Companies hire people who perform various activities in different departments. These people help a company operate and continue its business. Legally, they act as the employee while the company is the employer. For most companies, employees are essential to working in an active market. While some companies have become digital, they still depend on people to perform tasks.
Employees in a company perform crucial tasks that it needs to survive. Without these individuals, the company cannot run or operate properly. Every company has a dedicated department that deals with its employees. This department is often called the Human Resource (HR) department, or simply HR. It is responsible for hiring and firing employees. On top of that, it also overlooks other functions related to them, including payroll.
The HR department is also responsible for conforming to the laws and regulations that apply to employees. Similarly, it must ensure all employees receive the same and equal rights. One of those rights includes applying and receiving a leave of absence. This leave may be paid or unpaid. Some people may wonder how to account for unpaid leaves. Before discussing that, it is crucial to understand leave of absence.
What is a Leave of Absence?
A leave of absence refers to time allowed to employees away from work. Usually, employees request some time off work to cover special circumstances in their private lives. A leave of absence also refers to time allowed to remain away from work outside existing leave benefits. In some cases, companies limit the day’s employees can spend away from work. The leave of absence impacts that limit.
In most cases, companies let their employees time off in specific circumstances. These cases include sick leaves, paid vacation, paid holidays, or even paid time off. However, a leave of absence does not fall under those categories. Instead, it covers the time employees take off for various other reasons. These reasons may be mandatory, paid, unpaid or voluntary.
Employees may require a leave of absence for several reasons. This leave can fall into several categories. Before getting time off work, employees must provide a notice to the employer. This notice may include the reason why they require time away from work. However, employees may keep that reason to themselves if it is personal. Usually, employers need employees to ask for leave through a written notice.
A leave of absence must come with approval from the employer. Employees cannot take time off work without permission. Likewise, the employer may classify this leave as either paid or unpaid. In each circumstance, the accounting for the leave will differ. Similarly, each of these cases will benefit one or the other party. It is crucial to understand the difference between unpaid and paid leave.
What is the Difference Between Paid and Unpaid leave?
Employees may receive a paid or unpaid leave from their employer. The difference between each case is apparent from their names. However, there are some details that everyone must know. Essentially, both paid and unpaid leaves are a type of leave of absence. While the former comes with payments to the employee, the other doesn’t.
A paid leave of absence allows employees to take time off work and still receive payments. Usually, they will get the same salaries or wages as when they are present. However, paid leaves are costly to the employer as they compensate employees for work not done. Although most employers prefer not to pay employees for leaves, they may have to do so for various reasons.
Paid leaves apply to several scenarios. Employment laws and regulations may dictate when employees can receive these leaves. On top of that, other factors can also dictate if employers must compensate workers despite taking time off. Most employers offer an allotted number of paid leaves that employees can receive. However, these policies differ from one company to another.
As the name suggests, an unpaid leave does not involve a payment to the employee. However, it does not imply the employee doesn’t receive time off work. Instead, unpaid leaves do not come with compensation for any time away from work. These leaves come with similar rules as the former case. For example, employees must still provide advance notice to the employer.
Unpaid leaves come with several disadvantages to an employee. The most primary of these includes not receiving compensation. However, it may also impact their position at the employer. On top of that, these leaves do not come with a legal base. Therefore, employees cannot challenge any actions taken against them by the employer in these cases. Employees may provide a limit to unpaid leaves as well.
How Do Unpaid Leaves work?
Unpaid leaves work similarly to paid ones. Employees must receive permission from their employer to miss work. In this case, however, they won’t receive compensation during their time away. Similarly, these leaves usually come with a limited period. Sometimes, employment laws and regulations may permit employees to take unpaid leaves. These cases may include the following situations.
- Self-care, such as health issues or conditions.
- Parental leave is also known as maternity or paternity leave.
- Family or personal emergency.
- Transition to active duty by an employee or their spouse.
In the above cases, employees can request unpaid leaves. However, these aren’t the only situations where employees can take time away from work. On top of that, some employers may also force their employees into unpaid leaves. In these cases, employees go into a furlough period. Employers can furlough employees for various reasons.
Unpaid leaves differ from one employer to another based on policies. Employees must contact their HR department or refer to those policies to know how they work. On top of that, they must consider each unpaid leave carefully. It may impact their ranking or position at the employer. In some cases, though, these leaves may be necessary.
How to Account for Unpaid Leave?
When an employer pays an employee, they will consider various costs. These costs are the items for which they must compensate the employee. Usually, these include salaries and wages. However, it may also consist of additional items. For example, bonuses, commissions, overtime, and other benefits also apply to payments. These items constitute the gross salary or pay.
The gross salary does not refer to the amount that the employee receives. Instead, it is the value the employer records in its books for the payroll expense. Before recognizing that expense in the accounts, the employer will deduct various amounts first. These amounts come as deductions to the gross salary. One of these deductions includes unpaid leaves.
For wages, the accounting for unpaid leave is straightforward. The employer only calculates the payment based on the hours worked. The hourly rate is usually predetermined or known. Essentially, this calculation accounts for unpaid leaves automatically. However, the same may not apply to salaries. Since these are fixed amounts, the employer will make the applicable deductions from that amount.
The accounting for unpaid leaves does not impact the books. Instead, it applies to the underlying calculations to determine the amount for recording. In other words, unpaid leaves do not require any accounting. Employers adjust these leaves in the amount recorded as a payroll expense in their books. No additional steps are necessary to recognize unpaid leaves.
Employees may request a leave of absence for various reasons. These leaves may fall under unpaid or paid categories. Usually, paid leaves fall under predefined conditions, while the latter doesn’t. Nonetheless, they follow a similar process to get approved. The accounting for unpaid leaves occurs through the amount recorded in the books.