October 6, 2020

Limited vs. Unlimited PTO: Pros and Cons to Consider

Job seekers want more than just well-paying, challenging jobs with good benefits. Many also want flexible schedules so they can maintain a healthy work/life balance.

“Many modern workers are firmly in the ‘work to live’ bucket, rather than the ‘live to work’ bucket,” said Jill Santopietro Panall, SHRM-SCP, owner of 21Oak HR Consulting in Boston. “They value their time off, time with family and friends, and opportunities to rest and relax, [then] to come back to work with fresh perspectives and ideas.”

To appeal to top candidates, a growing number of companies are creating unlimited paid time off (PTO) plans. Unlimited PTO offers several advantages for both workers and employers, but it isn’t the best option for every organization. It pays to learn the pros and cons of unlimited and limited PTO before revising workplace policies.

Limited PTO

Traditionally, companies have offered limited PTO, which is a combination of vacation and sick days. On average, U.S. employees receive 10 paid vacation days after one year with a company, according to the U.S. Bureau of Labor Statistics. A company will separately provide sick days according to the limits required by state law.

While limited PTO may not seem conducive to the modern workplace, it does have its upsides. Santopietro Panall said that, with limited PTO, companies can easily track time off and calculate costs. For instance, they can determine lost productivity for salaried employees and lost dollars for nonexempt hourly employees.

Companies can also tie their PTO levels to seniority and titles to use it as a reward or motivator. And some leverage PTO to encourage employees to take a break, especially if there is a capped amount or a “use it or lose it” policy.

“To be able to say, ‘Wendy, it’s September and you’ve taken none of your vacation [time] yet this year. Please take some time off to rest and refresh!’ is a positive thing,” she said.

Another benefit of limited PTO is that it works well for companies in certain industries, said Eric Mochnacz, an HR consultant with Red Clover HR in Fairfield, N.J. For instance, if you’re in the contracted services industry where you employ manual workers at a client site, you can’t offer unlimited PTO.

To be sure, even if limited PTO is your only option, making employees feel overworked is a bad strategy, and you run of the risk of becoming too strict, which isn’t attractive to potential job candidates, Mochnacz said.

“For example, a company may have a bereavement policy that is limited to three days, but grief and anything related to a death can take months to manage. So requiring an employee to use PTO outside of their three days to grieve can come across as a bit heartless,” he said.

Unlimited PTO

Offering unlimited leave can not only help you attract better job candidates but also make your current workers happier. It accommodates different people’s work styles and gives them the flexibility to take time off as needed, said Matthew Burr, an HR consultant at Burr Consulting in Elmira, N.Y.

“It shows that the organization does care about the employee and wants to promote wellness,” Burr said.

If employees feel they have a good work/life balance, that will result in lower turnover, less burnout, higher productivity and stronger morale in the workplace, said Farrah Fielder, executive vice president of Engage PEO in Hollywood, Fla.

“With unlimited PTO, employees are encouraged to take advantage of their much-needed time off without having to worry about going into the ‘negative’ or utilizing too many days,” Fielder said.

Of course, there are disadvantages to unlimited time off. Some employees may take advantage, which could lead to a loss in productivity. And when making the switch from limited to unlimited PTO, it can become complicated to implement federally mandated leave laws, such as unpaid family and medical leave, according to Fielder. Plus, if a company’s prior vacation policy let employees accrue time off, then the costs to pay out that time before introducing unlimited vacation time could be significant.

Research by HR vendor Namely has shown that employees with unlimited PTO end up taking fewer vacation days than their limited PTO counterparts (13 days versus 15 days). Not taking enough time off can quickly lead to employee burnout and dissatisfaction.

Despite the downsides of unlimited PTO, you may still want to implement it at your company. Before starting such a program, here are some tips for putting it into action.

Study the Laws

Start by checking on city, county and state laws, advised Charles A. Krugel, an employment attorney in Chicago. He said that most statutes across the U.S. require five paid days off per year for illness or family-related reasons, that employees must be informed of all relevant laws in writing, and that managers may not retaliate against an employee’s legitimate use of PTO.

In Massachusetts, where many of Santopietro Panall’s clients are based, companies have to pay out accrued and unused vacation time at termination, but they don’t have to do that with sick time. “If you lump both into one PTO bucket in Massachusetts, it makes your time off usage more flexible, but it also means you do have to pay it all out at termination,” she said.

Review Company Culture

Do your employees need to be onsite every day, or could they do their work from home? Do they thrive under close management, or are they self-starters? Are they generally irresponsible, or do they take their jobs very seriously? The answers to these questions will help you determine if an unlimited PTO plan is right for your company.

“If you’re working with a workforce who haven’t developed the work ethic yet to understand ‘unlimited PTO’ isn’t a free for all, then it would probably benefit you to have a structured, limited PTO policy in place,” said Mochnacz.

Since having whatever policy you select in writing is a legal requirement, you should list unlimited PTO rules and regulations in a handbook or in a separate policy statement, Krugel said. If employees abuse unlimited PTO policies, you’ll also need to provide a warning in writing. Most jurisdictions will also require that you post PTO laws in common areas where employees can see them.

Having the policy clearly laid out guarantees compliance. “Credible payroll documentation is always key to address or resolve any dispute or concern,” Krugel said. “Credible documentation includes easy-to-read and -understand payroll, PTO policies and payroll records. This makes it easier to track trends (e.g., employees who call in sick every other Friday), and to communicate to employees the problems they’re causing by taking excessive time off.”

Create a Layered Approval Process

One manager shouldn’t be in charge of approving all unlimited PTO. Instead, there should be multiple approval levels that require an explanation from each employee as to why the time off is needed, Burr said. “Carve out language in your policy around how excessive use of PTO will be reviewed on a case-by-case, consistent basis.”

And, as always, be open to change. New problems may arise from an unlimited PTO policy, and employees might give valuable feedback that could be incorporated into your plan.

“Benchmarking and revising are critical with PTO policies,” Burr said. “You need to know what the organization needs.”Unlimited vs. Limited PTO: Which One Is Right for Your Workplace?

Published by SHRM

Written By Kylie Ora Lobell

January 15, 2020