Compliance with state wage and hour laws is on the forefront of the mind of just about every employer, particularly as employees are looking for more flexibility in their work schedules since the pandemic. Ogletree Deakins’ recent survey report, Strategies and Benchmarks for the Workplace: Ogletree’s Survey of Key Decision-Makers, revealed that state wage and hour laws are the second most challenging area of multi-jurisdictional compliance.

Employees are seeking ways to maintain the flexibility with their work schedules that they may have experienced while working remotely during the pandemic. Employers may be tempted to move toward flexible vacation or paid time off (PTO) policies, where employees are allowed to take unlimited time off with certain parameters.

But before transitioning to an unlimited PTO policy, employers may want to consider these four questions.

1. What Is the Benefit of Unlimited PTO Policies?

The benefit of an unlimited PTO policy is that once the employer makes the transition, employees will no longer have accrual of PTO time or banks with PTO balances. Thus, there is no unused PTO that has to be forfeited or carried over at the end of the year and no unused balance to pay out at termination. This can make multistate wage and hour compliance administratively easier. The key is making the transition from you current plan to the unlimited PTO plan in compliance with all applicable state laws. Even under their traditional PTO policy, a number of employers realize that they are already operating under an unlimited PTO policy in theory if their employees are taking time off and not recording the use of the PTO.

Four states—California, Colorado, Montana, and Nebraska—currently prohibit employers from forcing employees to forfeit earned  PTO days  either at the end of the year or upon termination. That means employers in these states may not have a policy that limits the amount of earned PTO time carried over from one year to the next (e.g., 40 hours) and employers must pay out accrued time upon termination. Employers may place a cap on the accrual amount but cannot limit the carryover amount in these states.

Five other states—Illinois, Louisiana, Maine, Massachusetts, North Dakota, and Rhode Island—currently do allow forfeiture of unused PTO at the end of the year if the policy is clear and employees have been provided the opportunity to use the earned PTO  but require that employers pay out all accrued or earned time upon termination. Maine will soon join the list of states where time cannot be forfeited at termination under a new state law passed in April 2022 set to take effect on January 1, 2023.

2. Are Unlimited Vacation/PTO Policies Legal in my State?

For the most part, unlimited vacation/PTO policies are legal even in states that prohibit the forfeiture of accrued time once the employer has made the transition to the unlimited plan. At the same time, employers may want to be aware of the pitfalls of some formulations of unlimited time off policies. Employers may want to be sure that any unlimited PTO policy does not cap the amount of time or number of days that can be used each year or risk having that cap on use be considered a bank of days that could trigger state-law payout obligations. Employers may want to be clear in the policy that there is no accrual of time off and that there is flexibility for employees to use.

Despite the use of any unlimited leave policy, employers may still be able to require that employees record their time off and seek approval for any leave. In addition, employers may want to set reasonable limits on taking time off, such as subjecting employees to discipline if they abuse the system or if they do not meet performance expectations.

3. How Does an Unlimited Plan Impact Paid Sick Leave?

Some employers use an unlimited time policy to comply with paid sick leave obligations. Employers that do so may find it helpful to make it clear in the policy that the leave allotment includes vacation and sick leave combined such that the employer will not provide employees with paid sick leave separately. Additionally, unlimited PTO policies are not intended to be supplemental pay for long-term leaves of absences. Employers may want to consider making clear in policies that employees can use a certain amount of unlimited time while going on leave of absence. Employers may limit an employee’s use of PTO while on a leave of absence. While the amount of PTO use varies, most employers allow two weeks to ensure compliance with most paid sick leave laws. It may also be helpful to indicate that use of PTO while on leave will be offset by any other paid benefit under another company policy or paid state leave laws and an employee will not be paid for more than 100 percent of their pay for any single absence regardless of the source.

Key Takeaways

Unlimited policies are not right for every employer or every industry. Nevertheless, some workplaces, especially those with exempt employees, may already be operating like they have unlimited leave policies if they are not clearly recording employee PTO. Employers may want to review whether adopting an unlimited policy would be beneficial, considering the specifics of their workplaces and applicable state laws.