With flexibility and work-life balance becoming increasingly important to employees, employers are rethinking the concept of vacation time as a fringe benefit; and some employers are responding to the needs of their employees by enacting “unlimited vacation” policies. Most members of America’s workforce have grown accustomed to the traditional vacation leave policies where employees earn or accrue vacation days based on seniority or a set formula – companies offering unlimited vacation take a strikingly different approach. The key feature of an unlimited vacation policy is its flexibility – employees can take any form of paid time off (PTO) such as personal leave, sick time or vacation, in any manner or combination they wish and theoretically without any limitations.

While the flexibility provided to employees under unlimited vacation policies is obvious, many employers that have moved away from traditional vacation policies have done so because of the additional flexibility in administration of vacation benefits. The implementation of unlimited vacation policies reduces administrative overhead by removing the need to track vacation usage and process vacation request forms. Moreover, the burden of keeping an accurate accounting of vacation balances, accrual, carry-over and payout is eliminated.

Despite the benefits to both employers and employees, unlimited vacation policies must be carefully crafted to fit the individual needs of the employer, while also remaining legally compliant and not creating any unanticipated obligations for the employer. An employer considering implementing an unlimited vacation policy must critically assess its business model, business goals and current vacation policy. Consider the following tips:

1.            Identify whether an unlimited vacation policy is appropriate

Unlimited vacation policies may be best suited for the workplace that provides employees with flexible hours and autonomy. The unlimited vacation policy trend has been most prevalent among technology companies that employ highly sought after individuals and a large percentage of Millennials, and where the performance expectations are clear and measurable.  If the work culture emphasizes flexibility/work-life balance and does not necessarily require face-to-face interactions, an unlimited vacation policy may provide an employer with an added recruiting tool. In such situations, an unlimited vacation policy can result in increased productivity and enhanced trust between employees and their employer.

2.            Coordinate policy with federal leave laws and anti-discrimination laws

Prior to implementing an unlimited vacation policy, employers should review their current leave policies—including all PTO, unpaid medical leave and protected leave under the Family Medical Leave Act (FMLA)—to ensure that the overarching leave policies are cohesive. Employers who are subject to the FMLA are required to provide up to 12 weeks of unpaid leave to eligible employees. Prior to implementation, employers should determine whether or not the full 12 weeks of FMLA leave will be paid as part of the unlimited vacation policy. Regardless, employers are still required to maintain and adhere to the requirements of the FMLA. To avoid running afoul of the leave protections provided by the FMLA, employers should reference their FMLA policy, continue to require employees to submit supporting medical documentation for FMLA leave requests and maintain a system for tracking FMLA leave usage.

Employers must also be mindful of federal and state anti-discrimination laws that generally prohibit employers from discriminating against employees on the basis of age, sex, race, ethnicity, sexual orientation, or national origin with regards to any term of employment—including vacation time. Employers should train managerial employees on how to oversee and administer the unlimited vacation policy in a non-discriminatory manner to ensure that all employees have equal access and entitlement to take leave under the unlimited vacation policy.

3.            Consider applicable state laws affecting leave policies

While federal law does not require employees to offer paid vacation time, some states have enacted laws or regulations that require paid sick leave, vacation time or the payout of any unused vacation upon termination. While unlimited vacation policies may meet the requirements of laws that mandate PTO, state law requirements mandating payouts of unused vacation time upon termination present a significant legal risk, making careful drafting of unlimited vacation policies critical.

For example, in California, paid vacation time is considered a form of wages (i.e., earned compensation). Once earned, the vacation time cannot be forfeited; and employers must compensate employees for any unused vacation time. (Cal. Lab. Code § 227.3). A hallmark of unlimited vacation policies is the elimination of accounting, accrual and ultimately payout for unused vacation time. However, in states with vacation payout mandates similar to California’s, employers must consider the possibility that implementing an unlimited vacation policy may be deemed to be an attempt to circumvent mandatory payouts or the possibility that courts may still require some form of vacation payout (for example, by deeming some amount of vacation as “earned”). There is currently little guidance on the interplay between vacation payout laws and unlimited vacation policies; however, the risk is clear, even though it seems counterintuitive for courts to punish an employer for providing liberal vacation leave.

4.            Draft a clear policy to avoid potential for abuse

Unlimited vacation policies, like many other traditional employment benefits, are subject to abuse by employees. To minimize the risk of abuse, employers should adopt clear parameters about the limitations of the unlimited vacation policy. Unlimited vacation policies are a bit of a misnomer, because employers who want to successfully implement such policies are well aware of the need to place certain well-defined limitations on their usage. Employers should make it clear that taking vacation time does not eliminate or change productivity and performance expectations.  To prevent employees from taking too much time off, employers should consider adopting limitations regarding consecutive days off, or if a time period or month is particularly busy, an employer should consider prohibiting employees from taking time off during that period altogether. Additionally, to ensure that supervisors know how many employees will be off, the unlimited vacation policy should require employees to provide notice of the dates and length of time off.

With employers constantly looking for a competitive edge and strategizing on ways to attract the most talented employees, unlimited vacation policies may gain traction and become more popular. The spirit of unlimited vacation policies is an emphasis on optimizing employee performance and maximizing flexibility for both employees and employers alike. Employers considering adopting an unlimited vacation policy should seek the advice of legal counsel to assist in drafting a policy that is clear and compliant with applicable state and federal laws. 

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