Thirty years ago, Ferris Bueller taught us how important a day off is. Fast forward, the recent rise of unlimited paid time off (PTO) policies sounds like Ferris’ heaven. Ferris would definitely take advantage. So what is causing this recent trend in the U.S. and how can it be managed in a global workplace?
Pros in the U.S.
Most countries require mandatory paid vacation and sick days for employees. Not the U.S.
The Fair Labor Standards Act (FLSA) does not require payment for time not worked, such as vacations, sick leave or holidays. These benefits are matters of agreement between an employer and an employee or state law. Only seven states and 30 cities or counties currently require paid sick leave. Yet, it is not unusual to see U.S. companies offering a specified number of days of PTO.
Now, some employers are voluntarily offering unlimited PTO policies – why?
- Savings: Unlimited PTO policies allow companies to cap the amount of vacation owed to employees on the books at current levels; eliminate additional accrual in the future; and thereby reduce vacation payouts at termination (where that is required by law or Company policy).
- Reduced Administrative Burdens: Unlimited PTO policies remove the need to monitor and track vacations.
- Recruiting Tool: Unlimited PTO policies can attract talent (e.g. millennials who are often credited with pressing for flexibility and autonomy) and bolster an egalitarian culture.
Cons when Going Global
Some U.S. multinationals are trying to take this innovation of unlimited PTO global.
Yet, benefits seen in the U.S. do not necessarily cross borders. Unlike the U.S., most overseas countries have minimum legal entitlements to paid vacation and sick leave. Thus, combining U.S. style unlimited time-off policies with local statutory requirements can be difficult to reconcile.
- Savings Not Equivalent: Outside the U.S., the potential cost savings of removing vacation liabilities from the books does not generally exist. The norm is that a company must at least grant employees statutory vacation, which includes requirements to carry certain accruals. Multinationals could argue U.S. style unlimited policies are more generous than such statutory requirements and, as such, permissible. But, if a company using an unlimited policy does not track statutory vacation at all, that can create significant cost issues on termination because accrued but unused statutory vacation (which can roll over into a large balance over time) will still need to be paid out in most countries.
- Administrative Burdens Not Reduced: Outside the U.S., it is virtually impossible to eliminate tracking unused statutory vacation and its accrual. Local statutory vacation entitlements are the mandatory minimum threshold and must be granted no matter how much vacation an employee can theoretically take in excess. Therefore, to be able to demonstrate compliance with local law, companies with unlimited PTO policies will still need to track vacation. This removes the administrative advantages enjoyed in the U.S for unlimited PTO.
Beyond statutory entitlements for vacation, employees outside the U.S. typically have enhanced contractual rights (either by individual contract or collective contracts with unions or work councils), which define the terms and conditions of employment and require employee consent before alteration. Arguably a change to unlimited PTO could be viewed as an improvement to benefits for which consent is unnecessary, but this argument has not yet been tested. Either way, the adding of unlimited vacation could not be pulled back without consent.
Not Viewed as a Recruiting Tool: There are cultural expectations outside the U.S. which need to be carefully navigated. Internationally, the pattern is well-established for set statutory vacation or sick leave and tracking their use. As a result employees outside the U.S. may well have the perception that an “unlimited vacation” really means that there is “no vacation”.
- Risks of Abuse: Employees abroad come out of a different culture and different tradition. For example, employees outside the U.S. are actually expected to take their vacation days; in many countries taking vacation is considered a health and safety issue. This (along with the absence of at-will rules for employment) make it precarious to discipline or discharge employees overseas for doing too little work and taking too much time off. Although arguably contrary the principle of “unlimited” PTO, it may be necessary to protect the company by placing certain “limits” outside the U.S.: e.g., limiting how much time off employees can take at once or implementing systems requiring preapproval of vacation time companywide (to ensure fair and equal treatment across the board).
The Direction of Travel?
Ferris Bueller is quintessentially American. So too unlimited time off polices?
Such policies have upsides in the U.S. that are not mirrored for companies implementing internationally. Global implementation undermines the U.S. drivers to have a policy that is less expensive, less burdensome and less bureaucratic. This is not to suggest it cannot be done, but only that rolling out such policies globally is today fraught with caveats.
Perhaps, more countries outside the U.S. will begin catching up quickly. Until then, prudence requires contemplating adding safety valves to any non-U.S. extensions of “unlimited” time off policies: e.g., requiring (and tracking) employees use of statutory vacation entitlement prior to use of any unlimited leave policy.
Ferris knew: “The question isn’t what are we going to do; the question is what aren’t we going to do.”