Unlimited PTO: Past or Future?

by Chelsea Jensen, MBA, SHRM-SCP, PHR, Human Resource Services

Bulletin,  California,  HR Expertise and Support

A growing number of employers are switching to Unlimited PTO Programs (UPTOP). However, we may start to see these numbers level off with new state and local laws governing sick leave.

Employers Council’s 2018 survey data shows that there has been an increase in the number of employers that offer an unlimited PTO program. Out of 623 respondents from our 2016 survey, 22 employers indicated having an unlimited PTO program. In 2018, 29 out of 678 employers indicated implementing an unlimited PTO program, reflecting a 25 percent increase in the actual number of organizations offering unlimited PTO. There are a few reasons for the increase in this type of time off program including increased access to information about work flows and demands, the need to explore new and more flexible ways of working, and giving employees increased autonomy.

David Burkus, author of Under New Management: How Leading Organizations Are Upending Business as Usual, advocates that unlimited paid time off actually creates a relationship of reciprocal trust between employer and employee. According to him, ‘The majority of people respond to signals of trust with more trustworthy behavior. We know from motivation research that when people feel trusted, it dramatically affects their feeling of autonomy. Autonomy tends to increase motivation and morale and usually, that correlates to increases in productivity and often to profitability.”

In addition, studies show that employees do not need strict rules to be productive. If an employer takes the time to hire employees for their skills and talents, then they can trust that the employee will “do what they do best.” You can handle any individuals who decide not to meet expectations on a case-by-case basis using your performance management mechanisms.

According to a survey by the Alexander Hamilton Institute, 54 percent of employers that implemented an unlimited PTO program said unscheduled absences dropped by up to 10 percent when they started the new policy. Four percent found that those absences dropped by more than 20 percent.

Here are a few additional benefits or ‘pros’ of an unlimited PTO program:

  • Employees enjoy autonomy and self-determination;
  • Employees view their employer as forward-thinking, which helps attract the younger (Millennial and Gen Z) generations; and
  • UPTOPs eliminate the administrative burden of tracking time off and the financial burden of paying out earned and unused PTO upon termination

Although the ‘pros’ of a UPTOP sound attractive, current research indicates that employees with unlimited PTO take less time off every year than workers who have caps, or limits, on vacation days. This is partially because many organizations have policies requiring those with limited vacation days to use those days or lose them at the end of a calendar year, which encourages employees to take their time off.

The 2017 HR Mythbusters report by Namely, which offers HR software and services to midsize companies, found that employees who were offered unlimited vacation took, on average, 13 days off a year, while workers with capped vacation days took, on average, 15 days off.

Here are a few additional drawbacks or ‘cons’ of an unlimited PTO program:

  • Managing time off under the ADA and FMLA can be challenging;
  • Employers must determine what to do with existing accrued PTO or paid vacation;
  • Usually, once vacation or PTO is earned, it cannot be forfeited; and
  • The potential for abuse.

Some states, such as California, require payment upon termination for all unused, accrued vacation. Although some state law guidance indicates that unlimited PTO programs do not result in a payout liability at termination (which may be another ‘pro’ of such a program), others are less settled and leave room for wage claimants to argue for noncompliance.

At the same time, new state and local laws governing sick leave could put a cap on the growth of unlimited PTO plans. For example, California and New York City have legislation requiring employers to provide employees with a certain amount of paid sick leave. “I think we will see PTO bank use leveling off a bit based on what happens at the state and local levels,” says Rich Fuerstenberg, senior partner with Mercer in Princeton, N.J. While such laws, like the one in California, allow an employer to substitute paid sick leave requirements with an UPTOP, others, again, are less clear.

If you decide to implement an unlimited PTO program, here are five recommended steps:

Step 1: Decide who is eligible.

It’s up to you as the employer! Certain jobs, or levels of jobs, may lend themselves to UPTOPs while others may not. You may decide that only exempt employees receive the UPTOP benefit, or maybe only the executives. Make sure that you do not err into a disparate impact claim, however.

Step 2: Figure out payroll logistics.

Work with your payroll vendor if you have one and find out if there are system programming issues. For the existing PTO or paid-vacation bank, you have a few options. You can pay it out, let it run out before the employee can use UPTOP, or pay out a percentage over the years. Other payroll considerations may include tracking PTO hours worked under the Affordable Care Act, federal time-tracking requirements, and making sure you are compliant with special local/state sick-time programs. State law requirements may further limit how you may treat previously accrued PTO or vacation time when you implement a new UPTOP.

Step 3: Decide how you want leaves and the UPTOP to work together.

You will need to coordinate any paid leave benefits like short-term disability, long-term disability, and workers compensation with the UPTOP. For example, you will need to decide how to treat UPTOP usage during a “baby bonding” leave under the Family Medical Leave Act (FMLA). Be sure to work with your disability leave and workers compensation providers when establishing coordination policies. Also, be sure to include a guideline explaining the leave and UPTOP coordination in your employee handbook and make sure this benefit is managed consistently. Be aware that some interpretations of the FMLA and state law equivalents suggest that if an employee is eligible for unlimited paid leave under an UPTOP, the entire duration of the FMLA or similar protected medical leave may have to be paid so that FMLA users are not treated less favorably than others on comparable leave.

Step 4: Train your managers.

This step is critical. Managers will most likely be the ones approving the UPTOP time off for employees and will need training. You can already hear employees complaining, “Why did Johnnie receive three weeks off while I was denied?” Managers will need clarity on how to balance the business need with approving time off in a non-discriminatory manner. They can set parameters with their teams so that everyone knows when they can’t take time off – for example, during a busy season – and when they can. Managers can also create a leave calendar where employees coordinate with each other to make sure there is appropriate coverage to meet business needs before requesting time off.

Step 5: Communicate with employees.

You will need to communicate to employees the job titles and/or levels that are eligible for UPTOP and which are not. You will also need to anticipate how employees who are not eligible for UPTOP may feel about it and how you will respond. Also, you will need to address the concerns of employees who feel their bank of paid time off or paid vacation time will be going away (even though it is still available until it is exhausted).

In the right situations, unlimited paid time off plans afford your employees great flexibility in managing their time off. There are, however, practical implementation issues that need to be considered to maximize the program’s effectiveness, foster employee morale and understanding, and minimize legal risk.

Employers Council is here to help you navigate the UPTOP opportunities and challenges.  Please reach out to us if you have questions.

About the author
Chelsea Jensen, MBA, SHRM-SCP, PHR, Human Resource Services

Chelsea is a consultant in Employers Council's Human Resource Services department. She works with employers on issues such as policy development, employee relations, and benefits. She also conducts training for HR and management professionals. Prior to her work at the Council, Chelsea was a Benefits Specialist at a large bank in Buffalo, NY. She received her MBA with a concentration in Human Resources from Niagara University located near Niagara Falls, NY. Chelsea has been certified by the Society for Human Resource Management as a Certified Professional (SHRM-CP).