Paid Time Off (PTO) is an important part of most compensation packages. It is common for organizations to provide employees with an allotment of time to dedicate to their own pursuits instead of the companies; whether for medical reasons, to address life’s small emergencies, or just rest and recuperation. This PTO allotment is usually finite, while some employees may be needing and deserving of more time off. PTO accrual can sometimes be costly to an organization as well. In both of those examples, unlimited PTO might be a solution worth looking into.
Summary of possible effects
- Unlimited PTO provides a flexible and generous benefit
- Unlimited PTO can be abused
- Unlimited PTO usually results in employees taking less time off
- Unlimited PTO can interact unfavorably with other leave policies
- Unlimited PTO can lead to lower expenses
Unlimited PTO provides a flexible and generous benefit
The most obvious reason for implementing an unlimited PTO policy is that it provides at least the minimum PTO an employee needs and does so flexibly. Employees may need to take time off to address several emergencies and still be deserving of additional time to rest and recuperate. In this instance, an unlimited PTO policy ensures that employees can have the appropriate work/life balance while still addressing critical personal problems as they arise. This may provide an advantage in employee compensation and retention.
The flexibility given to employees, however, also requires flexibility from the employer and the available pool of labor. An unlimited PTO policy only functions if there are processes and employees in place to pick up the slack of an absent employee, possibly to a greater degree than in organizations with standard PTO.
Unlimited PTO can be abused
The most obvious consequence of implementing an unlimited PTO policy is that, like most policies, some employees may attempt to abuse it. The Society for Human Resources cites that most unlimited PTO policies only apply to executives, who are the least likely to abuse unlimited PTO.
Unethical employees may attempt to take advantage of an unlimited PTO policy by fabricating emergencies or excuses in order to maximize the amount of PTO they benefit from despite the burden it may place on their employer. These fraudulent emergencies may be completely indistinguishable from legitimate PTO usage. Discipline of suspected inappropriate leaves or denial of repeated leaves may also appear discriminatory.
This possibility should be considered before adopting an unlimited PTO policy. Organizations should only adopt unlimited PTO policies if they generally trust the employees who will be eligible for unlimited PTO.
Unlimited PTO usually results in employees taking less time off
While it may seem contrary to common sense, providing unlimited PTO may result in employees being absent less-frequently than they might with a standard PTO policy. In many organizations, employees accrue PTO until they reach an accrual cap and then utilize enough PTO to remain under the cap. Because unlimited PTO has no accrual or cap, there may be less incentive to take PTO. This is explained by the negativity bias, or the tendency of most people to care more about losing something than gaining something of equal value.
An easy analysis to identify if this is likely to happen is to evaluate the portion of employees at the accrual cap in an organization that has a standard PTO policy. If most employees are at the cap and use PTO at the minimum rate to stay under the cap, then the implementation of an unlimited PTO policy is likely to decrease the total amount of PTO that employees use.
This reduction of PTO usage can be both a benefit and a disadvantage to organizations. PTO exists because employees enjoy utilizing it and prefer to work for companies that will provide PTO. To ensure that this benefit for employees still exists, some companies with unlimited PTO require that all employees utilize a minimum amount, e.g. one week, of PTO per year. The benefit to organizations, of course, is that when employees use less PTO then the pool of available labor increases without increasing the cost to the employer. This balance should be carefully considered before implementing an unlimited PTO policy.
Unlimited PTO can interact unfavorably with other leave policies
Organizations that adopt an unlimited PTO policy may find that it interacts with other policies unfavorably. Notably, the Family Medical Leave Act (FMLA) or other requirements to provide protected and unpaid leave may result in providing paid protected leave for longer than intended if the unlimited PTO policy is crafted poorly. Similarly, local requirements to provide leave, such as the Duluth Earned Sick and Safe Time, can often be met with explicitly allowing unlimited PTO to be used for those purposes, but then there is no limit on how often those leaves may be taken. This can leave the employer vulnerable to abuse but with fewer options for recourse against abusive employees due to the protected nature of the leaves.
Unlimited PTO can lead to lower expenses
In the earlier example of employees accruing the maximum amount of PTO, that PTO may be equivalent to cash, pending the rules for paying out PTO in the employee handbook. When rules for payouts exist, layoffs and resignations may be significantly more expensive than otherwise necessary. One of the advantages of unlimited PTO is that there is no bank of accrued PTO, so unlimited PTO has no accrual or payout, and therefore does not increase the cost of layoffs or add costs to resignations.
Unlimited PTO can change administrative burdens
An aspect of unlimited PTO that could be good or bad is that it changes the administrative process.
If unlimited PTO serves as unlimited sick leave, then employers may not have to track accrued sick leave when legislation requires sick leave be provided (e.g. as required by the Duluth Sick and Safe Time). If unlimited PTO is intended to serve as a catch-all PTO policy, then it may completely remove the administrative burden of tracking any kind of accrual or usage of PTO. If unlimited PTO is provided to salaried employees who would otherwise have to track hours to determine if they need to access banked standard PTO, then employees will spend less time with administrative busy work.
However, if the unlimited PTO is restricted in the type of leave it covers, it may just serve as an additional administrative process adding to the existing accrual and usage tracking.
Identify the purpose
Before implementing an unlimited PTO policy, determine exactly what purposes you are comfortable paying for, and which jobs should benefit from the policy.
Most organizations probably do not want to pay for FMLA leave or other types of protected leave. If the policy is meant to cover only emergencies and vacation, identify it as “Unlimited Paid Emergency and Vacation Leave” and indicate to which situations it applies. If the policy is intended to be used more generally, then specifically outline any situations that are not appropriate for paid time off, e.g. FMLA leave or no-call no-shows. If it is called “Unlimited Paid Time Off” but an organization imposes limits in practice, employees may become resentful.
Organizations might feel that certain types of employees, such as salaried employees, executives, or sales staff, need unlimited PTO whereas the rest of the employees may be better served with a standard PTO system. Inexperienced hourly staff might be more likely to attempt to abuse an unlimited PTO system, or even just be perceived as less trustworthy, so their inclusion may lead to increased stress for management. It should be clearly decided and expressed what employees have access to an unlimited PTO policy.
Identify the process
Because different reasons for leave may be governed by different rules (e.g. mandatory paid sick leave), it is important to identify how an organization would want to make decisions about granting or paying for leave. While the specifics of the process depend entirely on the organization’s intent for the unlimited PTO policy, the process would likely involve submitting a form that identifies the reason, duration, and date of leave to the employee’s manager or a human resources representative. Organizations may choose to grant leave according to business necessity for the date, the reason for the leave, the individual performance of each employee, or other reasons.
If an organization already has a standard PTO system, there will need to be a carefully implemented transition period. In addition to educating employees about the new benefit and setting up the administrative processes, the previous system will have to be ended. In many jurisdictions the accrued PTO can be payment that an employee is entitled to, depending on the language of the handbook.
Paying out all accrued but unused PTO may cost an organization tens of thousands of dollars.
When evaluating whether accrued PTO is an earned wage, employers and their trusted legal counsel should consider the presence of a statement saying that the policy may be changed at any time, the conditions that PTO may or may not be paid out for, and any existing legislation or regulation that may impact paid leave.
When determining how to pay out accrued PTO, an organization has several options. An employer may:
- Mandate the use of remaining PTO
- Payout the PTO in cash
- Provide a reasonable amount of time to use the PTO
- Track the PTO separately until it is exhausted, or the employee exits the company
- Use any combination of the above
Finally, the implementation of an unlimited PTO policy should not be the end of its consideration. It may be prudent to evaluate the reasons of the usage, the employees who use it, and the overall amount of usage to determine the future of the policy. A policy that met an organization’s business need at its implementation may not always continue to do so.
Employers considering an unlimited PTO policy should do so carefully. While there can be many benefits to both employers and employees with an unlimited PTO policy, there are also possible consequences that could be managed or avoided. The implementation of a new PTO policy may also require careful management of the previous policy. All organizations should strategically evaluate their goals, needs, and resources, as well as discuss their options with a trusted legal representative before undergoing major organizational change.
If you need further information or help to evaluate or implementing an unlimited PTO policy, feel free to contact Terch and Associates!