Should Your Company Have an “Unlimited” Vacation Policy?
“Unlimited” vacation or paid time off (PTO) policies have become more popular in recent years. While such policies can provide benefits for employees and employers, they also come with certain risks.
This article covers what an “unlimited” PTO policy is, pros and cons of having an “unlimited” PTO policy, and key takeaways when considering such a policy for your workforce.
But first, a rant.
What is “Unlimited PTO” & why We must stop calling it that
Full disclosure: as an employment lawyer, I have been known to be critical of so-called “unlimited” PTO policies. For starters, I don’t like that the name is misleading.
When an employee hears the term “unlimited” PTO, they might think that they get to take… an unlimited amount of PTO. Of course, despite its name, this is not the case.
True, “unlimited” PTO policies do shed certain limitations that are otherwise present in a more traditional accrual-based PTO policy. For example:
A typical accrual-based PTO policy sets an annual amount of PTO hours that an employee is entitled to accrue as they work throughout the year. The hours populate into the employee’s PTO bank and the employee is limited to taking only the amount of PTO hours that they have accrued, subject to employer approval.
A typical “unlimited” PTO policy, however, does not provide for any specific number of hours that an employee accrues and likewise does not set any hard cap on the number of hours an employee is permitted to use. There is no PTO bank that an employee draws hours from. Rather, employees are permitted to take paid time off with greater flexibility, deciding when and how much PTO to take without regard to, and not limited by, any specific accrued or banked amount.
So, more precisely, there are no hard limits or objective caps on use of PTO with an “unlimited” policy.
But let’s be real — there are always going to be limits to the use of PTO, whether quantitative or qualitative. Employees cannot simply put in for PTO beginning today and continuing for the rest of time. And exempt employees that might enjoy lengthier periods of vacation time may still find themselves still fitting in a couple of hours of work from the hotel room each day before heading out to the pool. Calling these policies “unlimited” is a misnomer and starts the employment relationship off on the wrong foot, misaligning some employees’ understandings with their employer’s true expectations.
To avoid this ambiguity and confusion, let’s stop calling them “unlimited” PTO policies and start calling them something closer to what they truly are: not unlimited, but flexible. Flexible (or flex-time) policies more aptly describe the concept of what the “unlimited” PTO policy is intended to cover. From there, a clearly -drafted and legally-compliant written policy is key to setting clear expectations and avoiding misunderstandings.
What are the pros and cons of an “unlimited” or “Flexible” PTO policy?
There are many reasons that a company might consider implementing a flexible PTO policy, as the benefits seem strong — at least in theory. Here are a few key reasons that a flexible PTO policy may be right for your workforce:
Recruiting and retention. As companies compete to attract top talent, they want to be able to tout a flexible, casual policy for taking time off. Employees may appreciate the ability to frontload certain working time or projects to free themselves up to take more vacation time off during the off-season, or to carve out certain afternoons on an intermittent basis to take care of personal matters. Showing employees that you trust them to take the time they need while also getting their work done can positively impact workplace culture, improving your recruiting and retention efforts.
Easier administration. There’s no tracking of PTO accrual necessary with a flexible PTO policy since employees do not accrue PTO. That said, take note that some states may require that you print the balance of PTO on an employee’s wage statement and, with an “unlimited” policy, that you indicate that the balance is “unlimited” in lieu of the actual accrued amounts. Moreover, if you implement this type of policy with hourly, non-exempt employees, you will likely still have to track the use of PTO in order to properly compensate employees for the paid time off without impacting the tracking of the employee’s actual hours worked (which is important for things like properly calculating overtime and paid sick leave accrual).
Cost savings. When done right, these “unlimited” policies can actually save companies money by reducing or eliminating the PTO liability on their books. While federal law does not require that companies pay out accrued, unused PTO upon termination of employment, many states have laws that do require payout. But under a flexible PTO policy, employees do not accrue any PTO hours at all. Therefore, when you have an “unlimited” or flexible PTO policy, theoretically there is no PTO to pay out at termination, even in (almost all of) the states that would otherwise require payout of accrued, unused PTO. It should be noted however that in Illinois, the state’s DOL has advised that employers must still pay an employee who separates from employment a monetary equivalent equal to the amount of vacation pay to which the employee would otherwise have been allowed to take during that year but had not taken; and because unlimited PTO policies are a relatively new development (at least in terms of how quickly the law develops to address such things), many other states’ courts and labor departments have not yet weighed in specifically on this topic.
In practice, however, “unlimited” PTO policies can create challenges and problems that companies may not anticipate when implementing them. For example:
“Unlimited” is not really unlimited. No PTO policy is truly unlimited. While such policies do not (and should not, see next bullet) indicate a specific cap to monthly or annual use of PTO, the reality is that employees cannot simply take infinite paid vacation. For example, “unlimited” PTO is still typically subject to an employer’s discretion to deny PTO requests and block certain dates (like busy seasons), and subject to the employee still being able to get their work done. But for an employer to enjoy the benefits of an “unlimited” or flexible PTO policy (i.e. no accrual and no payout), there must be a real ability for employees to take significant—if not unlimited—amounts of vacation time.
A poorly-drafted “unlimited” PTO policy risks converting your policy to a vested benefit requiring payout at termination that is not on your HR or legal team’s radar. Your “unlimited” PTO policy may not be what you think it is. For example, if you set a hard cap to the use of the “unlimited” PTO, or if you don’t make clear that employees can be approved for large amounts of vacation time, this may convert your policy into an accrual-based policy that must be paid out at termination in states that require it. In 2020, a California Court of Appeal held that a company’s purportedly “unlimited” PTO policy was not actually “unlimited” and therefore had to be paid out at termination. McPherson v. EF Intercultural Foundation, Inc., 47 Cal. App. 5th 243 (Cal. Ct. App. 2020). In that case, the company failed to put their policy in writing, failed to make the unlimited nature of the PTO clear, and employees testified that they felt limited in their ability to use the PTO due to the policy’s ambiguity and their busy work schedules. McPherson gave California employers some answers about what an “unlimited” policy is not and some clues regarding what an “unlimited” policy should include, but it left some open questions that are not for the faint of heart.
Some employees may actually take you at your word. What do you do if an employee tests the limits of your “unlimited” PTO policy? Employment policies that give flexibility and discretion to employees require that you trust that employees will not abuse the benefit. But how do you define “abuse” or “overuse” of a benefit that is supposedly unlimited? Disciplining employees for abuse of the PTO benefit becomes more challenging where you have not and cannot point to the threshold that has been crossed. Develop non-quantitative guideposts for when PTO should or should not be used so employees understand how the policy works.
With flexibility comes risk of uneven application. Are you leaving PTO approval to the discretion of individual managers or HR professionals? If so, set some concrete parameters on how to assess such requests in a uniform way. Otherwise, you risk that some employees will receive approval for PTO that other similarly-situated employees may be denied. With uneven application of HR policies comes the risk that employees may perceive the disparate treatment as unfair at best (negatively impacting morale), or discriminatory at worst. While “unlimited” PTO policies cannot have quantitative caps, employers should make sure to set certain qualitative standards for reviewing and approving PTO requests.
“Unlimited” PTO policies may result in reduced use of PTO. Employers that choose to provide employees with PTO often do so with a desire to drive positive culture and to give employees much-needed time to rest and recuperate. So it should be considered a major “con” that employees often feel pressure—whether internal or external—not to take PTO when they are on an “unlimited” policy. Underuse of time off may result in a negative workplace culture, burnout, and turnover. Moreover, because “unlimited” PTO policies are now somewhat notorious for this underuse, having such a policy may not be considered as helpful in recruiting as it once was thought to be.
Key takeaways when considering an “unlimited” or “flexible” PTO policy for your Workplace
Don’t assume your employees will understand that they really shouldn’t take PTO during certain times or in certain quantities when your policies communicate otherwise. Contradictory, vague, or misleading messaging creates problems for employers & employees alike. A successful PTO policy, whether “unlimited”/flexible or not, should be written and communicated to employees so that they understand its purpose, know how and when they can use it, and understand their own obligations with regard to PTO requests.
When it comes to deciding what type of PTO policy to implement with your employees, consider a few things:
What are your goals? Before implementing or changing your PTO policy, consider what your goals are in doing so. For example, if your goal is to entice top talent to join your team or to enhance employee retention, have you vetted that this change will be seen as a positive? If your goal is to reduce or eliminate PTO accrual liability by switching from an accrual-based policy to an “unlimited” one, confirm whether state law permits you to eliminate an employee’s existing accrued PTO or whether it may still need to be paid out, either now or at termination.
This may not be a one-size-fits-all policy. You can have different PTO policies for different types of employees as long as you do not implement the different benefits in an unlawful, discriminatory way. For example, some companies choose to have a more traditional accrual-based PTO policy for the majority of their workforce and have a flex-time or “unlimited” PTO policy that applies to senior executives only. This works well for some companies because flex-time or “unlimited” PTO tracks the same work-time concept as “exempt” employee status, i.e. get your work done in whatever time it takes you to get it done; the rest of the time is for you. It may also help to cut down on “unlimited” PTO abuse by narrowing the population of employees that such policy applies to.
Draft your policy carefully. The idea of “unlimited” PTO is still relatively new, which means that there is limited guidance from courts and administrative agencies regarding how to properly draft a policy that avoids accrual and required payout of PTO at termination. That said, certain jurisdictions have enumerated certain requirements that should be considered and incorporated when preparing your own written policy. In addition, employers should include clear instructions and parameters for employees to understand how to request PTO, when it might be approved or denied, and what types of time off the PTO may be applied to (e.g. personal and vacation time versus FMLA and other protected leaves of absence). Consider working with experienced employment counsel to draft or review your policy before you publish it.
Training is key. Even a properly-drafted “unlimited” PTO policy may become subject to payout if it is not administered properly. Any employer that implements a flex-time or “unlimited” PTO policy should provide regular training and oversight to managers, HR team members, and others who are responsible for reviewing PTO requests and administering the policy to ensure that the administration is done fairly and in a way that allows sufficient opportunity for employees to take time off and does not become a de facto use-it-or-lose-it policy. And, as with any new policy rollout, it can be helpful to do so with a general training to the employees impacted by the new policy to promote transparency, confidence, and understanding.