Employers are increasingly looking for ways to attract and retain the best talent in consultation with their advisers. One approach that is gaining momentum is shifting from accrued paid time off, which allows employees to earn PTO over time, to unlimited time off. But the transition isn’t always a smooth one.
With job openings in the U.S. outnumbering unemployed Americans by a margin of more than four million, companies are doing everything they can to draw top talent and keep employees engaged. According to a recent report from The Wall Street Journal, starting salaries and annual pay raises for existing employees are growing at their fastest pace in 25 years. And while cash may be king, employers are also experimenting with nontraditional policies — including unlimited time off — to gain a competitive edge.
Mentions of unlimited time off in Glassdoor reviews increased 75% over the past three years, according to analysis from the job-reviews site, and the companies that offer unlimited time off receive more favorable ratings of their vacation and PTO policies. Just how much does a company’s time-off policy affect its ability to recruit talent? A 2022 study asked job seekers to rank their top influences in deciding whether to accept a job offer. Three out of 10 respondents cited proportion of work to time off as a key consideration, up from 24% in 2021 and second only to overall compensation as a deciding factor in the job hunt.
The pandemic has fueled the trend toward unlimited time off. Consider that U.S. companies whose employees previously worked in a single location or region may now find themselves with remote workers in all 50 states. Since each state’s wage and hour laws can differ from federal law (and from the laws of the state where the company is headquartered), unlimited time off is sometimes viewed as a strategy for streamlining workplace regulation compliance. In addition, some believe that unlimited PTO reduces “presenteeism,” which occurs when ill (and potentially infectious) employees report to work rather than burn a sick day.
The jury’s still out on whether unlimited PTO policies help or hinder employee productivity and overall job satisfaction. In an ideal implementation, unlimited time-off policies reduce employee burnout and help employers build a culture of trust. A 2021 study from Wharton’s Mack Institute for Innovation Management found that unlimited time off yields happier workers and net gains in individual labor efficiency, which benefits both employers and employees.
On the other hand, skeptics warn that open-ended vacation policies are ripe for abuse. When employees use unlimited PTO as an excuse to take advantage of their employers, they can damage not just the bottom line, but also team morale. Fortunately, such incidents appear to be the exception rather than the norm. Some companies even report that employees wind up taking fewer days off work — not more — when time off is unlimited. More research with a larger sample size is needed to draw a definitive conclusion. Companies that wish to support employee wellbeing while discouraging abuse should consider mandating a minimum number of vacation days per employee while tying unlimited PTO to performance goals.
Beyond its potential positive impacts on job satisfaction and productivity, switching from accrued time off to unlimited time off can sometimes yield cost savings. Because employers are relieved from tracking accrued vacation days and calculating accruals, carryovers and forfeitures, their administrative costs may be reduced. Savings will vary depending on how much time a company spends administering accrued time off, but when Ask.com made the switch to unlimited PTO more than a decade ago, the search engine reported savings of 52 man-hours a year. An unlimited time-off policy also prevents the accrual of vacation time that is payable upon termination, which can represent a significant reduction in liability for employers.
Tips for a smooth transition
Moving from an accrual system with a fixed maximum number of vacation days to unlimited PTO is a significant adjustment. Here are some tips for employers to consider as they contemplate such a change:
- Play it fair and square. When transitioning to unlimited time off, employers should provide a generous amount of time for employees to use accrued vacation time before forfeiture. In many states, accrued vacation time is considered earned wages that employees cannot be forced to “use or lose.” Workers in these states must be paid for any vacation they accrue but do not use prior to the transition date.
- Avoid de facto maximums. It has been argued in California courts that an employer that offers unlimited time off but then communicates a more specific expectation (e.g., no more than eight weeks) actually has an accrued time-off policy for legal purposes and could owe up to eight weeks paid vacation to a terminated employee. Employers that implement unlimited time off must avoid setting any explicit or implied caps. It may be acceptable, however, to limit the number of concurrent days workers can take off in a row or deny requests that would prohibit an employee from fulfilling their job responsibilities.
- Communication is key. Update employee handbooks and other benefit materials upon switching to an unlimited vacation policy and make expectations around the policy’s rules and limitations crystal clear. For example, do time-off requests still require approval? How far in advance must requests be made? For what reasons can requests be denied? How will you handle requests for time off during busy periods or multiple team members asking for the same days off?
- Document everything. In a system where all “reasonable” PTO requests are to be approved, employers should carefully document vacation denials as well as approvals. Hold regular performance reviews so that any negative impacts of time off on employee performance (such as workers not meeting their targets or completing tasks on time) are well documented.
- Seek expert advice. Many companies apply a portion of the cost savings gained by switching to unlimited PTO to engage the help of an experienced consultant who can help them avoid the pitfalls associated with the transition.
As unlimited time-off policies continue to grow in popularity, employers must determine for themselves whether the rewards are worth the potential risks. Whatever they decide, employers will find the transition easiest when they understand the administrative challenges involved and plan accordingly.