Should Your Company Offer Unlimited Vacation Time?

​"Take as much vacation as you like." It sounds too good to be true, but at some companies, it is a reality. 

Biodesy, based in San Francisco, has offered unlimited vacation time since the 20-person company launched in 2013. "I was a little bit skeptical, and I've become a big fan," said chief financial officer Gayle Kuokka, who handles human resources matters for the biotech instrumentation business. "It gives people the responsibility for getting work done. … Employees feel more in control, and that adds more value to the benefit."

Even some law firms are giving it a try. Atkinson, Andelson, Loya, Ruud & Romo (AALRR) in Cerritos, Calif., switched about five years ago because managers noticed that the firm's 180 attorneys continued to answer e-mails and return phone calls from the beach or ski lodge. 

"As an attorney, you're never off," said Paul S. Fleck, an attorney at the firm.

Provided that AALRR's lawyers stay on top of their workload and meet their billable-hour requirements, they can enjoy unlimited vacation. The firm has retained the traditional paid-time-off model for its 100 support staffers, who are hourly employees.

An unlimited-vacation policy can be an appealing recruiting and retention tool, especially in fields where the line between work and leisure is often blurred. But the prospect of unlimited paid time off can raise concerns for managers and HR professionals. Preventing abuse is a major challenge. Making a smooth transition from a paid-time-off policy to an unlimited one is another challenge.

Making the Switch

Under a traditional paid-time-off (PTO) system, workers accrue vacation time at a specified rate. When they leave or are terminated, their employer must pay them for any unused vacation days, which are treated as deferred compensation, said Michael Wahlander, an attorney in Seyfarth Shaw's San Francisco office.

California protects workers from having to forfeit their accrued vacation time, so "use it or lose it" plans are illegal in that state. Businesses that deny or delay paying accrued vacation time to departing workers can face additional penalties as well. "Make sure you're not doing anything that could be deemed as the employee losing that money," Wahlander said.

Companies moving from a PTO system to an unlimited vacation policy must at some point—either upon the worker's termination or departure or on a specific date—compensate employees for unused vacation time accrued under the PTO system. This time cannot be merged with or applied to the new unlimited vacation policy.

"If you've earned it, you've got to keep it," said Sahara Pynes, an attorney in Fox Rothschild's Century City, Calif., office.

Opening the Door

Pynes recommends that HR professionals spearheading a transition give workers extensive notice about the shift in policy. Employees should be reminded that they will no longer accrue vacation time as of a specific date, but once the new policy takes effect, they will have unlimited vacation time. They should also be notified that under the new plan, when they leave the company, they will not be paid for vacation time they didn't take.

Employee handbooks and benefits briefings cannot offer any opinion about what management views as an appropriate or recommended amount of vacation time, Pynes cautioned. Doing so creates the impression that the employer is authorizing a fixed number of vacation days, and if that is the case, time off is considered deferred compensation and must be treated as such.

Companies with unlimited vacation policies can institute some parameters to prevent the office from emptying out during critical times. Workers may be required to clear their time off with a supervisor, for example.

Other Days Off

HR professionals should make sure that company policies clarify the difference between unlimited vacation time and sick days, which are mandated by state law and, in some cases, municipal law. For example, California requires 24 hours or three days of paid sick leave per year, either accrued over time or given upfront.

Workers who accrue vacation time do not have to tap it to cover sick days. But when employees have unlimited PTO, as the California Department of Industrial Relations explains, the distinction is irrelevant because time off is unrestricted. However, if management has instituted blackout days for vacation, it cannot prohibit workers with unlimited paid time off from taking sick days during that time.

Managing Performance

Kuokka, of Biodesy, was initially concerned that conscientious employees would eschew vacations while others would disappear for long periods of time. Neither scenario occurred. "Our corporate culture is the most collaborative of any place I've been," said Kuokka, a veteran of multiple startups. "People really feel a sense of responsibility to each other, and that's why we don't see abuse."

She estimates that employees take an average of two to three weeks of vacation a year. She doesn't know for sure because management doesn't track it.

Employees at companies with unlimited paid time off can be held accountable if their time away is affecting their productivity or the quality of their work. AALRR's unlimited vacation policy "forces us to address work as a performance issue," said Fleck. "If someone does what you're asking in half the amount of time [expected or allotted] … promote them or give them more work."

An unlimited vacation policy is best suited to work environments that are project-oriented—such as a software company that produces apps or a law firm, where lawyers are expected to log a certain number of billable hours per year—and don't require employees to perform their duties onsite at fixed hours.

"Are you doing the job?" Fleck said. "Because that's what this is designed for. Whether you're there for two hours or 102 hours, we don't care. Just get your job done."

June D. Bell, a regular contributor to SHRM, covers legal issues for a variety of publications. Contact her at june@junebell.com.