Is Unlimited PTO the Way to Go?

Unlimited Paid-Time-Off Programs have gained popularity amongst many employers, particularly for their exempt employees, but is unlimited PTO really the way to go? Some things are too good to be true and Unlimited PTO plans for California businesses may fall into this category. There are a number of reasons California employers are cautioned against these plans, ranging from employee satisfaction to compliance. If you have an unlimited PTO policy or are contemplating one, consider the following:

Employee Satisfaction

While unlimited PTO might sound enticing during the recruitment process, employees often become disillusioned by these programs over time. Many argue that employees with unlimited PTO end up taking off less time than those who accrue their benefits. The ambiguities surrounding an unlimited PTO program can leave employees wondering exactly what amount of time taken off is considered acceptable by management. This leads many employees to be skeptical about whether the time off is truly unlimited. And, savvy employees will figure out that most unlimited PTO programs do not have any cash out value should they leave your employment.

Compliance Concerns

Interaction with Protected Leaves

In California, unlimited PTO creates compliance concerns for employers. For example, there is an argument that if PTO is truly unlimited, it could turn every leave of absence into a fully paid leave. For example, if an employee goes out on a lengthy family and medical leave (under CFRA/FMLA), or needs to take leave as a reasonable accommodation (under ADA/FEHA), you may be on the hook to pay for the employee’s entire absence, especially if your policy does not carve out protected leaves.

Paid Sick Leave Considerations

We also recommend having a separate mandatory paid sick leave policy, to ensure compliance with California’s requirements and to avoid extending all of California’s PSL protections to your unlimited PTO program.

Sloppy Time Off Practices

Other issues may arise when unlimited PTO programs are poorly defined or managers impose informal limits in practice. In McPherson v. EF Intercultural Foundation, Inc. (2020), the California Court of Appeal considered whether an employer’s unwritten PTO program required it to pay out unused vacation upon termination. In the case, employees did not formally accrue vacation, but could take an unspecified amount of paid time off, subject to approval. In practice, the employer offered up to 20 days of paid vacation annually, even though this wasn’t defined in any policy. Under the circumstances, the Court concluded employees were entitled to payment for vested vacation at termination. The Court emphasized, however, that its decision does not mean all unlimited PTO policies trigger payout obligations.

The court provided guidelines for unlimited PTO plans that do not accrue/vest:

• Communicate your unlimited PTO program in a written policy;
• Clearly state that the ability to take PTO is not a form of wages, but instead functions to provide a flexible work schedule;
• Indicate employees’ option to decide when and how much time to take off;
• Include rights and obligations of both the employer and employees, as well as consequences for failing to schedule time off;
• Allow sufficient opportunity for employees to take time off;
• Fairly administer it in practice so it does not result in inequities across your employees.

For those employers with unlimited PTO policies, we recommend you work with an experienced advisor to include the strongest policy language possible to mitigate the risks discussed.

Do you need additional guidance or assistance with handbook policy customization? Reach out to CEA’s HR experts at 800.399.5331!