Understanding Unlimited PTO through Risk-Based Analysis
Written by Geoff Kreller, CRCM, CERP
It’s unusual for an HR policy to create such a fierce debate where one side uses phrases like “revolutionary,” “employee-first,” and “work-life oriented,” while the opposition uses terms like “oppressive,” “abusive,” and “insidious.” That’s where the discussion around unlimited paid time off (PTO) stands, although it’s important to recognize that the policy by itself is neither “good” nor “evil.” However, the application and execution of a policy where employees can theoretically take as much PTO as they want whenever they want can lead to either beneficial or harmful outcomes across the enterprise.
During the COVID-19 period between June 2020 and June 2022, the number of job descriptions containing “unlimited PTO” increased exponentially; since that time, some organizations previously offering this benefit abandoned it for traditional accrued PTO systems. One CEO summarized unlimited PTO as something that “sounds progressive, but it’s totally broken”[1].
Much like other key strategic decisions, businesses should take a risk-based approach to their PTO strategy that considers the effective controls and procedures necessary to mitigate inherent risks and maximize the benefits of implementation. While the purported benefits are well articulated – improved well-being, enhanced work-life balance, talent retention, and administrative cost reductions[2] - the risks, costs and potential pitfalls of unlimited PTO are not well understood. Many unlimited PTO programs failed because they were implemented on the basis of those benefits without adequately considering the costs and risks involved.
A business’s decision to adopt an unlimited PTO program for its employees should not be taken lightly – simply put, not all businesses are suited to implement such a program. To that end, this article highlights key considerations for considering and implementing unlimited PTO, enabling a business to leverage a risk-based approach in determining whether such a program would actually benefit employee wellness and the enterprise holistically.
1. “Unlimited” must be limited consistently (and “flexible” is a much better word choice).
It’s not enough for your PTO policy to simply state “take as much time as you need” - there need to be basic boundaries for consistent and reasonable application of this PTO policy. “Unlimited” is limited for a variety of reasons, and it’s far more accurate to consider it a “flexible PTO” program.
It’s difficult to manage limitations and restrictions while staying true to the intent of an unlimited PTO program, especially in “flat” or “lean” organizations where there is often less overlap in roles, responsibilities and coverage. Businesses considering an unlimited PTO program should assess whether their institution’s resiliency, culture, and business demands enable (or effectively prohibit) employees using this benefit. Offering “unlimited PTO” on job descriptions without a reasonable expectation of employees ever being able to use it could be considered a deceptive and harmful practice. Unduly preventing employees from taking PTO through excessively restrictive limitations could also be considered an unfair or abusive employment practice. Most importantly, your employees will find themselves taking fewer days off, unable to recharge and rest, and angry with your organization for not simply giving them three or four weeks of defined PTO with fewer restrictions.
For these reasons, limits must be carefully considered to mitigate operational risk without invoking significant talent, compliance, and legal risks. In addition to mitigating policy abuse, detailing policy limits will enable key deadlines to be met while providing reassurance to employees on when they can (or can’t) request PTO. These limits should consider and disclose:
Blackout periods (where PTO requests will likely be declined) during end-of-quarter or end-of-year to ensure key deliverables and reports are met
Other peak seasons or times requiring “all hands on deck” or specific departments to be fully staffed
The number of days in advance that PTO must be requested
The maximum number of employees that can be out at one time per department (or across the business)
The maximum number of business days that can be taken consecutively
The number of business days that must elapse after returning to work before PTO can be requested again
How conflicting PTO requests are resolved
While scheduling conflicts arise with any PTO policy, a flexible PTO program can cause significant resentment, hate, and disdain between your employees. These limitations and restrictions, even if a maximum number of PTO per year is set[3], almost ensure inequity in the number of days each employee reasonably can take. Because such a program can feel like (or actually represent) a zero-sum game where the decision of one employee affects the decisions of everyone else, an employee’s perception of both the time they request and the time other employees take drastically changes.
Under a fixed PTO program, employees feel entitled to take that time throughout the year because it was earned or given to them individually, and the decisions of other employees to take (or not take) their PTO is independent from that individual’s analysis. An unlimited PTO program effectively pools the entire company’s PTO (which by definition must be finite in order for the business to run), meaning that an employee in need of a mental health day may be reticent to ask for the time based on how that request will affect and be perceived by their peers. Because employees are striving toward similar business goals, employees who regularly take time off under an unlimited PTO program may gradually be perceived as weak, lazy, fragile, not pulling their weight, or simply not as committed to the business’s overall goals. Fearful of these perceptions from peers, bosses, and other departments, employees may shy away from taking time off, even if that decision leads to severe burnout and stress.
It’s also important to recognize that hourly or part-time workers are rarely eligible for unlimited PTO, and this has the potential to create a significant divide in organizations where salaried employees enjoy perks that are not extended to everyone[4]. Third party consultants, contractors, and support staff may follow the PTO policy of their employer (not yours); it’s important to align expectations with those groups to ensure they are adequately supported to maximize their effectiveness.
Navigating between the desire to achieve key business objectives while giving its staff time to recharge and refresh is difficult in and of itself; an unlimited PTO program adds a layer of social complexity between its employees that most HR staffs are not equipped to mitigate. If your business is considering an unlimited PTO strategy, governance, monitoring, and iterative improvements are crucial to implementation. Because of the significant risks involved, flexible PTO program limits should be well-articulated in your employee handbook, periodically reviewed with your staff, and independently evaluated through appropriate key performance and risk indicators (KPIs and KRIs) to ensure program alignment, usage and employee wellness throughout the enterprise.
2. PTO should still be requested, approved, and tracked.
To ensure consistent policy application, PTO should be formally requested, approved (or declined) and tracked. How conflicts in PTO requests are handled should be addressed in PTO policies and procedures, and may include considerations toward the employee’s seniority, number of days taken off, and the urgency of the request.
It’s important for employees to remember that PTO requests can still be declined – those reasons may range from a key project coming due to the employee being on a performance improvement plan (PIP).
While HR and Finance departments no longer need to track PTO accrued for the purposes of calculating the company’s overall liability for unused leave, there are key operational reasons for tracking each employee’s time off (segmented by different types, see the next section for more details). This documentation is crucial for compliance and labor laws, enabling a defense against potential claims related to overtime, discrimination, or wrongful termination[5].
Time off data is invaluable for analysis, monitoring, and predictive forecasting for:
Recognizing high PTO demand periods where temporary support may be beneficial (or required for business continuity purposes)
Identifying abnormally high rates of PTO approvals or declines by department or manager
Tracking policy abuse by employees
Highlighting employees who are not using PTO (and may silently be burning out before your eyes)
3. Other HR leave policies should be in alignment with your PTO strategy.
Your PTO policy should not be designed in a vacuum; there are other company benefits that must integrate and align with your PTO program. Several states (notably California) differentiate and mandate the allowance for certain types of leave, which must be accounted for separately. Your data should capture the use of all types of leave, including:
Sick Leave => These requests for time off should be specifically reserved for health-related absences, including both sudden and chronic illnesses, as well as medical appointments. A separate sick time policy can lead to honest assessments from employees about their health, reducing the likelihood of coming to work ill[6]. However, some employees may see sick time as an opportunity to extend their personal time off.
Work-From-Home (WFH) Benefits => Much like flexible or unlimited PTO, a WFH benefit is a matter of trust that should be earned and maintained. Failing to combine data from PTO, sick leave and WFH requests may exacerbate potential benefit abuses and may cause delayed or poorly-executed deliverables.
Family (Paternity/Maternity) Leave => In addition to family benefits your company may provide, the Family and Medical Leave Act (FMLA) applies to employers with 50 or more employees, and provides certain employees with up to 12 weeks of unpaid, job-protected leave per year[7].
Short-Term and Long-Term Disability => When employees are unable to work for an extended period of time due to an illness or injury that’s unrelated to their position, insurance may cover the employee’s earnings for a short (up to 1 year) or longer term (more than 1 year)[8].
Jury Duty => When employees are called to be potential jurors in a state or Federal court, the days away from work should be considered separate from PTO.
Bereavement => When employees suffer the loss of an immediate family member, most companies allow employees three to seven days of leave for this specific purpose[9].
4. There should be a mandatory minimum number of days an employee must take off.
Beyond the value of having a refreshed staff with the ability to disconnect from work to enjoy their time off, every employee should be required to take a minimum number of days off. Without a minimum requirement established through policy, an unlimited PTO program can easily lead to employees taking less time off than they otherwise would under an accrued PTO program[10].
Along with requiring a minimum number of days per year, each employee should be required to take at least 5 consecutive business days off per year, and it is recommended that senior and executive management be required to take at least 10 consecutive business days off as well.
Importantly, no-contact rules should apply during these mandated periods (if not for all leave) – meaning the employee should not have access to e-mail, slack, or other forms of company messaging during that time. A significant amount of internal theft, embezzlement, and fraud is detected when someone else covers the absence of another employee. The more authority and responsibility an employee has (and the less overlap with other employees), the easier it is to hide illicit activity.
5. Your employees will follow the example set by your senior and executive team.
To effectively adopt this policy throughout your business, there needs to be a clear “tone-from-the-top”. It’s critical that executives, senior managers, and leaders are seen taking time off while continuing to meet important targets, goals and milestones (without having to be “always on”). Absent this reinforcing behavior, some employees will fear missing deadlines, letting their teammates down[11], and the impact taking time off has on their performance reviews and opportunities for advancement.
6. You need to determine what happens to their current accrued PTO.
Moving from an accrued PTO program to an unlimited PTO program does not usually erase the company’s existing obligation for unused PTO already accrued by its staff. For this reason, the policy and underlying procedures need to identify if and when that amount will be paid out.
To simplify these calculations, most companies transitioning to an unlimited PTO strategy have an implementation date that is one of the following:
The first of the month
The first business day of the month
The first day of a payroll period
Similarly, most companies electing to pay out unused balances will use one of the following strategies:
The end of the next full payroll period (accounting for all accrued PTO earned to the start of the new program)
The end of the calendar year
The employee’s termination date
With unlimited PTO programs, the lack of accrual can also lead to state law disputes about whether employees are entitled to a payout of unused leave upon termination. Employers must design their policies and procedures carefully to comply with these state laws (California being a great example) while maintaining the intended flexibility of their PTO programs[12].
Summary
Unlimited PTO has many potential benefits and can potentially increase morale, productivity, and employee well-being. To maximize those benefits, the risks of policy abuse, missed deadlines, inconsistent usage, and biased enforcement must all be mitigated[13], and these risks are incredibly difficult and complex to manage. The effectiveness of a flexible PTO program hinges on clear communication, defined expectations (including the program’s limitations), the institution’s resilience, and your existing company culture. Absent that foundation, a flexible PTO program will cause significant harm to your organization and the well-being of your employees. A flexible PTO program won’t work for every institution – carefully consider the elements in this article to cultivate and promote a robust PTO program that benefits both your company and your staff’s wellness today.
Follow NAQF on LinkedIn for additional insights. For more information on how NAQF can help your organization with talent risk, policy development, or training, contact us at contact@naqf.org.
Article References
[1] https://worldatwork.org/publications/workspan-daily/why-unlimited-pto-doesn-t-work-and-what-you-can-do-about-it
[2] https://www.blueridgeriskpartners.com/blog/the-risks-and-rewards-of-unlimited-pto
[3] Setting a maximum per year invalidates the word “unlimited”, and as a result “flexible” is far more appropriate to use in describing these programs
[4] https://www.ptoexchange.com/blog/unlimited-pto-revolutionary-perk-or-risky-policy
[5] https://www.linkedin.com/pulse/unlimited-pto-friend-foe-deep-dive-legal-hr-marijana-horvat-etfwf/
[6] https://www.ontheclock.com/Blog/PTO-vs-Sick-Time.aspx
[7] https://www.dol.gov/general/topic/benefits-leave/fmla
[8] https://www.adp.com/resources/articles-and-insights/articles/s/short-term-disability.aspx
[9] https://peoplemanagingpeople.com/workforce-management/bereavement-leave/
[10] https://worldatwork.org/publications/workspan-daily/why-unlimited-pto-doesn-t-work-and-what-you-can-do-about-it
[11] https://blog.buddieshr.com/unlimited-pto-pros-and-cons/
[12] https://www.linkedin.com/pulse/unlimited-pto-friend-foe-deep-dive-legal-hr-marijana-horvat-etfwf/
[13] https://blog.buddieshr.com/unlimited-pto-pros-and-cons/
