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Is FMLA Leave Paid? How Payroll Handles Unpaid Leave, PTO Substitution and Benefits

9/6/2026

The short answer is no: the Family and Medical Leave Act does not require an employer to pay anyone. The Department of Labor's regulation says it plainly: "Leave taken under FMLA may be unpaid" (29 CFR 825.206(a)), and "Generally, FMLA leave is unpaid leave" (825.207(a)). FMLA is a job-protection and benefits-continuation law, not a wage-replacement program.

That short answer is also where most payroll mistakes start. An employee on FMLA leave is very often paid, just not by FMLA. Accrued PTO, a short-term disability plan, workers' compensation, an employer parental leave policy or a state paid family and medical leave program may all be replacing income during the same weeks. Each source has its own rules about whether it runs concurrently with FMLA, how it is taxed, whether the employer can require it, and what happens to benefit deductions when the paycheck shrinks or stops.

This guide walks through those sources in the order payroll actually meets them.

What FMLA Does Guarantee

Before getting into pay, it helps to be precise about what the law requires of a covered employer during an eligible employee's leave:

  • Up to 12 workweeks of job-protected leave in a 12-month period (26 for military caregiver leave), per 825.200
  • Continuation of group health plan coverage on the same terms as if the employee were working, per 825.209
  • Restoration to the same or an equivalent position on return, per 825.214
  • Freedom from interference and retaliation, per 825.220

Pay is not on that list. Everything else in this guide is about the other rules that decide whether, and how, money flows during the leave.

Source 1: Substitution of Accrued Paid Leave

The most common way an employee gets paid during FMLA is substitution: the employer's paid leave runs at the same time as the unpaid FMLA leave, and the employee receives pay under the employer's normal paid leave policy for those days.

Under 29 CFR 825.207(a):

  • The employee may choose to substitute accrued paid leave for unpaid FMLA leave.
  • If the employee does not choose to, the employer may require
  • The employee's ability to substitute is governed by the terms and conditions of the employer's normal leave policy. If the PTO policy requires two days' notice for vacation, or allows sick time only for the employee's own illness, those conditions apply to the paid portion.
  • If the employee does not meet the policy's conditions, they lose the pay, not the protection. They remain entitled to unpaid FMLA leave.
  • The employer must tell the employee in the rights and responsibilities notice whether substitution will be required and what conditions apply (825.300(c)(1)(iii)), and confirm it in the designation notice (825.300(d)(1)).

Two clarifications prevent common disputes.

Substitution does not extend the leave. The paid days and the FMLA days are the same days. An employee with three weeks of PTO and a 12-week FMLA entitlement gets 12 weeks of protected leave, three of them paid, not 15 weeks.

Paid leave used for a non-FMLA reason does not count against FMLA (825.207(c)). A sick day for a cold that is not a serious health condition is just a sick day.

Requiring substitution: the policy decision

Many employers require substitution so that PTO and FMLA run together and the employee does not return from 12 weeks of FMLA with a full PTO bank to take another month off. Others let employees choose so they can preserve vacation. Either approach is lawful under the federal rule, but it must be stated in your policy and applied consistently, and some state leave laws and state paid leave programs restrict whether the employer can require employees to use PTO alongside state-protected leave or benefits. Check the rules in each state where you have employees before applying one nationwide policy.

Payroll coding

Set up distinct earnings codes so that the register shows which hours are PTO-paid FMLA, which are unpaid FMLA, and which are ordinary PTO. FMLA records must show the dates of leave and, for partial days, the hours (825.500(c)), and those records must be kept for three years. A single "PTO" code cannot tell you how much of an employee's FMLA entitlement has been used. Getting HR, benefits and payroll to share one coding scheme is a team-training problem as much as a systems one, which is where a bundle such as the Leave Management Compliance Suite fits.

Source 2: Short-Term Disability Plans

When an employee's own serious health condition keeps them out, an employer-sponsored or insured short-term disability (STD) plan often pays a percentage of salary after a waiting period. Under 825.207(d):

  • Leave under a disability plan counts as FMLA leave if the condition qualifies, and the employer may designate it and count it against the entitlement.
  • Because disability-plan leave is not unpaid, the substitution rule does not apply. Neither the employer nor the employee can require accrued paid leave to be used during the weeks the plan is paying.
  • The employer and employee may agree, where state law allows, to use paid leave to supplement the disability benefit, for example topping up a plan that replaces two-thirds of salary.

The waiting period is a different story. The days before disability benefits start are unpaid FMLA leave, so substitution can be elected or required for those days under your normal policy.

Payroll also has a tax job here. Benefits from an insured plan are generally reported as third-party sick pay, with responsibilities split between the carrier and the employer depending on the arrangement; our guide to third-party sick pay reporting and the page on Social Security, Medicare and FUTA taxes on sick pay cover the mechanics.

Source 3: Workers' Compensation

A work injury that is also a serious health condition can be designated as FMLA leave, so the two run concurrently (825.207(e)). As with disability plans, workers' comp absences are not unpaid, so neither party can force substitution of paid leave, but they can agree to supplement where state law permits.

If the treating provider releases the employee to light duty and the employee declines it, they may lose workers' comp benefits but remain entitled to unpaid FMLA leave until their entitlement runs out. From the day workers' comp benefits stop, the substitution rule applies again. The employee also has to arrange payment of their health premium share while comp benefits are being paid (825.210(f)), because there is no paycheck to deduct it from. The FMLA, ADA and workers' comp overlap guide covers how the three regimes interact.

Source 4: State Paid Family and Medical Leave

A growing number of states run paid family and medical leave (PFML) programs funded by payroll contributions. These programs pay benefits, usually through the state or an approved private plan, not wages through your payroll. When an employee's leave qualifies under both FMLA and a state program, the federal leave protection and the state wage replacement typically run at the same time, but the details are state law: how benefits are calculated, whether employers can require accrued PTO to be used first or to top up benefits, and whether the state also provides its own job protection. Our state paid family leave roundup tracks the programs and their payroll contribution rules.

Tax treatment is federal, and it changed recently. In Revenue Ruling 2025-4, the IRS set out how state PFML contributions and benefits are treated. In summary:

  • Family leave benefits paid by the state are taxable income to the employee but are not wages for federal employment tax purposes.
  • Medical leave benefits attributable to employer contributions are taxable, are wages for employment tax purposes, and are treated as third-party sick pay.
  • Medical leave benefits attributable to employee contributions are excluded from income.

The IRS gave states and employers a transition period to comply, and Notice 2026-6 extended that transition through calendar year 2026. Payroll should confirm with each state program how it will report benefits and which party handles employment taxes on the employer-funded medical portion before the transition ends.

Separately, the federal Section 45S employer credit for paid family and medical leave was made permanent by 2025 legislation, according to IRS guidance; employers that voluntarily pay qualifying leave wages should review IRS.gov for current eligibility rules before claiming it.

Source 5: Employer Paid Parental or Family Leave Policies

Some employers pay for some or all of FMLA-qualifying leave under their own policies: paid parental leave, salary continuation, or paid medical leave. These are simply paid leave plans. Leave taken under them can be designated as FMLA leave and run concurrently, and the designation notice must say so (825.300(d)(1)). Write the policy so that it states clearly whether it runs concurrently with FMLA; if it does not say, expect disputes about whether the employee is owed both in sequence.

Exempt Employees: Salary Deductions During FMLA

The FLSA salary basis rules normally prohibit partial-day deductions from an exempt employee's salary. FMLA creates a specific exception.

Under 29 CFR 825.206(a) and 29 CFR 541.602(b)(7), an employer may make deductions from an exempt employee's salary for any hours taken as intermittent or reduced-schedule FMLA leave within a workweek, without affecting the exemption. The employer may pay a proportionate part of the full salary for the time actually worked.

Example. A salaried exempt employee earns $1,600 per week on a normal 40-hour schedule. In one week they take 12 hours of unpaid intermittent FMLA leave (PTO exhausted, so no substitution). The employer may pay 28/40 of the salary: $1,120. Without the FMLA exception, a partial-day deduction like this would put the exemption at risk.

The limits in 825.206(c) matter as much as the rule:

  • The exception applies only to eligible employees of covered employers and only to leave that qualifies as FMLA leave.
  • It does not cover leave required by state law for a reason outside FMLA, such as caring for a grandparent, or leave that is more generous than FMLA. Hourly deductions from an exempt salary for that leave are not protected by this exception.
  • It does not apply to an employee who has not yet met the eligibility tests, or to an employer with fewer than 50 employees.

Full-day absences for the employee's own sickness may sometimes be deducted under the separate sick-leave-plan exception in 541.602(b)(2), and full workweeks with no work at all need not be paid (541.602(a)). See our exempt vs. non-exempt guide for the broader salary basis rules.

Fluctuating workweek employees

For employees paid under the fluctuating workweek method, 825.206(b) lets the employer switch the employee to hourly pay for the entire period of intermittent or reduced-schedule leave, including weeks with no leave, paying only for hours worked plus time and one-half for overtime. The hourly rate is the weekly salary divided by the normal or average hours in non-leave weeks. If the employer chooses this, it must do so uniformly; if it does not convert, it may not take any deduction.

Hourly Employees and Intermittent Leave

For non-exempt employees, unpaid FMLA hours are simply hours not paid. The complications are tracking and rounding: FMLA leave must be accounted for in the shortest increment your payroll system uses for other absences, as long as it is one hour or less. The full method, including overtime situations, is covered in our guide to calculating pay during intermittent FMLA leave.

Benefit Deductions When the Paycheck Stops

FMLA requires the employer to keep group health coverage going, and it lets the employer require the employee to keep paying their usual share (825.210(a)). When the leave is paid, the share comes out through normal payroll deductions. When the leave is unpaid, payroll needs a plan.

The DOL rule allows the employer to collect the employee share on the regular payday schedule, on the COBRA payment schedule, through prepayment under a cafeteria plan at the employee's option, under existing rules for other unpaid leave (as long as they do not require prepayment), or under another arrangement agreed with the employee (825.210(c)). No administrative surcharge can be added.

When the premiums run through a Section 125 cafeteria plan, the IRS regulation at 26 CFR 1.125-3 describes three payment options the plan may offer on terms at least as favorable as for employees not on leave:

Option

How it works

Tax treatment

Pre-pay

Employee pays the leave-period amounts before leave starts

Can be pre-tax; employer cannot mandate it

Pay-as-you-go

Employee pays during the leave on a regular schedule

Generally after-tax, unless paid from taxable pay due during leave such as PTO

Catch-up

Employer advances the premiums and the employee repays on return

Repayment can come from post-return pay as agreed

 

If the employee's premium payment is more than 30 days late, the employer can drop coverage only after mailing a 15-day written notice (825.212). Many employers prefer to keep coverage in force and recover the employee share on return, which the regulation permits. Before taking catch-up deductions from a returning employee's pay, confirm that your state's wage deduction law is satisfied, which often means a written authorization signed before the leave.

Our cafeteria plan guide covers the election and revocation rules that interact with these options.

Other Pay Items During FMLA

Holiday pay. FMLA does not require it. Under 825.209(h), entitlement to benefits other than group health, such as holiday pay, follows your established policy for employees on other kinds of paid or unpaid leave.

PTO accrual. An employee may, but is not entitled to, accrue additional benefits or seniority during unpaid FMLA leave (825.215(d)(2)). Benefits accrued before the leave, to the extent not substituted, must be available on return. Accrual during paid PTO usually follows the PTO policy.

Bonuses. Bonuses tied to a goal such as perfect attendance or hours worked can be denied if FMLA leave caused the employee to miss the goal, but only if employees on equivalent non-FMLA leave would also be denied (825.215(c)(2)).

Raises. Unconditional increases granted to everyone during the leave, such as cost-of-living adjustments, must be applied when the employee returns (825.215(c)(1)).

Retirement plans. Unpaid FMLA leave cannot be treated as a break in service for vesting and eligibility, though it need not be credited as service for benefit accrual (825.215(d)(4)).

A Payroll Checklist for FMLA Pay

Step

What to confirm

Designation received

Dates, continuous or intermittent, whether substitution is required

Pay source identified

PTO, STD, workers' comp, state PFML, employer paid leave, or unpaid

Earnings codes

Separate FMLA-paid and FMLA-unpaid codes

Exempt status

Deductions only for qualifying FMLA hours

Benefit premiums

Collection method chosen and communicated in writing

Tax reporting

Third-party sick pay and PFML benefit reporting responsibilities confirmed

Return

Arrears collected, accruals restored, any across-the-board raise applied

 

Training for the People Who Run This

FMLA pay questions sit on the line between HR, benefits and payroll, and the errors usually come from one department not knowing what another already decided. The Leave Management Compliance Suite is the site's leave compliance bundle, and a practical starting point when more than one person in the organization touches FMLA, state leave and payroll.

Frequently Asked Questions

Do you get paid while on FMLA leave?

Not from FMLA itself. FMLA guarantees job-protected leave and continued group health coverage, but the leave can be unpaid. An employee may still receive income during the leave from other sources: accrued PTO or sick leave substituted under the employer's policy, a short-term disability plan, workers' compensation for a work injury, an employer paid parental leave policy, or benefits from a state paid family and medical leave program. Which of those apply depends on the employer's policies and the state where the employee works.

Can an employer require employees to use PTO during FMLA leave?

Under the federal rule, yes. 29 CFR 825.207 lets the employer require accrued paid leave to run concurrently with unpaid FMLA leave, and the employer must tell the employee in its notices that it will do so. The paid leave is governed by the employer's normal policy terms. The employer cannot require substitution while the employee is receiving disability plan or workers' compensation benefits, because that leave is not unpaid. Some state laws and state paid leave programs limit forced PTO use, so check state rules for each work location.

Can you deduct pay from an exempt employee for FMLA leave?

Yes, for leave that qualifies as FMLA leave. Under 29 CFR 825.206 and 541.602(b)(7), an employer can reduce an exempt employee's salary proportionately for hours of intermittent or reduced-schedule FMLA leave without losing the exemption. The exception is narrow: it does not apply to employees who are not FMLA-eligible, to employers with fewer than 50 employees, or to state-law leave for reasons FMLA does not cover. Deductions outside the exception can jeopardize the employee's exempt status.

Who pays health insurance premiums during unpaid FMLA leave?

The employer keeps paying its share, exactly as if the employee were working. The employee can be required to keep paying their usual share. Because there is no paycheck during unpaid leave, the employer must give advance written notice of how the employee's share will be collected, for example on the regular payday or COBRA schedule. If a payment is more than 30 days late, coverage can be dropped only after a 15-day written notice. Many employers instead continue coverage and recover the employee share when the employee returns.

Does PTO accrue while an employee is on FMLA leave?

Federal FMLA does not require accrual during unpaid leave. Under 29 CFR 825.215(d)(2), an employee may, but is not entitled to, accrue additional benefits or seniority during unpaid FMLA leave, so it depends on the employer's policy for other unpaid leave. Benefits the employee had already accrued before the leave, and did not use through substitution, must be available when they return. When the employee is using paid PTO during FMLA, accrual typically continues according to the PTO policy's normal terms.

Are state paid family leave benefits taxable?

According to IRS Revenue Ruling 2025-4, state family leave benefits are taxable income to the employee but are not wages for federal employment tax purposes. Medical leave benefits attributable to employer contributions are taxable wages and treated as third-party sick pay, while the portion attributable to employee contributions is excluded from income. The IRS extended its transition relief through calendar year 2026 in Notice 2026-6. State income tax treatment varies, so check the state program's guidance as well.