Should Your Small Business Have an Unlimited Vacation PolicyIn our work helping small businesses build HR infrastructure, we often spend a bit of time discussing time off policies. For the record, I have never had a business decide not to offer time off, but have certainly had businesses go back and forth for some time trying to decide which policy is right for them. There are many options.

Paid Time Off (PTO) – where all time off hours are in one “bucket” and employees can take them as they choose.
Gifted Time Off – where employees are gifted their year’s allotment of time off at the start of the year (or their employment) and can take as they choose.
Accrued Time Off – by far the most popular, where employees accrue time based on hours worked.
Unlimited Time Off – the policy that has risen in popularity in the last few years where, as the name suggests, there is no tracking of time off and employees can take as much, or as little, as they want. This is the policy we will discuss today.

An unlimited vacation policy in one where employers do not give guidance on how much vacation time can be taken and can not discipline for taking too much time. If an employee is taking too much time and their work is suffering, they can be disciplined for performance, but not for time off. The policy truly is an open policy where employees are in control of time off. Leaders can enforce black out periods or deny requests, but there should be definitive business reasons to do so.

In recent months, I have had several clients who started their business with accrual based policies consider switching to unlimited policies. After consideration some have switched and others haven’t. The decision comes down to a few key points that each business has to evaluate for themselves.

Before I list those steps let me say that for my clients in California, we are extra careful. With the labor code as it is in this state, we want to be sure we are not violating any law that could allow employees to feel they need to seek legal recourse. The point of an unlimited policy should be a benefit to employees and California in particular is extra strict about making sure they are in fact, a benefit.

The first point that needs to be discussed around an unlimited vacation policy is whether or not the culture of the business supports it. My business, for example, is perfect for unlimited vacation. My employees can work from anywhere, anytime. They have no set schedule and do not have to report into me on any given day. They have work to do and as long as it gets done I don’t care how or where. They don’t need to tell me when they are taking a day off, they only need to make sure the work is complete. While not all businesses can be this relaxed, many can do some variation of this and those are perfect for unlimited vacation policies.

If your business demands that people be in your location on a very consistent basis and vacations that aren’t planned months in advance will hurt productivity then an unlimited policy is probably not for you.

Employee Base
Most of the employers who I know either have these policies or are looking at implementing them are made up of mostly exempt employees or are considering offering it to only exempt personnel. These individuals are already in the mindset of having control over their schedules. They are used to independent work and know how much or how little they need to work in a week to accomplish what they should.

State Specific Law
As mentioned, California and other states have stricter laws in their labor code that make unlimited vacation policies tricky. First, mandated sick leave laws require employers to prove they are providing so many hours of sick leave per hours worked. In these states, I always encourage employers to have a separate sick leave policy in accordance with the law and only make the vacation time unlimited.

Further, employers have to be very careful of doing anything that seemingly caps the unlimited vacation or tracks it in any way. The minute this time is capped or tracked, it is no longer unlimited. This is the one policy where the required record keeping is minimal and actually discouraged.

The Transition
When transitioning from an accrued policy to an unlimited one, it is always advised to have a specific end date of the old policy and start date of the new one. Employers should pay out any accrued vacation. I have heard of companies who have given employees a window of time to use their accrued vacation before moving to the unlimited policy, but if employees aren’t able to do so they are legally required to pay it out anyway so it may be easier to plan to pay it out. Employers should have a clear communication plan on how vacation will be handled, how employees can request time off and if there are any restrictions or blackout periods.

It has been argued that unlimited vacation policies result in less vacation time for employees. For this reason, I prefer employers to build in a way to encourage employees to take time off. It could be that you offer a free flight to a destination of their choosing or something along those lines. It should be something tangible rather than paying out time as that could be misconstrued as an accrual system.

One final thought. I have had clients who have switched to unlimited vacation policies only to switch back. The reasons are varied but sometimes employees and leaders end up not liking them as much as a more structured system. It certainly isn’t for everyone. Before transitioning to a system like this, it would be beneficial to talk to employees and leaders and get their thoughts before proceeding. The last thing you want to do is implement and then find out everyone hates it. Time off policies are supposed to be rewards for work well done, not policies that make things more difficult.

If you are considering moving to an unlimited vacation policy and want to talk through the implications for your team, we would be happy to help.

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