The Pitfalls to an Organization’s Unlimited Paid Time Off Policy

An organization’s Paid Time Off policy directly influences recruiting, job performance, and their bottom line. The big debate is whether a company should offer employees a set number of vacation days (a Traditional Paid Time Off Policy) or an Unlimited Paid Time Off Policy. On the surface, an Unlimited Vacation policy may seem “generous”, but if you take a closer look, it may not be in the organization’s, or employee’s, best interest, from both a financial and wellness perspective.

It’s more critical now than ever for business leaders to go back to the drawing board with their Finance Teams & HR Departments to refine their PTO programs to ensure their goals, standards & expectations, communication strategies, and execution are set up successfully to optimize Paid Time Off usage.

Limited or Unlimited Paid Time Off? That is the question.

Some companies feel that offering Unlimited Paid Time Off will solve all their employee wellness problems. It’s understandable why...according to MetLife's 2019 U.S. Employee Benefit Trends Study, professionals respond positively to Unlimited PTO policies, with 72% expressing interest in receiving Unlimited PTO. Plus, with Unlimited PTO, employers are relieved from the administrative headache of tracking time off and the financial burden of paying out accrued vacation time.

While the idea of Unlimited Paid Time Off sounds nice in theory, in practice, not so much. U.S. professionals are hesitant to take time off, even if they are paid to take it. According to a study by the U.S. Travel Association, 55% of Americans didn’t use all of their vacation time in 2018, resulting in 768 million days of unused Paid Time Off. Even with the well-known positive benefits of taking time off including reduced stress and greater job satisfaction, there’s still a major hesitation to take time off and COVID-19 has only made matters worse, resulting in a sharp increase in employee burnout and vacation accrual liability.

As an organization, if you want to truly execute a vacation policy that will empower your employees to take the time they need to reset and recharge to avoid burnout, a Traditional Paid Time Off policy has proven to be more successful. Here’s why:

1. Unlimited Paid Time Off is more of a recruiting ploy for tech workers than an effective wellness solution

We are seeing an uptick in jobs promoting unlimited Paid Time Off, but according to the Society for Human Resource Management's (SHRM's) 2016 Employee Benefits report, only 1-2% of American companies offer unlimited PTO as a benefit. Even though it’s a rare benefit, data from job platform Indeed indicates that since 2015, the number of job listings promoting their Unlimited PTO almost tripled, from 450 per million postings to nearly 1,300.

Tech jobs are six to eight times more likely to offer unlimited PTO versus other job openings. Generally speaking, unlimited vacation policies are more popular with start-ups, likely influenced by the unlimited PTO policies set in place by tech companies like Netflix, Dropbox, Glassdoor, and other high growth companies.

It’s critical to question if an unlimited time off policy is truly in the best interest of an organization and its employees. In a survey by community-workplace app Blind, almost 60% of tech workers felt burned out...that’s 44% higher than physicians

2. Employees who have unlimited time off actually take less time off

At first glance, unlimited time-off seems like an undeniable perk - it may set the tone that an employer gives their employees the agency to set their schedules and promotes a healthy work-life balance. But a recent study by Namely shows that on average, professionals with unlimited time-off take less time off than employees with a set number of vacation days, likely due to the lack of guidelines and formalized structure. When an employee understands their limits, they will do their best to work within them.

3. Unlimited Time Off is not actually unlimited...

Unlimited Paid Time Off policies are more of a marketing tactic for hiring than a true vacation policy. Time Off still needs to be approved by managers and each company sets their own standards and parameters for “appropriate use”. This ambiguity can cause anxiety and actually inhibit an employee from feeling confident in taking time off due to the heightened pressure and fear of “crossing the line”.

4. Managing time off distribution is challenging

If employees can schedule their time off whenever they want, this may create an issue with maintaining healthy business rhythms. Without diligent and proper oversight by management, companies may face understaffing or project delays if critical team members aren’t working at the right times.

5. Employees are leaving billions of dollars on the table

With Traditional Paid Time Off, employees are paid out the dollar value of their accrued days whenever they leave the company. This is a major financial asset that employees have access to. But with Unlimited Paid Time Off, employees aren’t eligible to be compensated for any unused vacation days which is essentially hundreds of dollars down the drain...In their careers, employees will forfeit $65.5 B in unused Paid Time Off. The average professional who is hungry and eager to leave a good impression falls victim for leaving vacation days behind.

6. Employees who aren’t eligible for carry over actually get paid less

There’s a catch to Unlimited Paid Time Off. With an unlimited PTO policy, unused time off doesn’t accrue. Therefore, if an employee quits or leaves the company, their employer is not obligated to pay them for their unused time. This means that employees who don’t accrue unused vacation days effectively get paid less than their peers who work at companies who are offered traditional Paid Time Off policies that pay out for unused time-off.

Tips for predicting, managing and reducing accrued vacation liabilities

Here are a few simple steps you can take to reconstruct a healthy Paid Time Off program:

  • Calculate your predicted carry over liability, in both days and dollars (on a company level and per employee level) to better understand the liability on your books

  • Read up on your state’s PTO payout laws

  • Consult your state for more details and verification

  • Define and write your company’s Paid Time Off policy outlining how time is accrued, roll over restrictions, which days are off-limits to take time off, and how employees can cash out unused time

  • Make sure to include all of these details in your employee onboarding documents and handbooks