Unlimited PTO May Not Be as Hassle Free as You Think

“No one keeps track of vacation time and sick days anymore,” one of my friends in HR recently told me. “Everyone gives unlimited PTO these days.” And she’s right—unlimited PTO has become far more common in the last decade, with many employers with younger workforces, like those in tech and sales, providing unlimited PTO. I have heard unlimited PTO described as the “wave of the future” on more than one occasion.

The logic behind unlimited PTO makes sense. Treat everyone like adults and let them take the time off that they need. As long as they get their work done, who cares when or where they work? Well, the government and employment lawyers do, making life needlessly difficult for employers like usual. Unlimited PTO may create a host of legal problems for employers.

The first problem with unlimited PTO is the Illinois Wage Payment and Collection Act, which requires employers to pay employees for any unused vacation time when they leave. If vacation time is unlimited, what happens when an employee leaves? Obviously that employee doesn’t get unlimited pay. Does the employee receive no pay? It’s not clear because no court has ruled on this yet.

The Illinois Department of Labor has weighed in on the issue though, and it believes that employers with unlimited PTO policies must pay employees who leave a monetary equivalent to the amount of vacation pay that the employee would have been permitted to take that year but did not. The Illinois DOL opinion is not binding on employers, but it may influence courts who rule on the issue.

The second problem with unlimited PTO is sick leave laws. The Cook County sick leave ordinance requires employers to pay employees for unused sick leave. Again, it is not clear what this means for unlimited PTO, as no court has addressed this.

Unlimited PTO also creates issues with the Family and Medical Leave Act. That law requires employers to provide employees with 12 weeks of unpaid leave, but also requires employers to use paid vacation and sick leave during this time off. How does unlimited PTO affect FMLA leave? Does it require employers to pay for all of the FMLA leave that an employee takes? Again, there is no court case that I have seen ruling on this issue.

Here is my advice for unlimited PTO policies: don’t make them truly unlimited. Say that employees are entitled to a reasonable amount of time off and put some parameters around when this time off can be taken. Without such parameters, if you fire an employee for taking too much time off, he could claim that this firing breached his employment contract because it permitted him to take “unlimited” time off. Also, address what happens during FMLA leave.

As for paying employees for unused vacation and sick leave, I would follow the DOL’s guidelines and establish a payout system for unused vacation time and, if you are in Cook County and in a municipality that is covered by its sick leave ordinance, do so for sick leave. I do not think that refusing to pay anything to a departing employee who has never taken a day off is a good idea.

Finally, keep track of the reasons that employees take days off. One of the reasons employees have unlimited PTO policies is so they don’t have to do this, but I think with the uncertainty regarding unused vacation and sick pay it is probably a smart move to do this.

An unlimited PTO policy needs to be drafted right so that it complies with all of these legal challenges. I would strongly suggest having an attorney either draft such a policy for you or to at least review the policy you have.