When it Comes to PTO, Should You Go Unlimited? - Sam Slade

Monday, August 31, 2020

 

In today’s COVID-19 world, an increasing number of companies are considering unlimited paid time off (PTO)/vacation polices. That means no vacation banks, caps, or accruals — employees simply take as much or as little vacation time as they desire, with approval. These plans answer employees’ desire for flexibility while freeing employers from tracking time and, ideally, not paying out big vacation balances. But is it really a simple win-win? Not really.

Below are some of the perks and pitfalls of unlimited PTO policies to help you decide if this approach is right for your organization.

 

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Pros

·       Recruiting and Retention – Having an unlimited policy is an attractive feature to advertise to potential employees. This type of progressive plan can show how much your company values its employees by giving them flexibility with their time off to care for themselves or a family member.

·       Gain Trust Between the Employee and Employer – Employees will feel their employer trusts them to make the right decision when taking time off and not abuse their time away. And employers will trust that their employees will take advantage of this policy to provide a more positive home/work-life balance.

·       Flexibility – An unlimited policy offers employees the chance to take more time off. That doesn’t necessarily mean longer periods of time, but perhaps more single days to care for themselves or family members, flexibility they may not have had under a traditional PTO/vacation policy. Since they don’t have to pick and choose when they can take out, an unlimited policy can alleviate pressure on your employees.

·       Happier and More Productive Employees – Flexibility and freedom from stress can go a long way to boost satisfaction. But unlimited time off does not mean an employee can take whatever vacation time they want and with unlimited days. Even with an unlimited PTO/vacation policy, there will be rules. And employees will have to meet certain production goals in order to have time off approved. Plus, there will be blackout dates at certain times of the year when productivity must be at its best.

·       No Payouts – Because unlimited PTO does not “accrue,” the theory is that it doesn’t “vest” as wages so there’s nothing to pay out at termination. When implemented effectively, employers should no longer have to pay out any accrued PTO/vacation time at the end of the individual’s employment. However, you need to make this — and other rules — truly clear in your written policy.

 

Pitfalls

·       Employees Abusing Time Off – In the case of an unlimited policy, your company runs the risk of someone abusing the system. Other employees may see a coworker taking “too many days off” and feel they’re not allowed to do the same. Therefore, having rules and guidelines for approving or declining requests will help prevent abuse and create a fairer environment.

·       Hard to Implement – When you switch to an unlimited PTO/vacation policy from a traditional one, you need to deal with the employee’s existing bank of accrued time. Depending on your state, there are several ways you can do this, but you’ll need to be careful in a state such as Massachusetts, where paid time off is considered wages. Some options include allowing employees to use their accrued time until they spend down their vacation bank within a reasonable amount of time, then shifting to the new unlimited PTO system, or paying out the balance to employees and starting with a clean slate.

·       Seasoned Employees See It as Unfair – Your seasoned staff may feel that new employees are receiving a benefit that they worked hard for during their years of service and dedication to the company. If you foresee this as an issue, you can require new employees to complete a set number of years of service before they can move to the unlimited PTO in what would be considered a “hybrid” policy.

·       Interactions with Other Types of Employee Leaves – If your policy isn’t written clearly, you could potentially turn employee leaves related to medical, family, or parental leaves into fully paid leaves. You’ll want to ensure that you have clear rules on the number of consecutive days a person can take be on paid time off under an unlimited plan before the employer and employee need to explore other leaves, such as FMLA.

·       Putting a Fence Around Leave Expectations – Employers need to be careful about putting time band expectations around how much time is expected an employee will take under an unlimited plan. For example, if there are policies allowing a “minimum of two weeks but no more than five,” but at that point, what is the difference between that and a traditional vacation policy?

·       Employees Hesitant to Request Time-Off – Employees who have managers or supervisors who don’t take time off for whatever reason may be apprehensive about asking for time away since they don’t want to appear lazy. Creating productivity goals for individuals to meet in order to take their requested time off can help. And you may need managers and supervisors to encourage employees to take time off throughout the year to care for themselves and their loved ones if they do not see employees using the policy correctly.

·       Protected Leave Compliance Concerns – Unlimited PTO/vacation policies can also create issues when accounting for other forms of leave. For example, the Family and Medical Leave Act (FMLA) requires employers to allow available paid leave to run concurrently with an employee’s FMLA leave. With an increasing number of states adding protected sick leave and state-run paid family leave, where does one end and the other begin? If you don’t put a fence around the specific leaves and appropriately categorize the protected leave, you may run into a slew of compliance concerns and risks.

·       State Risks – In some states, unlimited policies may not be a good idea. For example, when it comes to vacation, California has very clear regulations and considers vacation time as “earned wages,” so any form of “use it or lose it” is not permissible. This applies to both payout upon separation as well as carryover at the end of the plan year. The California legislature has not made a definitive ruling on unlimited policies, leaving employers to rely on case law and general best practices. States with strict vacation laws, including but not limited to California, require a detailed policy in writing.

Sam Slade is Managing Director, Employee Benefits, at The Hilb Group of New England, where he delivers consulting and brokerage services to local employers. He has extensive experience in all aspects of employee benefits, including underwriting, plan design, communications, compliance, and analytics, with a particular focus on alternative funding and self-insurance. Sam lives in South Kingstown with his wife and three sons.  

 

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