In recent years, a number of highly visible companies in jurisdictions that prohibit “use or lose” vacation policies have adopted unlimited paid time off (“PTO”) programs, garnering ample media buzz.  Under such policies, employees can take off as much time as they choose (within reason) as long as they get their job done.  The focus is on producing results, not just logging hours.

Buzz aside, only about 1-2% of employers currently offer such policies – primarily in California due to its generous laws regarding vacation accrual and payout—and, because they are so new, courts and legislatures have not yet opined on them.  The following lays out the legal and practical issues for employers to consider when deciding whether to transition to an unlimited policy.

Benefits of an Unlimited PTO Policy 

  • Cost Savings:
    • There is an argument under current wage and hour laws that employers can avoid payout of accrued vacation upon termination, where applicable, because PTO is “unlimited” and does not “accrue” or “vest.” See e.g., Cal. Lab. Code § 227.3 (where “an employee is terminated without having taken off his vested vacation time, all vested vacation shall be paid to him as wages”) (emphasis added). That being said, there is currently a dearth of case law on this issue and we don’t know whether courts will agree or if legislatures will eliminate this perceived legislative loophole.   While there has not been case law regarding payout of “unlimited” vacation at termination, California has acknowledged the existence of “unlimited” plans as it relates to paid sick leave which indicates an understanding of this concept as something distinct from a traditional accrued vacation plan.
    • Unused, accrued PTO that rolls over each year and is paid out upon separation can be a significant expense on a company’s balance sheet. Indeed, one report estimates that American companies have $224 billion in liabilities on their balance sheets from unused vacation time. That liability can be decreased or eliminated with an unlimited PTO policy.
    • Some studies have shown that unlimited PTO policies may indirectly reduce the cost for other benefits (think health insurance, disability insurance and employee assistance programs) because employees can more easily take time for routine and preventative care.
  • Talent Acquisition Tool: The flexibility that these policies offer may make a company more attractive to top talent, especially to millennials.
  • Reduces Administrative Headaches: In many cases, human resources and payroll staff are relieved of monitoring time off and, in jurisdictions and companies with a “use or lose” policy, the end of the year rush to take unused PTO goes away too.
  • Employee Loyalty: If managed correctly, unlimited PTO may build higher morale and a culture of employee ownership because the policy conveys that the company trusts its employees to manage their time in a way that serves their personal needs while also meeting their obligations at work.

Drawbacks of an Unlimited PTO Policy

  • Not a Good Fit for Every Company Culture: These policies are better suited for results-driven companies that already provide employees with a certain amount of autonomy and flexibility. They are unlikely to be effective at companies where employees must be physically present at the worksite, like retail establishments, restaurants or manufacturing plants. Also, these policies may cause morale problems for more senior employees who may be upset that a junior employee now gets the same vacation time as someone who has been a loyal employee for many years.
  • Too Cumbersome for Non-Exempt Employees: These policies likely won’t make sense if the workforce is heavily comprised of employees paid on an hourly basis who are not exempt from overtime and minimum wage requirements because employers must still track non-exempt employees’ hours worked to ensure compliance with overtime, minimum wage, and meal and rest break laws. Additionally, non-exempt workers are paid based on time worked, not their completion of their work assignments, so the likelihood of abuse is much greater. Companies that otherwise wish to implement an unlimited PTO policy may do so for their exempt employees, while keeping a traditional vacation policy for non-exempt employees.
  • Requires Active Management of Employee Performance: Supervisors must proactively manage employee performance and create and communicate metrics to assess contribution and productivity without simply relying on hours logged at the office. Managers won’t be able to discipline someone for not being in the office, but rather for failing to complete their work, which requires more oversight. And remember, there will be some employees who will abuse this privilege by, for example, creating consistent long weekends through the summer.
  • May Dissuade Employees from Taking Time Off: If employees do not have clear expectations of how much time off is acceptable or if job security is low or employee competition is high, employees may fear taking time off absent a fixed entitlement to do so. This can defeat one of the reasons for providing unlimited paid time off in the first place.
  • Uncharted Territory: As these policies gain popularity, legal issues will arise. Not all companies will have the appetite to adopt a policy that has not yet been vetted by courts and legislatures.

Transitioning to an Unlimited PTO Policy

When making the transition to an unlimited PTO policies, employers should remember:

  • “Unlimited” Should Not Mean “Unmanaged”: It’s imperative to have a clear, written policy addressing: (i) eligibility; (ii) how to request time off; (iii) the rules and guidelines around the benefit (including that sufficient advanced notice is required for planned time off); (iv) that because vacation does not accrue, there will be no payout of PTO upon separation; and (v) that employees must meet their goals and maintain satisfactory job performance to remain eligible for the benefit. Supervisors should discuss with their teams how PTO will be managed so that there is no interruption of service for clients and to minimize headaches for other team members. Discipline under the new policy will be challenging initially and Human Resources should be very involved in these discussions to ensure consistency throughout the organization.
  • Must Comply with Other Legal Obligations: Companies must still comply with their FMLA, ADA, USERRA, paid sick leave, and similar obligations, if applicable. To minimize complications related to leave administration, employers should make clear how these policies interact with an unlimited PTO plan, in compliance with applicable local law. The PTO policy should establish clear limits on how PTO is used, and how long an employee can use it for in a single block of time (i.e., absences of more than 15 consecutive days are not covered by this policy). Remember that leave statutes and ordinances have anti-retaliation policies, so companies must be consistent in how the PTO use limits are applied.
  • Plan for the Transition: Companies transitioning away from a traditional PTO plan should give staff ample time to use their accrued days or cash them out in advance of the unlimited policy going into effect and have a clear communication plan in place. There should be clear talking points about why the change has been made and how the company will administer it. Supervisors should be armed with information and know when to pass questions onto Human Resources. This is key, as employees will always come to supervisors first, and without a communication plan in place before the transition, there is likely to be inconsistent (and otherwise problematic) responses without valuable input from Human Resources. And remember that everything is local here, and companies must balance the desire for uniformity with local rules regarding use and payout of accrued paid time off, medical leaves of absence, reasonable accommodations and paid sick leave.