The idea seems so simple: Instead of carefully tracking how much time each employee takes off during the year, we all agree to treat one another as professional, responsible adults, and take off whatever time we need consistent with getting our work done. That’s the idea behind unlimited vacation or PTO policies, and it does seem great in theory. Employees get flexibility. Employers don’t have to book accrued vacation or PTO or worry themselves about complicated recordkeeping. Everyone is happy.

Until, that is, the government and the lawyers get involved.

Lawmakers and regulators often are not “out of the box” thinkers. To the contrary, their whole job is to define the legal boxes that we all live in. Often this is for the general good, but it does make things complicated when someone tries to implement a new approach to an issue like vacation pay.

Here in Illinois, like a number of states, employers are required to keep track of employees’ work hours as well as their vacation or PTO accruals and usage. The Illinois Wage Payment and Collection Act requires employers to pay employees for any accrued, unused vacation or PTO remaining to them at the time of termination. But how does that work with an “unlimited” PTO policy?

Employers with such policies might argue that the payout requirement does not apply because employees do not accrue any guaranteed vacation time. Employees simply take time off when needed without having their salaries docked.

Unfortunately, that is not how the Illinois Department of Labor sees things. According to the Department’s FAQs on vacation pay, employers with such policies “must pay an employee who separates from employment a monetary equivalent equal to the amount of vacation pay to which the employee would otherwise have been allowed to take during that year but had not taken.” That obviously creates a problem – how do you know how much leave a given employee “otherwise would have been allowed to take,” if you don’t limit or even track vacation or PTO usage? Do you take an average of the number of days used by all employees, or by each specific employee? Do you look at what if any scheduled time off the employee may have had coming up later in the year? Do you look at the calendar year? Anniversary year? What sort of evidence is required? Is an employee’s testimony about how much vacation he would have used sufficient to sustain a claim? On top of the practical problems, it is not clear whether the IL DOL’s interpretation of this issue in its FAQ would govern any actual claims, since the FAQ page is not a binding regulation and the courts have yet to weigh in on this issue. Indeed, the impracticality of measuring how much vacation an employee “otherwise would have been allowed to take” is a strong argument against the IL DOL’s interpretation. However, until the issue is addressed by binding legal authority, Illinois employers are left to wonder.

Unlimited vacation and PTO policies can also create issues when accounting for other forms of leave. For example, the FMLA requires employers to allow available paid leave to run concurrently with an employee’s FMLA leave. When employees have a set number of days or weeks of PTO available, the employer’s obligation to provide paid leave is limited to the number of days allowed by policy. But if an employer’s policy simply provides for unlimited PTO with no cap, arguably that would mean that an employee’s entire 12-week FMLA leave entitlement must be paid.

Finally, employers should be mindful of the criticism that because unlimited leave policies do not provide concrete guidance on how much time off the organization regards as reasonable, unlimited PTO policies can actually result in employees taking less time away from work than they would if they might if they had a fixed amount of PTO or vacation. For some employers perhaps that is part of the point, but most employers recognize that taking appropriate time away from work is important for employee productivity and retention.

While unlimited PTO policies are not as simple as they seem on their face, the complications and risks associated with such policies can generally be managed or minimized through careful planning and implementation. Here are a few tips for employers that are considering (or that already have) such a policy:

  • If you are transitioning away from a system in which employees accrued a fixed amount of vacation or PTO, talk with your legal counsel about how to manage the transition without violating your state and local wage laws.
  • Don’t make your policy truly “unlimited.” Establish reasonable parameters around when and how employees are able to use PTO, such as a requirement that employees obtain management approval for time off and an upper limit on the number of consecutive work days an employee can take off with pay.
  • Make sure that your policy is coordinated with other benefits that your organization offers, such as paid parental leave or short-term disability.
  • Be aware of the laws in your jurisdiction, and try to craft your policy in a way that ensures compliance. For example, if you are in a jurisdiction that requires employers to provide a certain number of days of paid sick leave, consider adding language to your policy to make clear that employees will be provided at least the number of paid sick days required by the law, and for all of the purposes provided by the law.
  • Even if you do not restrict the time that employees take off, keep track of the days your employees take and the reasons for their absences. Yes, having to keep these records does reduce one potential advantage of an unlimited PTO policy, but in many cases it is required by law. Even if it were not required, having a record of when people were and were not at work can be very important for defending against certain kinds of claims.
  • Ensure that your managers understand that they still need to manage employees’ time off, not just to prevent employees from taking too much time, but also to ensure that employees take enough time off to remain satisfied and productive.
  • In states like Illinois that require employers to pay employees for accrued, unused PTO and vacation upon termination of employment, make sure you understand how the law might apply to employees covered by your policy.
  • This is a rapidly evolving area of the law. Regularly review and update your policy to comply with changes in the law.