In light of current labor shortages, employers are paying higher wages and contemplating different benefits and working conditions that employees are now demanding.  One such benefit is an unlimited paid time off (PTO) policy.  An unlimited PTO policy allows employees to take as much paid time off as they desire as long as they complete their work and meet all applicable deadlines.  Most policies require supervisory approval of paid time off and reserve the employer’s right to deny a request for PTO because of business needs and deadlines. Typically, an unlimited PTO policy is made available to exempt employees and not nonexempt employees.

There are unique issues that employers must consider in developing their unlimited PTO policies.  For the reasons explained below, I will refer to these policies as unlimited absence policies.

Family and Medical Leave and ADA Reasonable Accommodation Leave

Without including restrictions on unlimited absence policies, employers may find that they must pay for lengthy absences due to family and medical reasons.  To avoid such situations, there are a number of provisions an employer can include in their unlimited absence policy.

• Don’t call the policy an unlimited PTO policy. Label it as an unlimited vacation policy.  This title clarifies that unlimited paid time off is not for absences due to medical or family medical reasons but rather, is for vacations.
• Limit the number of consecutive days for which an employee can be absent in a specified period such as within a week or a month. If unlimited PTO can only be used for absences of, say, up to ten consecutive working days, an employee cannot use PTO for a reason that qualifies for a leave required by the Family and Medical Leave Act (FMLA).
• The same issue exists for a leave of absence which is a reasonable accommodation under the Americans with Disabilities Act (ADA). If unlimited PTO is allowed for any absence, then a leave of absence which is a reasonable accommodation will also be entitled to be fully paid.
• Continue to have separate FMLA, workers’ compensation, and ADA leave policies and clearly state in the unlimited absence policy that unlimited PTO applies to absences for reasons other than mandated FMLA leave or leave granted as a reasonable accommodation.

In addition to the above, unlimited absence policies should include a number of elements.  Informing employees that they are responsible for completing their work and that the unlimited absence policy does not excuse them from meeting applicable deadlines and carrying out their normal job responsibilities is an important caveat.  Employees should be required to follow established procedures for taking time off, including requiring approval from a supervisor. 

Paid Sick Time

Employers should keep track of the amount of time that employees are taking off for medical reasons vs. for vacations. This is important as an increasing number of cities and states enact paid sick and safe time laws.  If employees work in locales that require paid sick and safe time, the employer should ascertain if by implementing a PTO policy they are entirely exempt from all requirements of the paid sick and safe time requirements.  In some jurisdictions, employers who offer paid time off rather than vacation/sick leave policies are still required to keep track of the amount of paid sick and safe time that employees are taking.

Payment for Unused PTO at Separation.

An unlimited absence policy should also make it very clear that paid time off does not accrue and that unused paid time off is not paid at termination.  Employers should consult with legal counsel to determine whether there are any applicable laws regarding payment of unused paid time off at termination.  For example, the Illinois Department of Labor’s FAQs state that if an employer has a vacation policy that allows employees to take vacation subject to business needs, the employer must at termination pay a “monetary equivalent equal to the amount of vacation pay to which the employee would otherwise have been allowed to take during that year but had not taken.”  Thus in Illinois, if an employer can demonstrate the average amount of vacation time an employee takes in any given year because the employer has been tracking such vacation, the employer will be in a better position to determine how much-unused vacation is due to an employee at separation.  Legal counsel can advise employers about specific city or state policies that may apply to their employees.

Conclusion

Unlimited absence policies are becoming more and more popular however when designing a program, employers need to consider mandated family and medical leave laws, paid sick and safe time requirements, leaves of absence that are a reasonable accommodation under the ADA, and state laws regarding the obligation to pay for unused vacation at separation.  If the policies are not crafted carefully, employers may find they are required to pay for a lengthy leave of absence.