Is an Unlimited PTO Policy Right for Your Business?
- Human Resources
6 min. Read
Last Updated: 10/03/2022
Table of Contents
An unlimited PTO (Paid Time Off) policy might be on your company's list of potential benefits to consider this year. According to the Society for Human Resource Management, four percent of organizations now offer unlimited paid time off. That number may continue to rise, as startups and large organizations alike begin experimenting with the trend. For HR managers, the key question is whether an unlimited PTO policy is right for the business.
What Is Unlimited PTO?
Paid time off is an employer-provided benefit where an employee is allotted an amount of paid leave time that may be used for vacation, sick, or personal reasons at their discretion. Employers can either frontload an annual allotment of PTO or require employees to accrue PTO based on time worked.
How Does an Unlimited PTO Policy Work?
In many ways, unlimited PTO policies closely resemble a standard PTO policy but without a prearranged number of available days off. An employee may use as much time as they require (for vacation, sickness, and other reasons), with their manager's approval.
As with a more traditional approach, the employee's manager must generally sign off on PTO requests. Also, an organization's recognized employment schedule and/or flextime benefits typically remain unchanged.
Companies should have a clear, documented PTO policy that's communicated during hiring and orientation, as well as included in the employee handbook. Make sure the policy clarifies when employees can take time off, how far in advance requests must be submitted, and what approvals are required.
Highlight any busy periods where it may be more difficult — or even impossible — to approve PTO requests. Keeping track of employees' PTO requests and flexible hours may feel overwhelming. Investing in a time and attendance solution can help you gather information and track attendance efficiently, and keep you more informed and organized regarding each employee's schedule.
Why Do Employers Offer Unlimited PTO?
Employers that adopt unlimited paid time off (over traditional vacation, sick, or personal time policies) seek to help ease the burden of administration and tracking of time off (by type and time taken) by having one simple policy. Eligible employees can use the time as vacation, sick time, personal time, or for whatever need arises. This flexibility allows employees to manage and use their time in a way that best fits their needs and wants.
The approach may also curtail the potential abuse of leave benefits. For example, some employers encounter employees who call in sick to use up the time they have available to them.
Pros and Cons of Unlimited PTO
Increasingly, more companies are focusing on results-based flexibility strategies, which may involve giving employees the ability to work wherever and whenever they would like; as long as the job is getting done and specific results are achieved, employees can choose when to use their time off.
When examining this type of practice, organizations must consider many factors, including but not limited to business operations, company culture, specific job duties, and/or customer needs.
Benefits of an Unlimited PTO Policy
Unlimited PTO policies can help:
- Build trust between an employer and employees.
- Serves as a powerful recruitment, retention, and engagement tool.
- Reduce situations where employees feel obliged to come to work when they're ill.
- Reduce administrative time and resources spent monitoring individual time-off accrual or assessing individual employee time-off needs.
According to the Fair Labor Standards Act (FLSA), in most cases, employers need to not pay for time not worked, such as vacations, sick leave, or legal holidays. These benefits are generally matters of agreement between an employer and an employee (or the employee's representative). Although the FLSA does not mandate offering these types of benefits (some states may mandate it), many employers provide paid time off as a recruitment and retention tool and as a means of enhancing work/life balance.
The Disadvantages of Unlimited PTO Policy
There can be disadvantages and challenges to consider when contemplating adding an unlimited PTO benefit. These may include:
- Assuming a culture of a flexible, results-based workplace can be difficult — change can be uncomfortable.
- The time and effort required to create, provide, and communicate a written policy outlining the unlimited PTO benefit provisions to all affected employees.
- Abuse--perceived other otherwise--of the policy and resulting morale issues among employees.
- Not determining if unlimited PTO is feasible for the organization. Working environments where coverage is critical, such as call centers, manufacturing facilities, healthcare establishments, or retail stores may not be able to adopt this type of benefit easily, if at all.
- Possible employee discontent over the inability to accrue time to be paid out, where applicable by law.
- Difficulties disciplining employees based on excessive absences.
Offering unlimited paid time off does not release an employer from remaining compliant with federal, state, and local laws and regulations.
Understanding the Role of State and Local Laws
Some state laws regulate certain aspects of paid time-off policies. For example, some states will require that any earned but unused paid time off be paid out upon an employee's termination/separation. Some states may regulate the accrual of paid time off, consider paid time off as a form of vested wages, or even require that these policies be provided to employees in writing.
There are also wage statement and protected use considerations. For example, an employer using an unlimited PTO plan to comply with California's paid sick leave requirements would need to ensure their plan meets the minimum requirements imposed by the state for sick leave.
It's important to understand these state and local laws when providing PTO benefits. Employers should consult with an employment attorney if they have questions regarding unlimited PTO policies.
Understanding Unlimited PTO
It's important to remember that "unlimited PTO policies" does not necessarily mean employees are permitted to make use of an unlimited amount of paid time off. For many organizations, an unlimited time off policy is best administered with specific parameters for appropriate employee use.
In fact, employers frequently see underuse as a bigger issue than any employee taking too much time off. In such cases, business owners and management should encourage an appropriate use of PTO or vacation time, with the message that they want employees to be able to recharge and refresh.
Of course, employers must be conscious of shifting circumstances (such as seasonal workloads or long-range projects that risk being interrupted without available team members) that might negatively affect operations. Some businesses adopt a master calendar that monitors which employees are present in the workplace and those who are not.
Another approach to managing this benefit offering encourages employees to spread out their PTO over the course of a year, rather than taking it all at once around a holiday such as Christmas. With unlimited PTO, employees feel less burdened with the need to "save" their time off for holidays or other times that might lead to a gap in work coverage.
How Do You Transition to Unlimited PTO?
Moving to unlimited PTO often involves specific steps:
Determine how to handle current paid time off that employees have accrued to date. Employers can:
- Compensate team members for what accrued, unused time off prior to transitioning to the new PTO policy.
- Monitor accrued time separately and compensate the accrued balance before an employee is terminated.
- Offer an equitable period of time (and advance notice) where employees can use the time they've accrued before the new policy is implemented. PTO is lost if not used within this equitable period of time.
State laws may prohibit certain practices. For example, option 3 is likely not permitted in states with anti-forfeiture provisions.
However, the transition is planned, it's essential that employees receive advance notice of the coming change. This "grace period" can also serve as a training time for supervisors to become knowledgeable about the forthcoming switch to unlimited PTO.
Effectively Implementing Unlimited PTO Policy
Successful unlimited PTO policies require solid guidelines, good management, and support from senior leaders and human resources. Different companies with similar policies can experience dissimilar outcomes. Key action steps include the following:
- Make sure the policy is clearly communicated to employees and disseminated in a manner that conveys company expectations.
- Understand local, state and federal time off and wage and hour laws when developing these policies and flexibility strategies. Offering unlimited paid time off may create additional compliance issues that will need to be addressed.
- Speak with an HR subject matter expert or an employment attorney to review the risks.
Document and Communicate the New PTO Policy
Embracing an unlimited PTO policy requires clear communication and documentation:
- How far in advance must employees get time off requests approved?
- What is the approval process?
- Is there a maximum number of days employees are permitted to take off in a row?
- What arrangements must be made — or work completed — before an employee uses PTO?
- Define your policy so that guidelines are clear, and then put the documentation and processes in place to ensure its enforced consistently across the board.
What Happens if a Team Member Abuses the Unlimited Time Off Policy?
Problems with unlimited PTO can be prevented by laying out the specifics of the policy in clear, easy-to-understand wording. Your policy should indicate that violations may result in disciplinary action. Employers may wish to consult with legal counsel to assist in consistent application of disciplinary action.
Is It Necessary To Compensate for PTO in the Event of an Employee’s Departure?
State regulations differ regarding the payment of unused time off in the event of an employee's departure. Generally speaking, unlimited PTO policies do not provide for a payout of time to departing employees, because these employees haven't accrued PTO. Make sure to check relevant state laws to determine an employer's responsibility.
How Many Days of Unlimited PTO, on Average, Do Employees Take?
The numbers vary from state to state, and from one company to another. According to the U.S. Bureau of Labor Statistics, "more than one-third of private industry workers received 10 to 14 days of paid vacation after one year of service." For employees with ten or more years of service, more than 30 percent of these private industry workers "received between 15 and 19 days of paid vacation."
Is Flexible PTO the Same As Unlimited PTO?
Although these terms are sometimes used to mean the same thing, there is a key significant difference. Unlimited PTO policies allow employees to take all the time off they want (or as little time off as they want). Some flexible PTO policies specify an unlimited amount of paid time off, but more often, flexible refers to the kind of time available, but with specific limits on how much time can be used for PTO (generally at the employer's discretion).
Deciding Whether Unlimited PTO Is Right for Your Business
If you're considering unlimited PTO policies, think about the potential benefits and challenges from your employees' perspective. Would they look at this benefit as an attractive one or too confusing to use? Also be sure to consider applicable state and federal laws related to paid time off.
Whatever your decision, it's crucial to effectively communicate any changes to benefits in a way that resonates with your employees. Here are valuable tips on change management, as well as information on how Paychex can help with your business's human resources needs.