unpaid time off for jury duty, though some state laws and company policies provide pay for this civic responsibility.

Personal Leave or Discretionary Unpaid Leave

Many employers offer personal leave of absence for reasons not covered by FMLA or other laws. While these policies are discretionary, they must be administered consistently and without discrimination. Granting a personal leave to one employee while denying a similar request from another in a protected class could lead to a discrimination claim. A clear, written policy with objective criteria for approval is essential.

Pay and Benefits During Leave — What Must Continue

During any leave, HR must ensure pay and benefits are handled according to the law. The FMLA requires employers to maintain the employee’s group health insurance under the same terms and conditions as if they were actively working. Employers must continue to pay their share of the premium and can make arrangements for the employee to pay their portion.

When wage replacement from STD or Workers' Comp applies, HR coordinates these payments. It’s also important to ensure that benefits are not applied in a discriminatory way. For example, if you allow employees on paid leave to continue accruing seniority or other benefits, you should consider applying the same policy to those on unpaid, job-protected leave to avoid potential discrimination claims.

Avoiding Wage and Hour Compliance Pitfalls

The intersection of leave and pay creates significant risk under the Fair Labor Standards Act (FLSA), especially when it comes to exempt employees.

Exempt Employees and Partial-Week Deductions

Under the FLSA's salary basis test, exempt employees must generally receive their full salary for any week in which they perform any work. Deductions from salary are only permitted in very limited circumstances. For example, you can make a full-day deduction if an employee is absent for one or more full days for personal reasons, other than sickness or disability. You can also make a full-day deduction for sickness or disability if it is made in accordance with a bona fide plan, policy, or practice of providing compensation for loss of salary. Improperly deducting from an exempt employee's salary can jeopardize their exempt status, making them eligible for overtime pay.

Nonexempt Employees and Overtime Implications

For nonexempt employees, the primary issue is accurately tracking hours worked, especially when they are on intermittent leave. Paid leave hours (like PTO or sick time) do not count as "hours worked" for the purpose of calculating overtime. Your payroll system must be able to distinguish between hours worked and paid time off to ensure overtime is calculated correctly.

Recordkeeping and Documentation Best Practices

Meticulous recordkeeping is your best defense against a wage and hour claim. Use a reliable leave tracking tool and ensure payroll notes clearly reflect the type of leave taken and the pay applied. For any salary deductions for exempt employees, document the reason and ensure it aligns with FLSA rules. This documentation provides clear proof of compliance in the event of an audit or lawsuit.

Overlapping Laws — FMLA, ADA, and Workers’ Compensation

When these three laws overlap, coordination is key. A work injury (Workers’ Comp) that is also a serious health condition (FMLA) and a disability (ADA) requires a multi-faceted response. You must manage concurrent leave designations, coordinate wage replacement with FMLA’s unpaid leave, and handle return-to-work. This includes following the stricter reinstatement rule (ADA’s requirement for the original position) and documenting all offers of accommodation or light-duty work throughout the interactive process.

Communicating Paid vs Unpaid Leave Policies to Employees

Clarity and transparency are essential for preventing disputes. Your employee handbook should clearly explain the differences between paid and unpaid leave, how they interact, and the rules for concurrent use of PTO. Provide managers with simple scripts and training so they can answer basic questions correctly and know when to refer an employee to HR for more detailed guidance. When employees understand their rights and options, they are less likely to feel that the process is unfair or unlawful.

Compliance Checklist — Key Questions HR Should Ask

Use this self-assessment to audit your paid and unpaid leave practices:

• Does your paid sick leave policy comply with all applicable state and local laws?
• Is FMLA leave being properly designated as unpaid, with concurrent use of PTO applied consistently according to a written policy?
• Do you have a documented interactive process for considering unpaid leave as an ADA accommodation?
• Are you following FLSA rules for salary deductions for exempt employees on leave?
• Is all leave-related medical documentation stored in secure, confidential files separate from personnel records?
• Are your managers trained to recognize a leave request and escalate it to HR immediately?

Download Our Paid vs Unpaid Leave Compliance Guide

Don’t let the complexities of paid and unpaid leave create compliance risks for your organization. Make sure your leave policies meet every federal, state, and wage law requirement. Download our Paid vs Unpaid Leave Compliance Guide—your quick-reference tool for HR professionals navigating these intricate rules with confidence.