Unlimited PTO

“I’m tired of paying out vacation when someone terminates. How can I offer vacation without accruing it?”

Your HR Survival Tip

You can front-load vacation so it doesn’t need to be accrued but that doesn’t eliminate the need for a payout upon termination. The only other option is an unlimited paid time off (PTO) plan but it has problems of its own to consider.

A California appeals court recently ruled a company’s unlimited PTO plan wasn’t done correctly and the result was the plan was accruing for purposes of that particular case. The court was very specific that the results were based on this particular case and may not apply to other plans.

CA doesn’t require companies to provide vacation time. However, if you offer paid time off, any accrued time is considered earned wages and cannot be taken away from the employee. Accrued time must either be used as paid time off by the employee or be paid out. This is why it’s critical you have a cap on accruals (which must be at least 150% of their annualized accrual) so you limit their accrual balance.

If you’ve been thinking about implementing an unlimited PTO plan, add this to your thinking:

  • The wording is critical to avoid it becoming an accrual plan when read by attorneys and judges. There are a few keywords and phrases that can work against you. You also want to be clear the PTO is not a form of wages.
  • You cannot restrict why they use the time off so medical leaves of absences qualify as paid time off. This means you need to consider what you can do to minimize long paid absences.
  • You must have a written policy that is signed by every employee. This is where the case mentioned above went wrong…they didn’t properly inform this employee they were under an unlimited PTO plan so it reverted to their normal accrual plan.
  • Will you allow sufficient opportunity for employees to actually take time off or reduce their hours in lieu of taking time off?
  • A common theme to these plans is the condition that it is the employee’s responsibility to ensure their work is being completed while absent. This means you need good job descriptions to use as a measurement for their work and performance.
  • Are there penalties for not properly scheduling the time off?
  • How are you ensuring the plan is fair? Will some employees take the time off while leaving the work for others who now won’t have the opportunity for time off?

Even if you figure out the answers to all these things, your plan will not be risk-free. Unlimited PTO is fairly new and new things are tested in court. No California state court nor the DLSE (CA’s Division of Labor Standards Enforcement) has definitively ruled on just what your unlimited PTO plan must include (or exclude) to avoid legal risk. Therefore, we are waiting for more court cases to provide more guidance.

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