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Unlimited Vacation Policies: Pros, Cons, and Pitfalls

unlimited vacationUnlimited vacation is a growing trend that may be a good way for organizations to provide an incentive or bonus to employees to reward them for good work without increasing salaries or providing bonuses or other kinds of incentives. The concept of unlimited vacation is very simple: Employees can take vacation, personal, and sick time (anything that would fit into a paid time off (PTO) bank) whenever, however, and as much as they want. Most of the time, however, such a policy contains some restrictions. For example, organizations may not limit how much time people can take off, but they might restrict how much employees can take off at once and put procedures in place for requesting vacation.

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Benefits of unlimited vacation
Unlimited vacation has some great benefits.

It boosts employees’ morale and shows them you trust them. Unlimited vacation works best for employees who you think will have their own incentive to get their work done and strive to do a good job. Showing them that you trust them to do their work on their own time, do a good job, and manage their vacation days in a manner that works may be a productivity and morale boost they can really appreciate.

It provides a job perk at little or no cost. You aren’t really paying employees extra because although it may seem counterintuitive, workplaces that have these policies in effect have said their employees don’t take more vacation than they used to. Of course, some employees may take a couple more days a year than they did before, but the organizations are noticing that when the employees are actually at work, they are more productive.

It encourages employees to have a balanced life and explore interests outside the workplace. These policies often mean you have happier and healthier employees. Why wouldn’t you want to encourage that?

It improves efficiency and productivity. With these policies in place, employees aren’t just sitting in the office to keep their seats warm for eight hours. They are making better use of the hours they are actually in the workplace. And believe it or not, some of the organizations that have implemented these policies have bragged that their productivity went up by as much as 30 percent.

It creates a culture of mutual respect, responsibility, and high performance. Unlimited vacation policies provide employees with a way to focus more on performance, getting the job done, meeting deadlines, and exceeding expectations.

It facilitates more flexible work schedules. Unlimited vacation can foster flex-time arrangements. This includes, for example, employees who work from home, come into the office only two or three days a week, or any similar type of working arrangement.

It reduces record-keeping time and costs. This is a key aspect of unlimited vacation and one of the reasons employers implement such policies. You can spend a lot of time and cost on accounting and administrative tasks — counting employees’ hours and trying to figure out what increments to use to count employee vacation and sick time.

It may avoid the obligation to pay out accrued and unused vacation time at termination. This may not work for every employer because it will depend on state law and your current policies. However, in many cases — and probably in most cases — if you move to a policy like this and you do it right, you can avoid having to keep vacation time on your balance sheet and can avoid having to pay it when employees leave.

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Risks of unlimited vacation
Although unlimited vacation has many benefits, it isn’t without risks.

Potential for employee abuse. The possibility of employee abuse exists, but there are ways to curb it. For example, you can limit how much time off employees can take at once, implement companywide systems requiring preapproval of vacation time, and ensure fair and equal treatment across the board.

Some people are skeptical of such policies. Some employees have the perception that when you say “unlimited vacation,” you really mean that there is “no vacation.” In certain organizations that have implemented unlimited vacation policies, some employees have pushed back, thinking their employer is really just pulling the rug out from under them and taking their vacation away.

Employees may feel like they are “working” all the time, even when on vacation. Some employees may resent that there is no designated bucket for vacation time unless they feel that they really can take the time off.

Loss of one way to ensure productivity and reward long-term service. You lose one way of ensuring that employees are sitting at work and being productive and one means of rewarding longtime employees. However, there are other ways to try to provide that reward and ensure productivity.

Uncertainties about when and how long people will be out may make planning difficult. This is why a lot of employers interested in implementing unlimited vacation policies want to include some restrictions.

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Legal risks of unlimited vacation
As unlimited vacation becomes a growing trend, the following legal issues may arise.

Claims of differential/discriminatory treatment. This issue can develop when there are differences among those who are eligible for unlimited vacation and those who aren’t. For example, if you have some hourly nonexempt employees for whom it’s just not going to work, it probably makes sense to carefully look at your statistics and the background of your workforce. Look for differences between race, sex, and any other kind of issue that might be perceived as discrimination. This would also be the case if you were moving to such a policy only in certain departments or in certain job categories.

FLSA wage-claim issues if employees are later found to be misclassified. In the last several years, there has been a lot of collective action on Fair Labor Standards Act (FLSA) issues, and a lot of the big cases have been related to employee misclassification. If you have a group of 50 employees who say they should have been classified as nonexempt and paid overtime and a court rules for them, you have 50 employees you might not have been keeping time records on any more because of your unlimited vacation policy.

FLSA wage-claim issues if the transition isn’t handled properly. This issue mainly arises regarding what you do with the bank of vacation days and PTO days you already have on the books.

Intersection with other leave laws and policies. If you have an unlimited vacation policy, you may have an issue with other leave laws and/or policies because you may not always know the reasons somebody is out.

State-by-state comparison of 50 employment laws in all 50 states, including various leave laws

Bottom line
Unlimited vacation has many benefits and may offer potential cost-saving opportunities to your organization. However, if you’re thinking about implementing such a policy, you need to look at all of its potential benefits and risks and proceed fairly cautiously to make sure you aren’t a test case for how it might go awry.

This article was adapted from the audio conference “Unlimited Vacation: The Budget-Friendly Benefit That’s Sparking Employee Productivity,” presented by Christina Gomez, an associate at Holland & Hart LLP. You can purchase a CD of the full audio conference.