Benefits and Compensation

Unlimited Vacation: Worker Exploitation or Dream Benefit?

The term “unlimited vacation policy” is almost a Rorschach test. Is it a marketing slogan for a system to exploit workers, or is it an attractive benefit that recognizes the changing nature of many workplaces?

hours

Adopting an unlimited vacation policy has significant HR and legal implications that cannot be ignored. And a recent California appellate court decision may limit the ability of companies in the state to adopt such policies or at least raise the legal risks in doing so.

Even “unlimited vacation” skeptics should acknowledge the potential benefits of adopting such a policy. Technology has made it more and more difficult to determine what is and is not a vacation day. For workforces with large percentages of exempt workers, accrued vacation systems do not necessarily align with how employees manage their time. If you check and respond to e-mails on your phone during your “day off,” is that a vacation day? And depending on where an employee is located, state law may limit the ability to require exempt workers to take partial vacation days.

Beyond the practical benefits of such a policy, the recruiting benefits of unlimited vacation cannot be ignored. A recent study showed that over 50% of surveyed participants said they would take a 10% pay cut in exchange for an unlimited vacation policy.

HR and Legal Risks

But before instituting an unlimited vacation policy, one should carefully evaluate the significant legal and HR risks.

Of course, many are skeptical that “unlimited vacation” means any such thing. For many people, such a policy merely signals an employer’s attempt to avoid the expense of paying out accrued vacation time. Moreover, while having a defined vacation benefit can signal to employees how much vacation time is appropriate, “unlimited” policies deprive employees of such signals. This can lead to employees taking less vacation. In a country that is notorious for depriving employees of time off, this is a serious concern.

Moreover, “unlimited” vacation policies can conflict with other paid and unpaid leave policies an employer may have. So, for example, whether voluntarily or by law, an employer may have family leave or medical leave policies. Depending on the state, an employer may be able to require employees to avail themselves of government leave benefits first. But it can be difficult to determine when an employee is taking such a leave when there is an unlimited vacation policy.

The California Court of Appeal recently weighed in on the “unlimited vacation policy” debate in McPherson v. EF Intercultural Foundation Inc. (McPherson). The court in McPherson held that despite the employer purportedly having an unlimited vacation policy, employees were actually accruing vacation time that needed to be paid upon termination.

Notably, the employer in McPherson did not have a written vacation policy for the employees at issue at all. Thus, the court held, the employees were never told that vacation benefits were not part of their compensation.

But in line with some of the more practical concerns with unlimited vacation policies, the McPherson court’s holding rested on more than just the fact that the policy was not in writing. The court was equally concerned by the fact that, in practice, employees were not provided unlimited vacation. Instead, there was an implied cap of 2 to 6 weeks of vacation, based on evidence submitted at trial.

Moreover, the court focused on the fact that employees had such burdensome workloads that they could not actually reap the purported benefits of an unlimited vacation policy. As the court explained, employers “cannot avoid § 227.3 [of the California Labor Code] by leaving the amount of vacation time undefined in its policy while impliedly limiting the time actually available for approval.”

A Cautionary Tale

McPherson is not the death knell for unlimited vacation policies in California but rather a cautionary tale. The court gave some guidance as to what might pass muster for a truly unlimited vacation policy. In particular, the court explained that the policy should:

  • Be in writing.
  • Clearly explain that the ability to take paid time off is not a form of compensation but rather part of the promise to provide a flexible work schedule.
  • In practice, allow sufficient opportunity to take time off or work fewer hours in lieu of taking time off.
  • Be administered fairly such that it does not become a de facto “use it or lose it” policy or result in inequities in terms of how much time one employee can take off versus another.

Of course, while this guidance is helpful, employers in California—and other states that might follow California’s lead—will still need to see how courts evaluate unlimited vacation policies in the future that attempt to adhere to the McPherson decision.

In the meantime, for “unlimited vacation policy” skeptics, the McPherson case should be seen as a positive development. The opinion is notable not for its guidance on mere technicalities (e.g., the fact that the policy must be in writing) but for how it appears to go out of its way to address concerns about how “unlimited vacation policies” may exploit workers. Thus, for those who are concerned that “unlimited vacation policies” are a marketing ploy that do not actually result in employees being able to take sufficient vacation, McPherson makes clear that companies that do not allow sufficient opportunity to take vacation will not be legally deemed to have an unlimited vacation policy.

In other words, for companies that are evaluating whether to adopt an unlimited vacation policy or already have such a policy in place, it is important they go beyond merely updating their employee handbooks. Employers must truly evaluate how their vacation policies are practically implemented, the culture around employees taking vacation, and how burdens and expectations between employees may be unfairly impacting certain employees’ ability to benefit from an unlimited vacation policy.

While McPherson still leaves much uncertainty, it has given both unlimited vacation policy boosters and skeptics the motivation to come together to devise a new era of vacation policies that both reflect the realities of the nature of work for many exempt workers and ensure employees are able to disconnect and enjoy the benefits of the flexibility technology was supposed to bring.

Mital Makadia and David Siegel are partners at Grellas Shah LLP, where they counsel tech start-ups and investors in general corporate, venture financing, mergers and acquisitions, and other transactional matters. Makadia previously practiced securities law for public companies at two major East Coast law firms. Siegel spent several years practicing complex litigation for a prominent AMLAW 100 firm and also guided various organizations through government funding audits during the Great Recession.