Unlimited Paid Time Off (PTO): How to Do It Right

Introduction

It’s not hard to see why unlimited PTO (paid time off) is popular: who doesn’t want to take as much time off as they want? The freedom and flexibility can be a draw for job candidates and a boost to job satisfaction. Companies love unlimited PTO because it’s less work to manage, and completely eliminates a major financial liability.

But unlimited PTO is frequently misunderstood and poorly implemented, leading to disastrous results. It can actually reduce time off taken if your culture doesn’t encourage getting away. And a poorly-implemented policy can open the door to serious legal risks that threaten the entire company.

If you’re thinking about unlimited PTO, make sure you understand what it really means, how it really works, the pros and cons, and how to properly implement and manage it.

What Is Unlimited PTO?

Unlimited paid time off (PTO) is a type of PTO policy that allows employees to take as much time off as they need, whenever they need, with no limits to how many days they take off in a year. 

In some cases, a company may implement a blanket unlimited PTO policy for all types of time off, such as vacation, sick, and bereavement leave.

In other cases, companies grant unlimited PTO for vacation but have other policies for other leave types.

How Unlimited PTO Works

In theory, the process of taking time off with unlimited PTO is simple:

1. An employee notifies their team that they want to take time off

2. The employee’s manager reviews and approves their request

In reality, there’s a lot more to take into account. Your policy needs to:

1. Establish clear workflows for requesting time off (e.g. through your PTO management system, via email or direct message, in person, or another way)

2. Specify whether employees have to include a reason for their time off

3. Give managers clear guidance on how to decide whether to approve an employee’s PTO request (unless requests are automatically approved)

Without these details, your unlimited PTO policy could confuse employees and managers, and could even expose your organization to serious legal liabilities.

Unlimited PTO vs. Accrual PTO

Under a traditional PTO policy, employees earn (“accrue”) a certain number of PTO hours each pay period. When they take time off, they draw down from their accrued PTO balance. Some companies “prorate” PTO or allow employees to go into negative balances so they can take vacations early in the year, before they’ve accrued the hours.

Under an accrual policy, if an employee has unused vacation or sick time at the end of the year, they can:

• "Carry over" or “rollover” their unused PTO to the next year, or
• Cash out the value of their unused PTO, or
• Forfeit their unused PTO (if their employer has a “use it or lose it” policy)

Note that when an employee leaves their company, they may be paid out for their unused PTO, depending on their state’s laws. Also, a handful of states have banned use-it-or-lose-it.

Unlimited PTO is, on paper, simpler to manage than traditional PTO. With unlimited, employees don’t accrue time off, so there’s nothing to carry-over or pay out. You don’t need to pro-rate or allow negative PTO balances, either. However, unlimited PTO creates other management headaches and can lead to leave discrimination and non-compliance.

Unlimited PTO vs. Flex Time vs. Discretionary Time Off

Unlimited PTO often gets used interchangeably with “flex time off” (FTO) and “discretionary time off” (DTO). In reality, there are important differences:

• Flex time off means employees have flexibility around how and when they take time off, but not necessarily that they can take as much time off as they want. For example, an FTO policy might lump vacation and sick time together and call it “flex time”. Or, FTO might mean that employees accrue vacation days but can use them whenever they want.

• Discretionary time off is similar to flex time. A DTO policy might allow employees to take time off whenever they need, without a specific reason. DTO could also mean that people have one bank of PTO to draw on, rather than dividing out leave types.

Unlimited PTO is usually easier to manage than Traditional, Flex, and Discretionary time off policies, which are usually more unique. But, as with anything that's one-size-fits-all, the simplicity of unlimited PTO can be both a good thing and a bad thing.

At the end of the day, the perceived simplicity of unlimited PTO is a trap.

Pros & Cons of Unlimited PTO

Unlimited PTO is popular but can have serious downsides and consequences.

Pros:

• Greater freedom and flexibility for employees

• Easier for HR to manage, in theory

• Eliminates a major financial liability for the organization

• Improves the attractiveness of the company to potential recruits

Cons:

• Unlimited PTO is never truly unlimited

• Lack of clarity and ownership creates confusion for employees

• Creates new operational and management headaches for HR

• Can open the door to discrimination lawsuits

• Difficult to coordinate with FMLA and other protected leave types

If you’re considering an unlimited PTO policy for your organization, it’s critical that you fully understand all of the potential risks involved. That’s why we’ve written a detailed deep-dive article on the pros and cons of unlimited PTO.

How to Do Unlimited PTO Right

An effective unlimited PTO policy starts with the basics.

Make Sure That Unlimited = Self-Managed

The hidden truth of unlimited PTO is that it’s never really unlimited. This fundamental misalignment between the promise and reality of unlimited PTO can lead to frustrated employees, harassed managers, and, in the worst cases, leave discrimination lawsuits.

So, approach unlimited PTO the way it’s intended: as a self-managed time off policy. In short, heed the advice of Lenke Taylor, Chief People Officer at Level, who says, “You must trust employees to make decisions with their time.”

This can be hard to do. It requires a culture of trust and accountability. Take a serious, honest look at your organization and decide whether this sounds like you. If not, think about whether it’s feasible and realistic to shift your company culture to one that supports unlimited PTO.

Or, just consider a traditional PTO policy instead.

Ensure Consistency

Write your unlimited PTO policy in a way that guarantees consistent application. Come up with a system of checks and balances to ensure everyone is treated fairly. For example:

• Train your managers on what they need to keep in mind when approving or denying PTO. Make sure they understand the role of time off in Diversity, Equity and Inclusion (DEI) and compliance.

• Establish clear workflows for requesting, reviewing, and approving or denying PTO. Then, require all employees and managers to follow them (to make this easier, use a PTO management tool).

• Periodically audit how your employees take time off: examine trends and patterns by department, manager, and location to detect any potential bias or discrimination.

We can’t overemphasize the importance of consistency. Inconsistent and unequal access to time off is unfair to your employees, and opens the door to serious legal risk.

Encourage Time Off

The ambiguity of unlimited PTO is a problem because employees aren’t sure about how much time off is too much time off. To avoid this, encourage them to use their PTO. Nudge them to get away when it’s been a while. Make sure managers set a good example. And consider setting a PTO minimum, such as requiring them to take at least 15 days off each year. 

Also make sure your PTO policy doesn’t inadvertently discourage time off. Confusing, poorly-written policies could make it sound to employees like they actually aren’t allowed to take time off.

Promote True Disconnection

82% of Americans work while on vacation, including checking emails and taking calls. There are many reasons why people don’t fully disconnect, including a sense of responsibility to the team, worrying about appearing less-dedicated than coworkers, or being afraid of coming back to a pile of work. 

When you encourage employees to take time off, also make it clear that you want them to fully disconnect from work. If they tell you they can’t, try to get to the bottom of why. Then work with managers and executives to alleviate those underlying issues.

Bake-In Compliance

Unlimited PTO is not a “free pass” to compliance with vacation and labor laws. On the contrary, poorly-constructed unlimited policies can actually increase your risk. Do your research, and be certain that your policies account for federal laws like FMLA as well as state-specific laws regarding vacation payout, especially if you’re in California.

Track Everything

For numerous compliance, auditing, and operational reasons, it’s critical that you set up and enforce a system to record time off requests and approvals. Unlimited PTO is not a free pass to abandon PTO tracking. If you don’t already, simplify this with a PTO management tool.

Other Considerations

Your unlimited PTO policy needs to be clear, explicit, and consistent. But that’s just the beginning. You also need to account for critical, yet often-overlooked details including:

• Local, state, and federal labor laws related to vacation and sick time off, including mandatory paid sick leave, PTO payout, and “use-it-or-lose-it” policies. Learn more here: How Unlimited PTO Works In States With PTO Laws

• The interaction between your unlimited PTO and other leave types, such as parental leave, FMLA and state-specific versions, sick time, and short term disability. Learn more here: How Unlimited PTO Works With Other Types of Leave

Conclusion

Unlimited PTO policies are popular for good reason. But they’re not nearly as beneficial as some articles might lead you to believe. If you’re thinking about making a switch, be sure you fully comprehend all of the risks involved: operational, financial, and legal.

Want to know more? Our team has more than 30 years of experience in human resources. We’ve spoken with hundreds of HR leaders over the years who have told us countless stories about their experiences with unlimited PTO policies. Drop us a line with your questions!