It sounds almost too good to be true, conjuring up images of beach-soaked days and jet-setting trips on a moment’s notice. Even for employees with more mundane (and realistic) desires, not having to track and allocate a fixed number of paid time off days over the course of the year is very appealing.
But how does it work in real life? And is an unlimited vacation (or unlimited PTO) policy viable for a small business?
Read on to find out the pros and cons, the legal pitfalls to watch out for, and some sample policy language to include if you decide to roll out unlimited PTO at your business.
Can vacation really be unlimited?
Well, yes and no.
Unlimited PTO policies, also known as discretionary time off policies or open PTO policies, generally allow employees to take time off as needed. There is no official ceiling on the number of days employees may take, and they’re usually subject to manager approval and coverage requirements.
The idea gets a lot of press. Glassdoor, for example, recently listed 20 companies with unlimited vacation—but it’s still far from common in actual practice. The Society for Human Resource Management (SHRM) reports that only about 5% of companies actually offer open or unlimited leave as of 2019.
Unlimited vacation: The pros
- The “adulting” factor: Unlimited vacation policies are based on the idea that employees are adults and shouldn’t have to ask for the grown-up equivalent of a hall pass every time they want a day off.
- Attracting and retaining good talent: The very best employees often thrive in an atmosphere of trust and chafe at unnecessary restrictions.
- Administrative simplicity: Not having a finite bank of days off means not having to track and monitor that time quite as closely, though you should still do some tracking—more on this below.
- Your financial bottom line: If employees never accrue any paid time off, there is no built-up bank that must be paid out when they leave your company, which is required in many jurisdictions (and common company practice elsewhere).
Unlimited vacation: The cons
Like an all-you-can-eat buffet, of course, even “unlimited” PTO has built-in limits.
- Productivity hits: If too many employees are taking too much time off, things simply aren’t going to get done at your business.
- Potential abuses: Unlimited anything can be abused.
- The opposite of “set it and forget it”: An unlimited vacation policy requires a lot of judgment calls on an ongoing basis: Is employee A taking too much time off? Is group B letting its folks collectively take too much time off? Is there a limit on how much time can be taken all at once? What’s a “normal” amount or range of time to take off in a year? If you’re not careful, your unlimited PTO policy can start to look an awful lot like a traditional PTO bank.
- Coverage issues: This is particularly true for small businesses—especially if you have fixed needs, like a front desk that must always be staffed or a machine that has to be operated by a certain number of people. Bigger companies can swap in other employees as needed, but you may not have other employees.
One really surprising con
Ironically, many employees wind up taking too little time off with an unlimited vacation policy because they don’t have a fixed bank of days that they feel entitled and comfortable taking.
The Bureau of Labor Statistics (BLS) reports that 66% of wage and salary workers had paid leave in 2017 and 2018, yet 9% of workers failed to take leave when they needed it.
Of those workers who didn’t take leave, 23% said it was because they had too much work and 21% said they were worried about their employment or their leave request was denied—only 15% cited financial reasons for not taking leave.
Americans are notorious for not taking all the vacation days they’re entitled to. People who are too nervous or too busy to take, for example, two weeks of vacation a year are not going to do better when they are given unlimited vacation—especially if they feel that the time isn’t really theirs to take.
Legal caveats of unlimited PTO
As with many workplace issues, offering unlimited vacation has potential consequences from a legal perspective. They fall into three main categories:
1. Accrued leave payouts
As mentioned earlier, some jurisdictions and company PTO policies require paying out accrued unused leave when employees leave a job.
If your company falls in this category and you switch to an unlimited vacation policy, you need to think about how to transition over. You don’t want to inadvertently break the law or expose yourself to a potentially massive vacation payout in one fell swoop.
2. Coordination with state and local leave laws
Many federal laws, including the Family and Medical Leave Act (FMLA) and the Americans with Disabilities Act (ADA), mandate a certain amount of unpaid leave for various personal and medical reasons. And an increasing number of local jurisdictions are passing sick leave and paid family leave (PFL) laws.
If your unlimited vacation policy isn’t clear, you could inadvertently create a lengthy—and costly—entitlement to paid leave beyond what the law requires. For this reason, many experts recommend distinguishing “unlimited PTO” from FMLA, ADA, workers’ comp, and similar leaves.
3. Hourly workers
Hourly workers are paid only for the time they work, but policies often stipulate that they will receive a certain number of vacation days (paid or unpaid) per year.
If you don’t know how much time off an hourly employee will take, it can be difficult to figure out how much you will actually be paying that person—it may be more or less than you expect. A lack of guaranteed time off may also incentivize your hourly workers to never take time off, which is not what you want.
For these reasons, many employers limit unlimited PTO policies to exempt workers only.
Given the legal issues involved, you should consult with local counsel before transitioning to an unlimited vacation policy.
Additionally, even with an unlimited vacation policy, it’s still a good idea to keep track of the number of days employees take, and the reasons, in the event of subsequent disputes—wage/hour, discipline-related, or otherwise.
For example, if an employee’s performance is suffering, you may want to review the amount of time they have taken off recently and compare it to what similar employees have taken.
Or, if an employee argues that a paycheck is short, you want to be able to confirm that the person did not work at all on the specific days in question.
Sample language for an unlimited PTO policy
Think unlimited PTO is right for your business? Use this open vacation policy template to help you roll it out to your employees:
[Your business] believes that employees should have the freedom to manage their work and personal obligations as they see fit. Accordingly, employees can take as many personal days as they need, subject to advance manager approval and adequate coverage of work responsibilities. No specific amount of time off is guaranteed, vested, or accrued under this policy.
Time off under this policy is not considered “hours worked” for purposes of calculating overtime pay for nonexempt employees.
Sick leave days* are included within this discretionary leave policy, but leave under FMLA, ADA, and workers’ compensation is separate. Refer to [resource or policy] for additional details.
Employees are strongly encouraged to take at least [X] personal days every year to relax and recharge. Employees may not take more than [X] consecutive weeks off under this policy at any time.
*Note: A certain number of sick leave days and/or parental leave days may need to be provided, and/or paid, per state or local law. If so, your policy must be clear on this.
Unlimited PTO is an intriguing idea, but not a cure-all
Depending on your specific business, an unlimited PTO policy could be a terrific idea—or one that will simply add more confusion and uncertainty to your day-to-day operations.
If you do decide to implement unlimited PTO, talk to a lawyer first, carefully consider coverage issues, and encourage employees to take enough time off to stay refreshed and productive.