A trend we have been seeing in many companies, especially in technology companies, is the offering of unlimited paid time off (PTO) as an employee benefit. Unlimited PTO, or open vacation policy, essentially lets employees take as many days off as they choose to or need to. In theory, this sounds amazing, particularly for employees. However, careful consideration of the pros and cons is a must before implementing such a policy, particularly if your business is in California.

The Pros of Unlimited PTO

There are many potential benefits to having an unlimited PTO policy. Unlimited PTO creates:

  • A useful recruiting tool to attract job candidates
  • An easier way to retain top talent
  • Flexible policies around vacation that will foster trust and avoid burnout among employees
  • Employees that are more likely to feel valued by their employer
  • Higher morale and productivity
  • Better employee health as sick employees will be more likely to stay home and take sick days, reducing the spread of illness in the office
  • Financial benefits to the employer, because days off are not accrued and, depending on applicable state laws, an employer may not have to pay out for vacation time when an employee leaves the company

The Cons of Unlimited PTO

The potential drawbacks and risks of having an unlimited PTO include:

  • More required planning and rollout time than normal vacation policy
  • Risk of policy abuse by employees, which can be mitigated with a properly worded PTO policy and some planning
  • Risk of employee burnout if they are fearful to use it
  • Inconsistent application of unlimited PTO that may create animosity among employees
  • Unequal administration and approval of PTO that may lead to potential discrimination claims
  • Risk of violations and retaliation claims if sick days and vacation days are combined into one unlimited PTO policy as California policy requires employers to provide a certain amount of paid sick leave.

Unlimited PTO Best Practices

Many of the drawbacks outlined above can be mitigated by a carefully written PTO policy and proper implementation. Here are some best practices:

  • Consider your employees.
    Unlimited PTO may not be appropriate for all employees. Full-time exempt employees, who are entrusted with the discretion and judgment to balance work obligations, may be more appropriate candidates than commissioned-based employees, or non-exempt workers.
  • Consider your company culture.
    Unlimited PTO may not be appropriate for all companies. An unlimited PTO policy works best when the company culture already operates on a goal-oriented basis that tracks performance and goals.
  • Set parameters around what “unlimited” means.
    Defining the “unlimitedness” of the policy, especially if an employer is in a state where PTO is paid out upon termination or layoff, can go a long way in preventing any claims against your company.
  • Base leave on performance evaluations.
    Employers retain the right to hold employees to performance and productivity requirements. The key for employers is to set boundaries on the PTO policy based on performance criteria
  • Establish a protocol.
    Employers should provide guidelines on how to request time off, such as requiring a 4 weeks’ notice when requesting 3 or more days of PTO. Also, each policy should come with a caveat that an employer can reject a PTO request due to workload or scheduling conflicts from other employees.
  • Draft a thorough policy.
    Employers must draft policies to explain the interaction between protected leaves (i.e. FMLA), unlimited PTO, and other wage replacement benefits (i.e. state disability benefits or sick leave). The policy should address the coordination of overlapping paid benefits as well. For example, if employees have unused PTO time from the previous policy, then this must be addressed before the transition to an unlimited PTO.

California Legal Risks

If you are a California employer, there are additional legal risks and concerns to consider when dealing with unlimited PTO.

In California, earned vacation time is considered wages that are earned. Vacation accrues, or “vests,” as work is performed, and this cannot be forfeited. The vacation time accrued must be paid out at the time of termination. Specifically, California Labor Code section 227.3 requires employers to pay out unused, accrued vacation or paid time off, at the employee’s final rate of pay.

Under an unlimited vacation plan, it can be argued that there is no accrual, and thus, no vacation payout is required at termination. However, so far, California courts have provided little insight into the legality of unlimited PTO policies. Depending on how it is being practiced, California Labor Commissioner and California courts may rule the policy as a ploy to avoid paying out accrued vacation.

Since CA Labor Code section 227.3 requires application of the “equity and fairness” principles to vacation policies, an “unlimited” policy that is unfair in application may violate California policy.

The law on unlimited PTO policies is constantly evolving. While there is a lot of uncertainty surrounding the concept of unlimited PTO, it is clear that it may have great benefits for the right employees and the right company.  However, a carefully crafted policy is a must, as those who don’t take the time to carefully design their policies will be exposed to substantial risks.

If you need assistance with your unlimited PTO policy or any employment law matter, please contact Hackler Flynn and Associates.

DISCLAIMER: Content within this post should not be considered legal advice and is for informational purposes only. Communications made through this post do not create an attorney-client relationship. Hackler Flynn & Associates is not responsible for any content that you may access from third-party resources that may be accessed through or linked to this post.

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