I. Background: The Proposed Unlimited Vacation Policy. The basic concept of the “unlimited” vacation policy under consideration is that employees may elect to take as much paid vacation time off as they prefer so long as they follow basic protocols (such as manager approval, advance notice, and cap on amount). Employees are not granted and do not accrue paid vacation time under the policy such that the employer is not be contractually or otherwise legally obligated to provide employees vacation or vacation pay at the time of termination pursuant to current applicable laws (which at this time only address standard grant/accrual policies). As a result, there is no need for tracking/reporting of employees’ vacation balances (through payroll and on employee pay stubs), nor would there be the need to account for vacation accruals on financial statements.
The concept of unlimited paid vacation (also called “flex time off” or “discretionary time off”) is a growing trend in the U.S. as companies focus on the need for more work-life balance following studies showing a fairly balanced amount of time at and off work leads to happier, healthier and more productive employees. The concept of providing unlimited vacation was pioneered in the Silicon Valley following the dot.com boom. Industry research indicates that currently only a small number of U.S. companies offer unlimited vacation (1% to 2%) and most of these companies are smaller technology companies with a majority of exempt employees. However, the concept appears to be gaining momentum as large companies such as General Electric, Best Buy, The Virgin Group, Netflix, LinkedIn, Groupon, and Grant Thornton have implemented, or are piloting, unlimited vacation programs. Industry research indicates that these larger companies offer the benefit only to the exempt workforce population. The Chicago Tribune and a few small technology companies dropped unlimited vacation programs due to employee complaints and/or reports that employees were taking less vacation due to confusion about the policy.
II. Overall Pros and Cons of an Unlimited Vacation Policy. The following summarizes the pros and cons to be considered before implementing an unlimited vacation policy.
- Recruiting Advantage – An unlimited vacation policy is viewed as a plus to candidates, particularly senior level employees, in the recruiting process and will attract higher caliber candidates.
- Employee Appreciation – Employees appreciate the trust and flexibility they receive under an unlimited vacation policy as well as the unlimited time they can take off, particularly those employees who “work hard and play hard” making the most of such a policy.
- Increased Employee Productivity and Efficiency – Employees are likely to work “harder and faster” while at work in order to take more vacation time and are likely to take more quality vacation time unplugged from the office resulting increased productivity and efficiency in the workplace.
- An Additional Benefit To Existing Employees – Unlimited vacation policies when implemented and administered correctly are generally viewed as a large benefit/perk to employees and part of a rich employee awards program the employer is positively enhancing.
- Positive Financial Impact – There are no direct financial costs associated with an unlimited vacation policy because there are no vacation accruals to be booked as a liability and no pay-out requirements at the termination of employment, resulting in an overall positive financial impact when compared to a traditional accrual based vacation policy.
- Reduction of Administration Costs – Due to the “unlimited” nature of an unlimited vacation policy, there is no need to track employees’ vacation time out for accounting payroll or general administration purposes, thus saving the employer the accounting, IT and personnel costs associated with following a traditional accrual-based vacation policy.
- Employee Uncertainty – HR industry research indicates that employees may develop uncertainty and confusion at the beginning phases of such a policy roll-out when they are unclear about the actual amount and timing of paid vacation they may take and how program works with no vacation time tracking. Employers should be able to address and negate any such uncertainty through a concise policy and well thought out implementation of the policy with employee meetings with Q & A tools. Naming the program something other than “unlimited” such as “flex time off” would also assist with these perception issues so it is clear there is in fact structure around the policy.
- Employee Skepticism and Decreased Morale – Employee uncertainty may also cause employee skepticism and morale issues if employees mistakenly believe that their employer is taking advantage of them by stopping vacation accruals (formerly stated on paystubs) and instead offering a policy with undefined vacation grants with no tracking. Morale issues may also arise if the employer offers the perk to only its exempt workforce employees who are usually higher paid to start. Again, a clear policy and well thought out implementation of the policy would go a long way to address and hopefully eliminate these concerns.
- Productivity Decrease During the Initial Phase of Policy – HR industry reports indicate that initially employees are reluctant to take vacation time when faced with a new unlimited vacation policy due to uncertainty and skepticism. The concern is that employee productivity decreases if there is a lack of time away from work to re-energize and return to work focused and energized, the work-life balance is off with too much work time.
- Employee Abuse – Certain employees prone to poor performance or systematic abuse of an employers’ benefits could easily abuse the vacation policy, requiring some type of disciplinary action (possible termination) thereby increasing the legal risks addressed below. Employers can mitigate this risk through a clear policy, training, and following a comprehensive implementation process with a formal denial of vacation process. Again, naming the program something other than “unlimited” such as “flex time off”, would likely assist to curb abuse.
- Unequal Opportunity from Manager Unfairness — Unlimited vacation policies require direct manager involvement and a significant amount of managerial discretion when it comes to the approval/denial process and overall management of the vacation program. Significant managerial discretion leaves room for unfair, improper decision making and disparate unequal treatment of certain employees. There are ways curb the possibility of unfairness through manager training and HR oversight, but it nonetheless will remain a reality, even diligent well-intentioned managers may not be able to coordinate schedules to ensure 100% fairness.
- Operational Inefficiencies — Due to the unstructured nature of an unlimited vacation policy, there is potential for operational and departmental inefficiencies when there is not enough coverage at the workplace as employees take more vacation time. Through proper manager and HR oversight there are ways to curb such inefficiencies which, to a certain extent, exist even with traditional accrual-based vacation policies.
- Increased Legal Risks – Although untested to date, for the reasons stated below, unlimited vacation policies present additional legal risks when compared to traditional vacation policies that offer vacation grants based on objective criteria (typically years of service) with balance tracking and reporting. Again, there are methods for mitigating these risks through comprehensive SOPs with clear administrative guidelines, management training, a clear complaint process, and a lawful approach to the reduction/elimination of existing accrued vacation.
III. Legal Risks Presented By An Unlimited Vacation Policy – As referenced above, unlimited vacation policies are a new concept in the employment world and to date, such policies have not been vetted through the traditional legal process of state or federal regulatory laws, or any interpretive state or federal cases. As a result, it is difficult to predict how an unlimited vacation policy would be viewed under state and federal wage and hour laws or to what extent such a policy may lead to liability under related employee leave and rights laws. The additional legal risks associated with an unlimited vacation policy are summarized below.
- Non-exempt Employee Wage & Hour Laws, Overtime/Off the Clock, FLSA State and Federal – There is no legal prohibition on providing non-exempt hourly workers with unlimited vacation. However, due to state and federal wage and hour laws requiring that employers track and record hourly employees’ time for purpose of minimum wage and overtime laws, it would be highly risky to allow hourly employees unlimited vacation pursuant to a policy that does not track or record vacation time. When hourly employees don’t report time worked as vacation during regular business hours or workweeks, they may later claim they were actually working in or out of the office or work site or “working off the clock” and not getting paid overtime. Conversely, if in fact under an “unlimited” policy, actual vacation time was indeed tracked, state regulators are likely to view such a program as a “de facto” traditional accrual vacation plan which must be reported on employee pay-stubs, accrued for on the company’s financial statements, and/or balances carried over annually and paid at termination. Due to increasing liability in wage and hour laws, including class actions, offering the unlimited vacation benefit to non-exempt employees is not recommended; best practice would be to wait until such a policy has been legally vetted.
- FMLA/ADA/USERRA/Sick and Other Forms of Leave – An unlimited vacation policy may lead to increased liability for violation of other state and federal mandated protected leave laws. The employer will not always know why an employee is out if he/she asks for and takes vacation time and may fail to follow the mandated leave laws with proper notifications and unpaid time off allowances. For the sake of simplicity, managers may also find it easier to simply grant paid vacation time off to employees with personal circumstances that actually give rise to protected time off (paid or unpaid) and require certain notifications and tracking of time. Thus, an unlimited vacation policy should be made clear and distinct from statutorily mandated protected leaves such as the FMLA, ADA disability leaves, and pregnancy disability leaves and managed by HR as separately. Employers should set out specific rules, guidelines and training for managers and employees regarding the interplay between paid vacation and protected leaves (paid and unpaid) so as to ensure adherence to all state and federal protected leaves. Also, there are financial reasons for clearly separating unlimited vacation leave from mandated state and federal leaves, particularly unpaid statutory leaves, as employers would not want to turn and paid vacation into a paid statutory leave.
- Sick Leave Laws, State and Federal – Federal and certain state laws, such as in California and Massachusetts, require annual paid sick leave time with accrual, eligibility and annual carry-over requirements. Employees generally are allowed to take such sick leaves without notice if proof of the illness is provided. There is an increased risk of liability that unlimited vacation policies could lead to alleged sick leave law violations due to the potential that employees will be denied paid sick time off when it is confused with the unlimited vacation time and, for example, they are either denied time off or disciplined for taking time off. Again, through specific rules and guidelines, and training for managers and employees this risk can be mitigated.
- Vacation Leave Laws, State – No state or federal laws require employers to offer employees paid vacation (yet), however, when it is offered, state laws such as in California and Louisiana provide specific rules around the administration of vacation when it comes to accruals, as well as annual roll overs and payment of accrued vacation at termination to avoid “use it or lose it” vacation policies. State regulators in states like California may view an unlimited vacation plan as an end around the vacation accrual and pay-out regulations and deem them “use it or lose it” policies resulting in fines and penalties. Also, if the implementation of the new unlimited policy is not carefully managed and the handling of the reduction/elimination of existing vacation accruals (e.g., through pay-outs, mandatory time off times, and carry-overs) done in accordance with applicable state laws, additional liability may result. Again, there are ways to mitigate these risks through a clear unlimited vacation policy, and state law compliant vacation accrual draw done programs.
- Non-Discrimination Laws, State and Federal – If managers are not fair and consistent when granting or denying employees’ vacation requests there is a heightened risk for discrimination or favoritism claims due to actual or perceived manager bias in the process. There is also the potential that offering the program to a select group of employees (certain management levels such as executive, or certain departments) could lead to discrimination claims if the select group has a disproportionately high percentage of a certain group of employees (such as predominately one gender or race) and employees not within this same group could claim favoritism or discrimination. There are ways to mitigate this liability through looking at the overall group make-up of employees selected for the benefit, and proper implementation steps.
IV. Recommended Implementation Steps. If an employer decides to implement an unpaid leave policy there are some basic implementation steps that should be followed in terms of the development and roll-out of the policy, as well as the day-to-day administration of the policy by HR and management.
- Develop a Clear and Comprehensive Unlimited Vacation Policy. The policy should address the following basic topics.
- Purpose – The goal/purpose of the policy should be plainly stated, to facilitate job flexibility and encourage employees to take time off from work to rest and re-charge.
- Notice Requirements – Notice periods should be clearly stated for approval of time off, such as 2 weeks for any vacations up to 3 weeks; 4 weeks for any vacations more than 3 weeks.
- Time Limits: The policy should include any time limits the employer will need for management and profitability reasons, such as cap on length of time to be taken, intermittent, continuous and annual (e.g. no more than 3 weeks at a time, no less than 1 day, and cap of 6 weeks annually) time off guidelines.
- Allocation Process – The policy should address when and how managers will be making vacation decisions so as to avoid claims of discrimination, favoritism and retaliation.
- No accruals or pay-outs – The policy needs to clearly state that there will be no more accrual of vacation time and there is no vacation grant allocations. The policy should also explain that because there are no accruals of vacation time, there is no pay-outs at the time of termination (except for accrued vacation balances at the time of the new policy roll-out). Finally, the policy should reference that HR will be handling how existing accrued vacation time will be handled and that it is not being taken away, just frozen.
- Discipline for abuse – The policy should briefly state that abuse of the policy could result in discipline.
- SOPs Surrounding the Policy for HR and Managers. Employers should develop a set of standard operating procedures with HR and legal input to ensure the unlimited vacation program is fairly administered and all involved departments operate under the same rules/guidelines. The procedures outlined should include the following as a start.
- HR oversight, roles and responsibilities
- Manager oversight, roles and responsibilities
- Employee abuse
- Complaint process
- Navigation with other types of mandatory state and federal leave.
- Q & A for Employees. As with any new benefits roll out, a Q & A tool should be developed to effectively and consistently answer common employee questions such as the following.
- Who do I ask for time off?
- Who makes ultimate decisions as to vacation requests?
- When do I need to put in a request?
- How much time off do I get?
- Can I use vacation time when I am sick?
- What happens if my vacation request is denied?
- How do I know managers will be fair when granting or denying vacation?
- What happens if I schedule my vacation, but don’t get my work done before?
- What happens when my employment ends?
- Manager and Employee Training. For the reasons stated above, manager and employee training will be key to an effective implementation.
- Manager training on administration and oversight.
- Employee training/orientation on the overall roll-out.
- The Handling of Existing Vacation Accruals. Employers will need to carefully look at all the existing vacation policies across the U.S, as well as all existing accruals per employee, and applicable state laws to formulate an “accrual draw down plan” that complies with local state law. Depending on applicable state laws, the “draw down” plan could be a combination of the following mechanisms: (i) pay-out of accrued vacation; (ii) mandatory vacation time prior to implementation of the new unlimited program; (iii) or freeze of accrued vacation until termination of employment.
V. 5 Tips for A Well Received Unlimited Vacation Program. Employers should consider the following 5 tips for a successful program in the mind of its employees if the company elects to implement such a policy.
1. Consider the name of the program – “Flexible” and “self-managed” may be better terms than “unlimited” to reflect the actual policy (which isn’t in fact unlimited), dispel skepticism and curb abuse.
2. Tie the Policy to The Company’s Mission or Core Values – To achieve buy in understanding of the reason for the policy, the employer may want to tie the policy into its mission, values, goals, etc.
3. Two to Tango – Communicate that paid time off is a two-way street, the employee needs to perform and work to his/her potential and the company will reward with liberal amounts of time off.
4. Maintain and Follow Practical Guidelines – The devil is in the details on these new types of policies and employers needs to maintain clear guidelines on how, when and for how long vacation will be approved.
5. Clock vs. Contribution – Employers should be ready to shift managements daily cultural focus on actual company contributions and impact vs. the clock and “face time.”