What Happens to Payroll When an Employee Takes FMLA?

When an employee requests FMLA leave, most employers know the basics: the job is protected, the leave is unpaid (in most cases), and there are paperwork requirements. What often catches employers off guard is the payroll side of FMLA.

How do you process a paycheck for someone who is out on leave? What happens to their health benefits? Can you require them to use PTO? What if they come back mid-pay-period?

These questions come up all the time, and the answers matter. Payroll errors during FMLA can create compliance exposure, frustrate employees, and cause problems when the leave ends. This guide walks through what happens to payroll when an employee takes FMLA leave, so you can handle it correctly from the first day of leave through the day they return.

This is general information, not legal advice. FMLA rules can interact with state leave laws and your own internal policies in ways that vary by situation, so confirm specifics with your HR or legal team as needed.

What Is FMLA?

The Family and Medical Leave Act allows eligible employees of covered employers to take job-protected leave for certain family and medical reasons. Qualifying reasons may include the birth or adoption of a child, caring for a spouse, child, or parent with a serious health condition, the employee’s own serious health condition, or certain military family leave situations.

Under federal FMLA rules, eligible employees may take up to 12 weeks of leave in a 12-month period for many qualifying reasons. Some military caregiver leave may allow up to 26 weeks.

The key point for payroll: FMLA protects the employee’s job and benefits, but it does not automatically require the employer to pay wages during the leave. FMLA leave may be unpaid, or it may run at the same time as employer-provided paid leave, such as PTO, vacation, or sick leave.

Is FMLA Paid or Unpaid?

When an employee takes leave under the Family and Medical Leave Act, the first question many employers ask is simple: “Do we still pay them?”

The answer depends on the employee’s available paid leave, your company policies, state leave laws, benefit deductions, and how the absence is recorded in payroll. FMLA itself generally provides unpaid, job-protected leave. It also requires covered employers to maintain group health benefits under the same conditions as if the employee had continued working.

That means payroll does not simply stop and restart later. Employers still need to track hours, manage paid and unpaid leave, handle benefit deductions, apply tax rules correctly, and keep accurate records throughout the leave period.

Federal FMLA leave is generally unpaid. However, an employee may receive pay during FMLA leave if:

• They use accrued PTO, vacation, sick leave, or other paid leave.

• Your company policy requires available paid leave to be used during FMLA.

• The employee qualifies for short-term disability benefits.

• The employee qualifies for paid family or medical leave under a state program.

• Your company voluntarily offers paid family or medical leave.

This is where payroll can get tricky. An employee may be on FMLA, but their pay could come from several different sources. Some pay may go through regular payroll. Some benefits may be paid by an insurance carrier. Some state benefits may be paid directly by the state. Each arrangement affects payroll differently.

How Payroll Changes During FMLA

When an employee begins FMLA leave, payroll should confirm whether the leave will be paid, unpaid, or a combination of both.

For example, an employee may use two weeks of PTO at the beginning of leave, then move into unpaid leave. Another employee may receive short-term disability pay at a reduced wage rate. Another may take intermittent FMLA leave, missing a few hours or days at a time. Payroll needs to track each situation correctly.

The most common payroll tasks during FMLA include:

• Recording FMLA hours separately from regular hours.

• Applying PTO, sick time, or vacation time when required or requested.

• Stopping regular wages when leave becomes unpaid.

• Adjusting salaried employee pay when unpaid FMLA leave is taken.

• Managing benefit deductions during paid and unpaid periods.

• Tracking employee premium payments.

• Coordinating with HR, benefits administrators, and insurance carriers.

• Documenting the leave period for compliance and recordkeeping.

Using PTO During FMLA Leave

Employees may choose, or employers may require, the use of accrued paid leave during otherwise unpaid FMLA leave, depending on the circumstances and company policy. The Department of Labor refers to this as “substitution of paid leave.”

In payroll terms, this means the employee is still on FMLA, but they are being paid using available PTO, sick leave, or vacation time.

For example, if an employee has 40 hours of PTO and takes one week of FMLA leave, payroll may process 40 hours of PTO while also tracking those 40 hours as FMLA leave.

This matters because paid leave does not usually extend the FMLA entitlement. If PTO and FMLA run at the same time, the employee is using paid time and FMLA protection together.

Employers should make sure their handbook clearly explains whether employees are required to use available paid leave during FMLA. Payroll should follow that policy consistently.

What Happens When FMLA Is Unpaid?

Once the employee has no paid leave available, or if paid leave does not apply, payroll may need to process unpaid leave.

For hourly employees, this is usually straightforward. They are paid only for hours worked or paid leave hours used. For salaried exempt employees, employers must be more careful. FMLA allows certain deductions from pay for unpaid FMLA leave without necessarily destroying the employee’s exempt status, but payroll should apply deductions accurately and consistently.

For example, if a salaried employee takes three unpaid FMLA days in a workweek, payroll may need to reduce that week’s salary based on the unpaid leave time. The calculation should match your payroll system, pay frequency, and policy.

This is one reason employers should avoid handling FMLA pay adjustments manually without review. A small calculation mistake can create wage issues, tax errors, or employee frustration.

What About Maternity & Paternity Leave?

Pregnancy leave can affect payroll in a few different ways, depending on why the employee is away from work and what benefits apply.

Under the FMLA, an eligible employee may use job-protected leave for prenatal care, pregnancy-related incapacity, childbirth, recovery from childbirth, and bonding with a new child. Federal FMLA leave is generally unpaid, but the employee may use available paid leave, such as PTO, sick leave, or vacation time, if allowed or required by company policy. The Department of Labor also notes that FMLA can apply before the child is born, including for prenatal care or when a pregnant employee is unable to work because of pregnancy.

From a payroll standpoint, maternity or paternity leave should not automatically be treated as one single type of leave. Part of the leave may be medical leave for the employee’s own pregnancy or childbirth recovery. Another part may be bonding leave after the baby is born. If the employee uses PTO, sick leave, short-term disability, or paid family leave benefits, payroll needs to track those payments separately while also tracking any FMLA time used.

Short-term disability is a common payroll issue during pregnancy leave. If the employee has employer-provided or voluntary short-term disability coverage, the employee may receive partial wage replacement during the period when they are medically unable to work. Depending on how the plan is set up, those payments may come through payroll or directly from the insurance carrier. That matters because it can affect tax withholding, benefit deductions, and how the payment appears on the employee’s pay records.

Employers should also remember that health benefits generally must continue during FMLA leave under the same terms as if the employee had continued working. If the employee is receiving regular pay, PTO, or other wages through payroll, benefit deductions may continue as usual. If the employee moves into unpaid leave, the employer needs a process for collecting the employee’s share of premiums.

What Happens to Benefits During FMLA?

One of the most important FMLA payroll issues is benefits. Before an employee goes on leave, it helps to review active deductions so there are fewer surprises later.

Under FMLA, employers must maintain the employee’s group health benefits under the same terms and conditions as if the employee had continued working. Employees are still responsible for paying their normal share of health insurance premiums.

When the employee is still receiving wages, payroll can usually continue benefit deductions as normal.

When the employee is unpaid, there may be no paycheck from which to deduct premiums. In that case, employers need a process for collecting the employee’s share.

Common options include:

• Having the employee submit premium payments during leave.

• Allowing the employee to prepay premiums before leave begins.

• Allowing the employee to catch up on missed deductions after returning to work.

• Using another method allowed by the plan and company policy.

The key is communication. Employees should know how much they owe, when payments are due, and what happens if premiums are not paid.

Health insurance gets the most attention, but payroll may also need to manage other deductions during FMLA leave.

These may include dental insurance, vision insurance, life insurance, disability coverage, flexible spending accounts, health savings account contributions, retirement plan contributions, loan repayments, garnishments, union dues, or voluntary benefits.  Each deduction may have different rules.

For example, 401(k) deferrals are usually based on compensation. If the employee is not receiving wages, there may be no employee contribution for that pay period. If the employee receives PTO during FMLA, normal retirement deductions may still apply unless the plan says otherwise.

Wage garnishments can also become complicated if the employee receives partial pay or no pay. Payroll should follow the terms of the garnishment order and applicable law.

How FMLA Affects Payroll Taxes

This is an area where payroll, HR, accounting, and tax advisors may need to coordinate. If the employee is receiving normal wages, PTO, sick pay, or vacation pay through payroll, those payments are typically treated like regular taxable wages. That means payroll may still need to withhold applicable federal income tax, Social Security tax, Medicare tax, state income tax, local tax, and other required deductions.

If the employee receives disability benefits or state paid family and medical leave benefits, the tax treatment may depend on who pays the benefit, how premiums were funded, and whether benefits are paid through payroll, an insurer, or a state program. State paid family and medical leave programs can have their own contribution, reporting, and tax rules. IRS guidance also addresses employer credits for qualified paid family and medical leave when certain conditions are met. 

When an employee returns from FMLA

The payroll implications do not end when the employee walks back in the door. A few things need attention on their return:

Benefit deductions: If premiums accrued during unpaid leave, confirm how they will be recovered. Spread over multiple paychecks is often less disruptive than a single large deduction.

Pay rate: Employees returning from FMLA are entitled to be restored to their same or equivalent position at the same pay rate. If raises were given while they were out, review whether they apply.

Accrual restart: Depending on your policy, paid leave accruals may have paused during unpaid FMLA. Confirm how the system handles accrual tracking during leave so balances are accurate when the employee comes back.

Reduced schedule or modified return: Some employees return under a medical reduced schedule as part of their ongoing FMLA protection. If a healthcare provider certifies reduced hours as a continuation of leave, payroll needs to reflect the actual hours worked — not the original full-time schedule.

How Horizon Payroll Can Help

Managing FMLA payroll is rarely as simple as marking an employee “on leave.” Employers need accurate pay calculations, clean timekeeping records, proper deductions, and clear communication between payroll, HR, and benefits.

Horizon Payroll helps businesses manage the payroll side of employee leave with more confidence. From tracking paid and unpaid time to handling deductions and payroll records, our team helps employers keep payroll organized when employee situations get complicated.

If your business needs support with payroll, HR tools, timekeeping, or leave-related payroll processes, Horizon Payroll can help you build a cleaner system before the next leave request lands on your desk.

Contact Horizon Payroll today to set up a free payroll consultation. 

This post is for general informational purposes and does not constitute tax or legal advice. Consult with a qualified tax advisor or attorney before making decisions about your retirement plan.