Should Employers Offer Unlimited PTO?

In this episode of The Workplace podcast, CalChamber Executive Vice President and General Counsel Erika Frank and employment law expert Jennifer Shaw discuss unlimited paid vacation policies and the types of workplace liabilities these policies may create.

A trend that has been picking up speed in the last couple of years among companies is to ditch the standard vacation accrual policy and opt for an unlimited paid time off (PTO) policy, Frank tells podcast listeners.

Over the course of the COVID-19 pandemic, employers saw vacation banks swell because employees simply were not taking vacations, she continues. Of course, this presents a liability issue because ultimately wages are owed for that stored vacation and it is a vested benefit that employees are entitled to if they were to separate from the company.

Some employers may be tempted to deal with this liability problem by adopting an unlimited vacation policy, but while the approach might appear to work, in practice it creates a lot of consternation and heartburn for many employers as they try to administer it, Frank cautions.

Work Flexibility

Shaw reminds employers that companies are not required to provide vacation time. Even if an employer says they are providing “unlimited vacation,” what the employer is really talking about is “flexible scheduling.”

Employers are saying: take the time you need—hours, days, weeks—so long as you’re still meeting the duties of your position, Shaw says. This approach is taken frequently with executive-level employees, who often work on big projects and have metrics to meet.

Addressing the stored vacation liability by adopting an unlimited vacation policy “is really built on a faulty premise,” Shaw says. “…The only reason people have vacation in the bank is because we’re not telling them they need to use it.”

While employers cannot adopt a “use it or lose it” policy in California, employers can cap the amount of unused vacation time that is accruing. Employers can tighten up vacation use in other ways too. For example, some remote workers may be taking off several hours in a day and not considering it “vacation” because they didn’t go anywhere due to the pandemic, Shaw says.

Employers should also be clear about what they call their policy to avoid liability if a worker makes a complaint or goes to the Labor Commissioner, Shaw stresses.

Lawyers at Shaw’s firm, for example, are told they may take time off when they need it, but the firm does not call the policy “unlimited vacation.” Rather, the policy is called a “work flexibility.”

Downsides of ‘Unlimited’ Paid Time Off

One of the problems that may arise out of an unlimited vacation policy is that the employer would be on the hook for paying an employee’s medical leave of absence.

The employer also would not be able to require employees to integrate with the state disability insurance or paid family leave program because the employer is already paying the worker at 100%, she says.

Another problem is that oftentimes companies adopt this policy on the fly and don’t write it down. And part of the issue is that it is difficult to explain the policy in a way that complies with the McPherson v. EF Intercultural Foundation, Inc. decision last year, Shaw tells Frank.

“So there are a lot of pitfalls and potholes… for employers in this area,” Shaw says.

Other Considerations

What about separating unlimited vacation from unlimited sick time so that employers don’t have to pay out medical leave? Can employers have separate policies, Frank asks?

Under an unlimited vacation policy, there is no easy way to prevent people from taking paid time off instead of a medical leave of absence, Shaw replies. So, having two separate policies is not going to affect anything.

Could a company offer unlimited PTO to executive staff and a more traditional vacation sick leave policy for all other staff, Frank asks?

Yes, Shaw answers. So long as an employer makes decisions on categories of employees and not on individual workers, then it is allowed. Employers should go by categories of job classification, job title, job function, etc. However, if different policies are given to individuals with the same job title and rank, it can be deemed discrimination.

Is any payout owed if an employee leaves a company that has an unlimited PTO policy, Frank asks?

No payout is owed, and this is why some employers may be tempted to see unlimited PTO as a solution to their unused vacation liability, Shaw says. Employers should know, however, that if they want to implement an unlimited PTO program, they first need to pay out the accrued vacation their employees have in the bank.

Frank points out that many companies which have adopted unlimited PTO policies later stop those policies as the administration of the policy is very difficult.

For employers who are seriously considering this policy, she recommends that they stop and think about why they want to offer this time, who they want to offer it to, and consider how they are going to articulate this policy in writing. These employers should also speak to professionals who can help craft that policy and who will ask the difficult questions that the employer may not be thinking about in evaluating whether an unlimited vacation policy is right for their organization.