Episode 180: Unlimited Paid Time Off Policies Are Attractive, But Have Risks

Welcome to the Workplace, a podcast by Cal Chamber. I'm Matthew Roberts, the Labor Law Helpline Manager and Employment Law Council with the California Chamber of Commerce. Hello listeners. We are in the thick of summer and hopefully everyone listening is finding ways to enjoy the season. Of course, during the summer, many employers are working to accommodate more vacation and time off requests than usual as employees also look to use accrued time here for summer vacations. And although providing vacation is a long running tradition for many employers, more and more employers are diving into the relatively new trend of providing what's known as unlimited or flexible paid time off as opposed to the traditional accrual methods. And you know, as with all employer policies, there are consequences to weigh as to whether this is a type of policy your organization wants to implement or continue to have if you already do so. So to discuss the issues you should be aware of with unlimited pto, we welcome back Bianca Saad, Cal Chambers vi, Vice President of Employment Law, Content Training and Advice. Thanks for joining me today, Bianca.

Thanks for having me, Matthew. It's great to be back.

Awesome. I think it would be helpful for everybody to kind of briefly run down some key traditional rules with vacation as background to see why unlimited PTO might be attractive for employers these days.

Yeah, so that's a great place to start. The first thing to note about vacation is that it's actually optional, so not a requirement. But many employers do choose to offer it as a recruitment and a retention. The other thing to keep in mind though is that although optional, once you do offer it, there are some rules that we need to be mindful of and follow if you will. So for example, with the vacation, it's going to accrue as the employees work. So no backloading vacation for a prior year's work, for example. The other thing to note is that once it's accrued, it's considered vested wages and an employee cannot forfeit that time. In other words, words, we can't have what's known as a use it or lose it policy under California law. Now, employers can set a cap to the accrual, but it's going to need to be reasonable based on how much time again they're going to accrue for the year. And then lastly, and this is a big one, that when an employee separates from the employer, whether they're terminated or whether they are voluntarily resigning, any available vacation hours that have been accrued but unused do need to be paid out along with other final wages.

Okay. And it's really that last part, I think, Bianca, right that employers kind of struggle with because it's often an unexpected expense that we have when we let somebody go or somebody separates from us. So we account, you know, in budget for their wages and salary and they'll take some time off in there, but if they've got a bank accrued, it's this extra lump sum we've got to kind of pay on top of it. So now these rules have been in place for quite a while. Nothing that you've said has really been new. So what makes the leap to unlimited PTO from a traditional accrual system attractive for employers?

Yeah, so first of all, it sounds great, right? Unlimited time off, that can be a very attractive and effective retention and recruitment offering that we're looking at. Right. Especially if you have certain employees in particular industries, this may be more popular than others where again, you have high performing professionals and sort of that idea of having that flexibility. The other thing it can do is it can demonstrate an employer's commitment to that idea of work life balance, which again is very important to a lot of people. Again, the idea, especially with remote work now very much here to stay having that flexibility. So that idea of unlimited paid time off is just another tool that can be used to make a workplace appear attractive. And then lastly, if it's unlimited paid time off off, and that's a big if, then we'll talk about that here in a moment. But if it really is an unlimited paid time off, it's not going to be considered vested wages. So there's no accrual of time, meaning that you don't have that situation where when you're separating from the employee that you are going to have that amount of time that you're going to need to pay out in addition to any wages that are owed.

Yeah, and this really sounds amazing, right, Bianca, it's kind of a best of both worlds. Employees get a bunch of time off. Employers don't really have to worry about that big lump sum on the back end. But as you and I are both aware of, there are certain risks associated with unlimited pto and we should probably get into those and see what those look like.

Yeah. So the first thing to note with unlimited PTO is this really is.

A gray zone, a gray area, if you will. Legally speaking, we don't really have a whole lot of guidance. We do have one court case and the one court case we do have, actually the employer lost their unlimited policy, or purported unlimited policy, I should say did fail in the eyes of the court. So we've got that as one thing to keep in mind for those who are interested in unlimited, the other thing that we have to think about is if we have such a policy, of course, there's always the potential for abuse, whereas it's a little more straightforward if we have a traditional vacation plan where employees have X amount of time to take. We don't really have to worry about that abuse piece as much. Another factor that comes into play with under California law is in addition to, well, we're talking about vacation. And again, this vacation isn't required under law. What we do know is required is California's paid sick leave. So a lot of employers will use their paid time off policies as a way to meet their obligations under California's paid sick leave obligations. And for those who have unlimited paid time off policies, a whole host of questions on what does that interplay with California's paid sick leave policy, especially if you're really just sort of wrapping it all into one, raises questions around how you're essentially subjecting your entire policy to the rules and parameters that we have in place for California's paid sick leave. Really, a lot of ways we have more questions than answers, I think, with the unlimited paid time off policies.

Yeah. And I don't think that California paid sick leave interplay can really be understated because there's so many strict rules, as we know in the administration of this, employees get to just provide verbal notice. Right. We can't block out dates like we can with vacation. For example, if you have a busy season, you can say with your vacation policy, you can't take vacation during this time. And that's totally permitted. But with paid sick leave, they get to use it when they have a qualifying reason. And then the double whammy, of course, is we don't really get documentation to substantiate the need for the leave. So when you say you wrap these two things into one bucket, you're now subjecting yourselves to California's paid sick leave rules as well as all these kind of gray areas that we have around unlimited pto. Now, you brought up a lawsuit over unlimited pto, the one court case that we have, and I think it might be a little instructive for our listeners to see what happened in this case, what happened, and what lessons can employers take away from this case?

Yeah. So first, the case is McPherson VEF Intercultural Foundation. This case was decided a few years ago, back in 2020. I won't get too far into the weeds, but just some basic facts for our listeners is you had one group of employees that they did actually have this fixed amount of vacation and would have been subject to all the rules that we talked about. Right. When you separate, you need to pay out any accrued and unused. You had another group of managers, though, who purportedly had this unlimited amount of time. They didn't record it in the same online system that was used by the other employees. Basically, they just needed their supervisor's approval, but again, still subject to, of course, around their work parameters. And what do they have going on with their work obligations. The problem for the employers in this case was a few things. One is the employer never actually told the employees that they had this unlimited paid vacation. They didn't have any written policy or agreement to that effect. And then lastly, they didn't even have it in the employee handbook. They only had a policy, again, addressing a separate group of employees who had this fixed amount of time. And conversely, their practice also suggested the exact opposite, which was there was this implied limit or implied cap as to how much time they could take. A lot of this was in practice and based on when their peak season was, and that the time off was extremely discouraged during the peak season. So really, due to their overall workloads.

It was expected that they would maybe take a couple of weeks in the year. And in practice, it turned out that they actually took less time than the group of employees that had this fixed, fixed amount of time in the handbook.

Now, of course, as you said, this case resulted in the employer losing. But what I found interesting about this decision in the McPherson case is that the court tried to provide some examples of what might work for an unlimited pto. And I think before we get into this, I'd like to caution the list isn't exhaustive. It is one appellate court, and as we've seen, other appellate courts can disagree and even the Supreme Court can overturn everything altogether. But if you're out there still looking at what kind kinds of policies you would need to have in place for this, I think this will provide you at least a start for this. So, Bianca, what did the court say here about the kinds of things that might establish a lawful unlimited PTO policy?

Yeah, so some of the examples that the court gave, again, not an exhaustive list, were things like clearly stating in the policy that the paid time off is not a form of additional wages, but instead is a promise to provide a flexible work schedule. Something else that the employer could do, again, is stating in the policy making it clear what are the rights and obligations of the employees and the employer and what Are the consequences for failing to schedule any of the time off? Another thing, you know, does the employer in practice allow the sufficient opportunity for the employees to take time off or work fewer hours? And again, this was an area where, you know, that went against the employer when the court took a look at the policy at issue in this case. And then another factor that the court mentioned was, does the employer administer the policy fairly so that it's not an inequitable use among the employees, meaning you have one employee who's afforded a little opportunity to take time off, again based on their workload or their department or how that goes, and then you might have another employee who has more of an opportunity. So again, these are just some of the factors that a court said if the employer does in these ways, it might make it a truly unlimited plan, such that an employer doesn't have those payout obligations at the end and that vested piece to it. But.

Again, not an exhaustive list. And it's really going to come down to not just what are the written policies of an employer, but the practice. I think that this case is a really good example of whether they had a policy, whether it was defined or not. Even the fact that there was other information out there as far as what this employer was actually doing, that is really what the court was paying attention to. So ultimately, as we know, the employer lost in this case, and they were held responsible for the vacation wages that it should have provided at the separation. And I think it's just a great way to highlight, again, some of those risks that we talked about around the unlimited PTO plans.

Yeah. What's interesting is the surveys you see out there and you hear through the grapevine, oh, this organization's offering unlimited pto or more organizations are starting to offer it. One of the counterbalances to this is exactly what kind of came up in this case, which is some employees just want to know, like, what guaranteed time off do I have? Flexible Unlimited. Sounds good. But as you said, if the job's so busy, it makes the employees feel like it's going to be very difficult to take this time off. So before we even jump into this policy, we need to look at is this something organizationally that we can do? One last thing I want to touch on with you, Bianca, before I think we close out for today is you mentioned something about the organization's policy in this case, where certain groups of employees had a fixed accrual rate, like they knew what they were getting, they were subject to the traditional rules, and then the managers just had this flexible and limited time off. Is that permitted? Was that an issue where you can give different vacation plans to different classifications of employees?

That's a great question. So having different plans for different classifications of employees is acceptable? That wasn't an issue or any, you know, foul play, if you will, in this case. What the court was looking at though, was the fact that they didn't have a policy that applied right. There wasn't anything wrong with the fact that maybe the policy was different for this group of employees, but the court was looking at what is actually the policy for that group of employees. So it is perfectly acceptable though, for there to be different policies for different classes.

Excellent. Well, Bianca, thank you for taking the time to talk through this unlimited PTO concept with me today.

Thanks so much for having me, Matt.

Always a pleasure and thank you listeners for joining this discussion on the workplace. Please comment, share and subscribe to Cal Chamber's podcast by visiting calchamber.

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