Undoubtedly, today’s employees place a high value on work-life balance. Studies show that 89% of Gen Z graduates who are moving into the workforce believe that flexible work options are essential in their careers, and 80% of them are at least somewhat worried about experiencing burnout.
These days, most employers offer a set number of PTO days. However, some are adopting more generous policies. Though only about 8% of companies are offering unlimited PTO right now, it’s becoming more popular every day.
Still, sick and vacation time accrual and payout laws in a growing number of states complicate unlimited PTO policies. While having unlimited PTO in these states is possible, careful tracking and policy creation are needed for it to be both effective and compliant.
Here’s what you need to know about unlimited PTO and how you can benefit from it without increasing your compliance risk.
What Qualifies as Unlimited Vacation?
Unlimited PTO can be defined as a policy in which an employer does not cap the number of paid sick or vacation days an employee takes. There are hefty advantages to policies like this, such as attracting and retaining top talent and increasing morale.
However, there are also a number of drawbacks, such as the potential for policy abuse and the complexity of aligning unlimited PTO with state-based sick time accrual laws.
Understanding the Implications of Different PTO Policies
Depending on what state you live in, your PTO policies can affect you in different ways when it comes to legal compliance.
How PTO Policies Affect Payouts Upon Termination
If you provide paid vacation under a traditional plan, keep in mind that 20 states require an employer to pay out for PTO when the employee leaves the company. Of those 20 states, at least seven make it possible for employees to get a payout for sick days as well.
Additionally, if your employee handbook promises a payout when the employee leaves, you will likely be required to honor it. To pay terminated employees, you can simply multiply the employee’s normal wage by the number of hours they have accrued and include it in their last paycheck.
If you have an unlimited PTO policy, though, it’s possible that you may not have to pay out any sick or vacation time when an employee leaves since none has technically been accrued. Unfortunately, this has been a gray area in the legal arena, and not many state laws have addressed this issue.
Recently, a California appellate court ruled that employees on unlimited PTO plans can accrue vacation time, which would entitle them to a payout upon leaving the company. It’s important to understand the requirements of your state laws to know how to align your PTO policies and procedures accordingly.
Balancing Unlimited PTO With State-Level Sick Time Accrual Laws
There are no federal laws governing whether employers offer paid sick leave to employees. However, 17 states and nearly two dozen individual cities and counties require employers to offer paid sick leave. In many of these states, employers must offer a minimum number of sick days per day or hours worked.
For example, California requires one hour of sick leave for every 30 hours worked, while Nevada requires one hour for every 52 hours worked. On the other hand, Washington, D.C. bases accrual requirements on employer size.
Though some states allow employers to front-load as much paid sick leave as they choose, others — like New Mexico — require this time to be tracked and employers to notify employees of how much time they have.
Paid sick leave must also be clearly marked for compliance purposes. Though you are certainly free to have an unlimited PTO policy, it may not free you from the administrative burden of tracking accruals and ensuring employees understand the minimum sick time they have available to them.
How to Develop a Policy That Protects Your Business
Again, the law isn’t always clear on how to align unlimited PTO with accrual and payout requirements. However, there are a few best practices employers should adhere to in order to craft a policy that protects the business:
- Clearly state that unlimited PTO is not a form of additional wages
- Ensure employees are informed about their rights under federal and state laws
- Address how payment works at the time of termination
- Clearly define the parameters and rules surrounding taking time off
- Let employees know how they can see their sick time accrual
As with all workplace rules, it’s critical to ensure all employees are aware of and have signed off on these policies and that they are administered consistently and fairly.
Finding the Best Way Forward for Your Organization
It’s hard to ignore the business benefits of unlimited PTO. However, HR professionals also need to recognize the legal gray areas that can make these policies more complex than originally anticipated.
For now, the best thing you can do is track time according to your state laws and seek legal counsel on how to implement unlimited PTO policies within those parameters. It may take some leg work, but the benefits your employees and the organization enjoy will be well worth your efforts.
