Unlimited Paid Time Off Policies Are Attractive, But Have Risks

Unlimited Paid Time Off Policies Are Attractive, But Have Risks

In this episode of The Workplace podcast, CalChamber employment law expert Matthew Roberts sits down with Bianca Saad, CalChamber vice president of labor and employment for content, training and advice, to discuss unlimited paid time off (PTO) policies.

Providing vacation time has been a long-running tradition for many employers, but there’s a new trend of employers exploring unlimited or flexible paid time off, Roberts says in kicking off the podcast.

As with all work policies, there are consequences to weigh.

Attraction of Unlimited/Flexible PTO

Providing vacation time is optional and not a requirement; however, once an employer offers it, there are rules that need to be followed, such as no backloading vacation for prior years’ work or no forfeiting of accrued time, Saad explains.

One important rule is that “when an employee separates from the employer, whether they’re terminated or whether they are voluntarily resigning, any available vacation hours that had been accrued, but unused, do need to be paid out, along with other final wages,” she says.

An unlimited time off policy can be a very attractive and effective retention and recruitment offering for employers — especially for employers in particular industries. Saad points out that high-performing professionals like the idea of flexible time off and these policies can demonstrate an employer’s commitment to the idea of work-life balance.

Employers also are attracted to this type of vacation policy because unlimited PTO is not considered vested wages.

“There’s no accrual of time, meaning that you don’t have that situation where when you’re separating from the employee that you are going to have that amount of time that you’re going to need to pay out in addition to any wages that are owed,” Saad points out.


Unlimited PTO can be a gray area legally, with not much guidance available. In fact, there is only one court case, and in it, the employer lost their purported unlimited policy, Saad says.

Another concern with this type of policy is the potential for abuse. In a traditional vacation plan where employees have X amount of time to take, the employer doesn’t have to worry about the abuse piece as much.

Another factor to consider is California law.

Vacation time is not legally mandated, but providing paid sick leave is. Many employers use their PTO policies as a way to meet their obligations under California’s paid sick leave obligations, Saad explains. So, for those who have unlimited PTO policies, there are unanswered questions on what the interplay is with California’s paid sick leave law is.

Lawsuit Over Unlimited PTO

The court case involving unlimited PTO is McPherson v. EF Intercultural Foundation, Inc.

Saad explains that in this case, a group of employees were afforded a policy with a fixed amount of vacation time, while a separate group of employees (a group of managers) were afforded an unlimited PTO policy.

The problem for the employer in this case was a few things. One is the employer never told its employees that they had an unlimited PTO policy, and the employer didn’t have any written policy or agreement to that effect. Lastly, the employer didn’t include this policy in the employee handbook. The employer only had a policy addressing a separate group of employees who had a fixed amount of vacation time.

“Conversely, their practice also suggested the exact opposite, which was, there was this implied limit or implied cap as to how much time they could take, … [and] that the time off was extremely discouraged during the peak season,” Saad says.

Due to their workload, the unlimited PTO group of employees ultimately took less time off than the group of employees who had a fixed amount of time in the handbook.

Appellate Court Guidance

While McPherson resulted in the employer losing, the appellate court gave examples of what might work for an unlimited PTO policy, Roberts says.

Saad says some of those examples the court gave included things like:

  • Clearly stating in their policy that PTO is not a form of additional wages, but instead is a promise to provide a flexible work schedule.
  • Clearly stating in their policy what the rights and obligations are of the employees and the employer.
  • Stating what the consequences are for failing to schedule any of the time off.
  • Allowing sufficient opportunity for employees to take time off or work fewer hours.
  • Administering the policy fairly, so that it’s not an inequitable use among the employees.

Saad clarifies that having different PTO plans for different classifications of employees is acceptable. In McPherson, the employer was held responsible for the vacation wages that it should have provided at the employee’s separation.

CalChamber members can read more about Vacation in the HR Library. Not a member? See what CalChamber can do for you.

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