Episode 111: Should Employers Offer Unlimited PTO?

Welcome to the Workplace, a podcast by Cal Chamber. I'm Erica Frank, Cal Chamber's executive Vice president and General counsel. We are fortunate today to have Jennifer Shah of the Shah Law Group back with us on the podcast. Welcome, Jen.

Hi, Erica. How are you?

Hanging in there? Doing well.

Good.

So today I want to talk about something that's not Covid related.

Hallelujah.

And instead talk about a trend that's been picking up speed over the last couple of years with regards to employers and companies ditching the old standard vacation accrual policies and opting more for what is called unlimited time off policies. Have you heard of these?

Oh, yes, I have. I get calls about them all the time. And I have to be honest, Erica, you might convince me otherwise today, but I'm not a big, big fan.

There's a number of things that we need to talk about as to why unlimited policies seem lovely on paper, but in practice create a lot of consternation and heartburn for many employers as they're trying to administer them. So let's talk about it because I know, like I said, as I said, we weren't going to talk about COVID It is relevant because many employers saw their vacation banks full, employees weren't using their vacation. And that, of course, is a liability when you look at an accounting purposes, because it is wages owed to an employee. It's a vested benefit that the employee is entitled to should they separate from employment. So I know that for many companies, the discussion among the board, boardrooms and among management, you know, how do we remove this liability? And oh, there's this thing called unlimited vacation. So, Jen, tell me a little bit about what are some of the concerns you have and some of the pitfalls you've seen employers fall into related to unlimited vacation policies.

So there are a couple of things. First of all, one of the things employers need to remember is that they're not required to provide vacation. Right. So even when you call something unlimited vacation, there was a court decision that came down last year. Really what you're talking about is flexible scheduling. What you're really saying is, look, take the time off that you need to take, couple hours here, a couple weeks there. You do what you need to do so long as you meet your requirements of the position. Most of the employers with whom we work provide this sort of benefit to executives, higher level folks who they have large projects they're working on or.

You know, metrics that they need to satisfy, and they have the ability and the flexibility to take the time that they want to Take the problem is the equation that you just gave, you know, lots of vacation in the bank answer, let's do unlimited vacation is really based on a faulty premise, Right? Because the only reason people have vacation in the bank is because we're not telling them they need to use it. Now, in California, we can't have a use it or lose it policy where whatever you have at the end of the year, if you haven't used it, we take it away. But we can cap vacation. There are a lot of different strategies that we can use. Also, remember, vacation isn't something that you only have to use when you go out of town. I've had a lot of employers who've had problems with remote workers where they're taking three, four, five hours off in a day, but they're not considering it vacation because their idea is, oh, well, I didn't go anywhere because it's Covid. Well, we may need to tighten up our vacation policies. But the first problem is if you call it the wrong thing and you don't administer it correctly, you're going to have huge liability at the end of the game when somebody makes a complaint or goes to the labor commissioner or files a lawsuit or a PAGA claim. Right. Private Attorney General's Act. So you got to do this correctly. Now, we do it for our lawyers and for our firm administrator where they have, you know. But we don't call it unlimited vacation. Right. We call it work flexibility. Take the amount of time you need to take. Now, here are the downsides. You go on a leave of absence, all that time is paid, Right? Because how do you not pay it? You're going to pay someone who goes to an ashram in India for three weeks, but you're not going to pay someone who's on medical leave for three weeks. Not going to work. Can you require them to integrate with the state disability insurance benefits or paid family leave benefits? Probably not, because you're paying them 100%. Why would they even apply for SDI or paid family leave? You're not going to tell them to do that. So that's a big issue. The other problem is people tend to do these sorts of of things on the fly. Come on, John, join me in my new company. You can have as much time off as you want. They don't write down, what is our policy? What is our practice? What does it mean? And honestly, Erica, part of the reason for that is it's hard to explain what your policy is going to say in a way that complies with the McPherson decision from last year where they looked at these exact type of policies. So. So there are a lot of pitfalls and potholes, frankly, for employers in this area.

If an employer did want to go down unlimited policies or has done so, can they split unlimited vacation from unlimited sick so that they don't run into those situations where if you have someone on an extended medical leave, they're not paying out the entire medical leave. Can they have separate policies?

Well, here's the problem. It's not going to affect anything because if you give unlimited time off or unlimited vacation, how are you going to restrict that? The more you restrict it, the more it seems like vacation which would accrue. So of course we have to deal with our California paid sick leave. Right. So many employers are going to give the minimum Healthy Workplace, Healthy Families act sick leave and then say whatever additional time you need to take, you can do it under this plan. They can also just roll it into the whole plan. But that means no documentation, no discipline for taking excessive time. Again, if you do it with higher level folks who are exempt, who just have projects they need to deliver on, that might be a different issue. But there's no easy way to prevent folks from being able to use this paid time on a leave of absence.

Now you just mentioned making unlimited time available for more of your executive staff. So is it okay for employ to offer unlimited to the executive staff and then a more traditional vacation coupled with a sick leave policy for your frontline staff or your everyone else in the workplace?

Yes. Erica, sorry for stepping on you. Yes, it's such a great question. They can do it. A lot of employers think they can't because it feels like discrimination. But one of the things I try to tell folks is if you're making decisions based on categories of employees and not individuals, you're okay. But if you and I both work at the Chamber and we have the same job and you get an unlimited plan and I don't now we may have an issue. Right. So it's important to go by classification, title, job function, and not by individual.

Now what Going back to the unlimited. If an employee who has an unlimited is part of the unlimited policy, buckets, so to speak, and they leave, is there any payout that's then owed?

No. That's why in your example you gave at the top of the podcast, the employer says, wait, I've got a solution. We've got all this vacation that we'd have to pay out on separation of employment, by the way, at the employees, then regular rate of pay. So they may have accrued it five years ago at a much lower rate than they're going to use it at.

Right, right.

You got to pay that out. So we'll avoid that by having unlimited vacation. If you do it correctly, you can eliminate the payout and wipe the liability off your books. By the way, when you implement this program, you're going to have to pay out the accrued vacation the employees have already received. So there's a big cost to doing this kind of a plan, but you can do that. I think it's interesting that Netflix was one of the first employers to that had an unlimited plan and they don't do it anymore. Because my understanding is it became way too complicated to manage. And certainly in Covid, you would have been paying all these people for their COVID leave this entire time. There's no way to get out of it.

Yeah. I do think from my understanding, and there's been a number of companies, Jennifer, that went out offering and then rolled things back as they realized it was administratively difficult to maintain, that employers really sit down and think about, why are we wanting to offer this unlimited time? Who are we going to be offering it to? How do we create a policy? Because you still need some kind of written policy articulating what your policy is, even if it's unlimited. And speaking with a professional such as you, Jen, who can help craft that policy, but also have the discussion ask those difficult questions that the employer may not already be thinking about in evaluating whether an unlimited policy plan is right for their organization.

Right. And one of the reasons it's so important, Erica, is in that decision from last year, remember that there was a regular vacation plan for some employees and this sort of unlimited idea for others. That is part of what upset the court. So even though you're allowed to have two separate plans, in that particular case, the employer didn't have a written policy for those individuals who had that unlimited time off. And the word unlimited just sends shivers up my spine as an employment lawyer, of course. So that's why we like this idea of workplace flexibility in our firm. You meet your billable hours, you're a lawyer, you do what you need to do. You don't meet your billable hours. Well, that's a problem. Right. So in your policy, you need to say your time cannot negatively affect your deliverables, your deadlines, that sort of thing. And you can also say, for example, if you're going to take more than two weeks at a time, we need to make sure that it's okay. For the company. So there are some restrictions that you can put on it. You just have to be really careful how you explain them and also how it is implemented. Because the whole idea of discrimination is even if we're both subject to the same policy, and if it's applied to us differently, we're going to have an issue with the Department of Fair Employment and Housing, potentially.

Well stated, Jen. Thank you so much. It is always so much fun to talk about these trendy issues with you.

I wouldn't miss one of them. So thank you for having me, and.

Thank you all for joining me again on the Workplace. Please comment, share and subscribe to Cal Chambers podcast by visiting calchamber.com.