Unlimited PTO: Pros and cons of an unlimited paid time off policy
Unlimited paid time off (PTO) is one of the top benefits that startups and tech companies offer to entice talent. Hubspot and Netflix were among the first to offer it back in 2015. Since then, the number of job postings offering unlimited PTO almost tripled, from 450 per million postings to nearly 1,300.
For employees, unlimited PTO offers a more rewarding work-life balance, while employers can take advantage of the cost savings and higher employee productivity. Although unlimited PTO offers many benefits to both employee and employer, it has its drawbacks. Take a closer look at unlimited PTO, how it can help or hinder your company, and how to implement it effectively.
What is unlimited PTO?
In a typical paid time off (PTO) policy, the employee accrues time off according to the number of days worked. The time converts into sick days and vacation days. An employee can use the days as needed, and any unused days continue to accrue. Unlimited policies don’t accrue time off. Employees can take unlimited vacation time as long as they don’t neglect their work.
The case for unlimited PTO
In 2017, KPMG, one of the big four accounting firms, published Meet the Millennials. The report revealed that Millennials and Generation Z want control of their working hours and location. Previous generations may have wanted work-life balance—but young talent expects it.
In early 2019, CBNC reported that 25% of businesses polled would adjust their benefits package to respond to what perks top talent want from an employer. One of the top benefits that employers plan on adding to attract them: flexible working arrangements.
Besides attracting and retaining top talent, an unlimited vacation policy can be good for company morale, increasing employee loyalty and productivity. Time Off research found that 68% of employees who reported that their company encourages time off are happier with their jobs than those who work in an environment where vacation is discouraged.
The financial benefits of unlimited paid time off
A traditional paid time off policy accrues sick days and vacation days over time. As time off vests, it’s considered earned wages that can’t be forfeited. In many states, the Labor Code requires employers to pay out accrued time from unused vacation days or medical leave at the employee’s final rate of pay and not at the rate it was earned.
Over time, unused PTO can be more expensive than an employer initially bargained for. When an employee retires or quits, the employer must pay out all remaining vacation time at the employee's final pay rate.
An employee doesn’t earn paid time off under a flexible vacation policy. Instead, the worker may take paid time off when desired, provided they continue to meet their duties and obligations. But unlimited vacation policy does not accrue to vest as wages, so there's nothing to pay out at termination or retirement.
Eliminating the payout expense of unused vacation time when employees quit may be one of the top reasons a business should consider an unlimited PTO policy, especially if employee turnover is high.
Pros and cons of unlimited paid time off
There are many factors to consider if you’re thinking about adding an unlimited PTO plan to your organization. Weigh the following pros and cons to decide if the policy is right for your business.
Pros of unlimited paid time off
- A recruiting tool to attract and keep top talent, especially from the Millennial and Gen Z demographic
- Employees are more likely to feel happier with the company and more appreciated by their employers
- Employees may be less stressed and more productive at work if they’re free to take time off for personal reasons
- Employer can benefit financially from less employee absenteeism and reduced paid time off
- Employers can save on large lump-sum payouts at employment termination from unused leave
- May be an integral part of the company culture if a flexible workplace aligns with a company’s values
- Publicly positions a company as modern and generous with employee benefits
Cons of unlimited PTO
- May create mistrust between employer and employees if the employer questions why an employee is taking time off
- Although the data shows it’s unlikely, there’s a risk that employees may abuse the benefit
- Lack of an organized structure may strain a business or affect its productivity if key staff wish to take time off at the same time
- May cause workplace unrest if only senior management have the benefit
- No end-of-the-year reporting of PTO as in traditional plans
Some of the main pros and cons show opposite sides of the same coin. Unlimited PTO can improve a company’s productivity—or negatively affect it. The benefit can encourage a more open and trusting environment—or create mistrust among staff. Correctly implementing the policy is the key to its success.
Advice on how to successfully implement unlimited PTO
Unlimited PTO doesn’t mean employees can stop showing up to work whenever they decide. For an unlimited paid time off plan to succeed, a thought-out and organized approach is needed. When crafting your company’s unlimited vacation policy, work in conjunction with human resources to develop a plan that considers the following concepts.
Tailor the policy scope
For liability concerns, separate leave related to military requirements or medical reasons from unlimited PTO. Family, disability, or medical leave may have their own statutory requirements and should be defined separately to limit possible discrimination or compliance claims.
Clarify your company policy to reduce confusion on how your flexible vacation policy works. Make it clear that your firm expects employees to balance their leave with their work responsibilities. Add disclosures to your employee handbook that you retain discretion to discontinue or modify the policy at any time. Inform new hires in writing that unlimited employee vacation time is not paid out if they quit or leave.
Set up a tracking system
Create a system to track the amount of time employees are taking for reasons such as sick leave, personal days, or mental health days. The data could provide valuable insight on employee well-being and how the plan is working for your business, especially as the company grows in the number of employees. Use the data collected to adjust your company’s unlimited time off plan as needed.
Have a scheduling system for taking time off
A successful unlimited PTO policy addresses scheduling in a clear and orderly manner. A business can grind to a halt because key employees all take personal days at the same time. To mitigate the risk, create a scheduling system that requires employees to use the procedure for vacation requests in advance.
Train upper management on policy management
Staff continuously coming and going can disrupt management, especially if there are tight deadlines to meet. Management may pressure employees to work more and leave less. This can lead to resentment or additional stress in the workplace. Work environment sensitivity training may be necessary so upper management can better handle frustrations that stem from a flexible workspace.
Make remote working effective
Not all businesses can adapt to staff working from home or remotely. Setting up systems and tech so employees can work while on leave could help a company and its employees meet targets and deadlines.
Is unlimited PTO a good idea?
Unlimited paid time isn’t ideal for all businesses. But if you’re willing to develop and enact a well-thought-out policy, you can attract and retain good talent with the perk of unlimited vacation days. Employees will feel more valued and might be more productive when given the freedom to schedule work on their own terms. And the company can save money by avoiding payouts when employees leave due to accrued paid time off.