PTO Forever: Unlimited Vacation

As we roll into the Thanksgiving holiday here in the U.S., vacation and the long holiday weekend are on my mind! I’m fortunate to be able to do some pro bono work in my in-house practice. One issue that a non-profit organization brought to me recently was their desire to eliminate the administrative burden of tracking PTO/vacation time. From their standpoint, it was an administrative hassle for a small organization with mostly administrative employees already working non-standard hours. Their employees get a great benefit and flexibility to manage their work and life without watching a leave bank.

I admit: it is a great concept in theory! No recordkeeping, everybody gets evaluated on results produced not hours worked. Well, that’s the theory, anyway. It isn’t that simple, but it is still manageable. Why? The Department of Labor and various states do not look to protect responsible employers. They protect employees from the less scrupulous employers, which makes unlimited vacation more complicated to implement.

Complicated is exactly where employers can find themselves. You can have one employee taking too much time off and another about to go out on unpaid FMLA leave. At what point does PTO become excessive? And if the FMLA-eligible employee could take unlimited PTO, shouldn’t the FMLA leave be paid and not unpaid?

We could go on for hours: if you are an Illinois employer, how would you reconcile an “unlimited” PTO policy with the state’s requirement that employers pay accrued vacation time when an employee’s employment ends? You might logically answer that if employees do not accrue vacation time, no payout is necessary. Illinois law is far from logical sometimes, though.

Let’s tackle those two issues first.

FMLA and Other Leaves Under Unlimited PTO Plans

The specific language of the policy matters here: is it unlimited PTO or unlimited vacation? Most employers and employees likely would agree there is a significant difference between unlimited paid time off and unlimited vacation. Defined properly, the policy could distinguish between short- or medium-term absences due to illness or an FMLA-covered reason. However, the simplest policy on unlimited PTO that does not differentiate might mean an employer must pay an employee during an FMLA leave. That’s where employers with the “simplest” unlimited policies can find themselves. (Note: I’m not saying you shouldn’t pay your employees on FMLA leave. You should. See more below.)

Paying Accrued Vacation at Termination

Like other states with similar laws, the Illinois Department of Labor has addressed “unlimited” vacation policies and disagrees that no termination payout is required. According to the Department’s FAQs on vacation pay, employers with unlimited vacation policies “must pay an employee who separates from employment a monetary equivalent equal to the amount of vacation pay to which the employee would otherwise have been allowed to take during that year but had not taken.” Unfortunately, that language is as clear as mud. How much time would you have allowed an employee with an unlimited vacation policy to take? Over what period? If you do not track PTO usage, how would you establish that fact? Does it depend on the employee in question? Is this just a factual determination at trial? Unfortunately, we do not know the answer to questions like this due to a lack of binding authority from courts. Researching this topic, I could find no Illinois appellate court that has addressed this issue, nor could I find decisions from appellate courts in California or other states with similar laws.

Potential Solutions

The number one solution: recognize the obvious. No “unlimited” vacation or PTO policy is truly unlimited, and no employee expects that it would be. Put some parameters around the “unlimited” policy:

1. Track PTO taken and hours worked. Yes, that’s an administrative headache, but setting aside that your state (like Illinois) might require you to do that for all exempt and non-exempt employees anyway, an unlimited PTO policy does not free you of ensuring that employees take PTO appropriately. Having the record will make your employment litigator very happy when defending against certain kinds of claims, too.
2. Say explicitly that “unlimited” does not mean unlimited. Set a limit on the number of consecutive days and, if relevant, the number of total days per pay period/month/quarter/etc. that you will approve.
3. Consider requiring that employees (particularly managers) take a minimum amount of PTO each year, while making clear that they are free to take more as their schedules and needs allow.
4. Require manager pre-approval for all leaves pursuant to the policy, with a reminder that approvals are based on business needs and scheduling.
5. Coordinate with other leave benefits and explain how (if at all) those leave benefits work together with this policy.

On that last point, if you cannot afford to make those other, non-vacation leaves paid, and you want to keep an “unlimited” policy, carefully and explicitly separate all non-vacation leaves from your unlimited vacation policies. Remember to take into account paid sick leave laws in your city or state, too, and clarify whether paid sick leave is in addition to or included within unlimited PTO/vacation.

Again, if you can afford it, employers, consider making these non-vacation leaves paid. Many insurers offer inexpensive short-term and long-term disability policies that can help you defray the costs. To give you an example, our short-term disability policy costs our employees between $3 and $9 per paycheck, but covers up to 100% of their take home pay, tax free.*

Unlimited PTO/vacation policies are an excellent and inexpensive tool to incentivize productivity. When properly crafted, they can create the helpful expectation that employees take vacations, time to spend with their families, and other opportunities to unplug from work.

*Premiums are paid after tax, making the benefits tax free. Employees making over approximately $110,000 a year, depending on their individual tax bracket, are subject to a weekly benefits cap under our policy.