Is Unlimited PTO Right for Your Small Business?

Unlimited paid time off (PTO) is the Vegas buffet of employee benefits. Who can say no to all the vacation time you like, anytime you like?

The hazard of a buffet is that all-you-can-eat splendor often exceeds the actual eating experience. Somewhere around the fourth plate, those sober questions start rolling in: Was this worth it? Am I better off, or should I have stuck with the menu?

So how does an unlimited PTO policy really work? Do employees get to dial in from the Bahamas whenever they feel like, as long as the work gets done? Do the policies get abused, and employers gypped, or vice versa?

Now that unlimited PTO has been around for a while, let's consider the reality behind the hype. Here are some benefits and drawbacks to consider when contemplating an unlimited PTO policy for your small business.

Overview: What is unlimited PTO?

Unlimited PTO lets employees take as much sick, personal, and vacation time as they like if the work gets done.

In practice, "unlimited" doesn't really mean without limits. An employer will not pay you to stay home all year. The work still needs to be done, and every team member needs to pull their fair share of the weight. When a company offers unlimited vacation, employees clock their work in units other than time.

Unlimited leave is often part of a more fluid work environment with arrangements such as remote work and flexible scheduling. It doesn't work for hourly employees, since they earn vacation as compensation based on the hours they work.

How does unlimited PTO work?

In a company with unlimited PTO days, employee leave is generally scheduled as usual. That means many items from the regular menu: planning vacation time in advance, balancing scheduling needs of teams, and getting managers' approval for absences.

It’s up to managers to decide how much leave is reasonable and sustainable for their teams. Without a set limit, it also falls on employees to anticipate how much discretionary time off they should request.

Many employees hesitate to ask and simply follow their manager’s lead. Hence the reports that instead of taking more leave, employees with unlimited PTO use less than their time-accruing peers.

But employees with unlimited leave need not sweat over that extra day they just took for a family emergency interfering with their annual beach trip. Unlimited PTO eliminates the ball-and-chain feeling of accruing time away from your desk in two-hour increments.

While there's less emphasis on tracking annual PTO, employers with unlimited leave policies still need to monitor attendance to ensure compliance with leave laws and prevent abuse.

6 benefits of unlimited PTO for employers and employees

There are plenty of upsides to including unlimited leave in your employee benefits. Here are a few.

1. Recruiting value

MetLife's 2020 Employee Benefits Survey found that only 4% of employers offer unlimited leave, yet 70% of employees want it. Clearly, unlimited leave can add a lot of weight to your benefits offer.

It also spares human resources (HR) from having to negotiate vacation time with seasoned candidates. No matter how much time they're used to, your policy beats it.

If you can maintain the same productivity and results, it seems like a winning bet for attracting top performers.

2. Financial and accounting benefits

According to a work-life balance report commissioned by Priceline, over 50% of American workers fail to use all of their leave each year; 25% leave nine or more days on the table.

With an unlimited leave policy, companies no longer have to pay departing employees for unused leave they've accrued. Besides saving you money, that can simplify offboarding and year-end accounting.

If you transition from a traditional accrual system to unlimited leave, you will have to figure out how to compensate existing employees for the leave they've earned. Some companies pay it out in cash, while others encourage staff to use their accrued days before the policy is implemented.

Remember, many states have laws regarding leave accrual and compensation, so you will need to ensure that whatever changes you make comply with the laws of your state.

3. Focus on results

With unlimited PTO, results come before time served behind a desk each week. That lets employees follow the demands of the job rather than a calendar and a clock. If a team needs to put in a lot of time one week to see a large project through, they can do so knowing they can take a break afterward to recharge.

4. Work-life balance

Helping employees achieve a healthy work-life balance is critical for the success of your employees and your company. Metlife's survey found that:

• One in three employees are tired, stressed, and/or burned out more than half of the time at work
• Lowering stress improves productivity, engagement, and loyalty
• Increased paid time off, a work-from-home policy, and flexible working hours and arrangements topped the list of ways to improve employee well-being

If an unlimited PTO policy doesn't quite fit with your workforce needs and plans, you may find that you can promote work-life balance through flextime and remote work privileges.

Employees who are stressed or burned out are less productive, engaged, and loyal. Image source: Author

5. Employee morale

Unlimited PTO shows you trust your people to be responsible and manage their time.

It also gives employees control over important aspects of their work, which is key to employee happiness. A recent study by the U.K. University of Birmingham showed a strong correlation between autonomy and job satisfaction.

6. Administrative simplicity

Many employers are already simplifying leave administration by combining sick, personal, and vacation time into a paid leave bank. With unlimited PTO, the job is even simpler, as you no longer need to account for every last hour of leave and deal with accruals and carry-overs.

HR software such as Zenefits can manage many of these tasks for you, including automating leave requests and tracking time off. It can also provide reports on key HR metrics to help you monitor average vacation time and retool your approach as needed.

6 disadvantages of unlimited PTO for employers and employees

Unlimited leave also has its downsides. Here are some potential drawbacks to consider.

1. Potential abuse

Employees can abuse an unlimited leave policy, and you're not in a very strong position to object given its broad promise.

There's nothing in an unlimited leave policy that prevents you from disciplining or terminating an employee who isn't performing, but you do need to have clear processes in place to measure performance. Your policy should clarify that managers may deny leave based on an employee's track record and the needs of the team.

2. Uncertain expectations

On the other side of that equation, good employees may hesitate to request leave if no clear parameters are established. Encouraging employees to take enough leave is usually more of a concern for employers with unlimited PTO than the occasional abuse.

Unlimited leave can also exacerbate the tendency for people to work while on break. Managers can combat this by encouraging employees to unplug totally and recharge while on leave.

3. Conflicts with mandated leave policies

Unlimited PTO is generally meant to cover a typical amount of vacation and personal leave, which can lead to confusion regarding longer leaves of absence under Family and Medical Leave Act (FMLA) or other laws.

For example, say you have a parental leave policy granting up to 12 weeks of unpaid leave, which is what the FMLA calls for. If you have an unlimited PTO policy, employees might assume that they can take unlimited paid leave for caregiving.

Your unlimited PTO policy needs to be carefully crafted to parse out these details and dovetail with mandatory leave laws. Those terms need to be run by an attorney, clearly spelled out in your policy, and communicated to employees.

Software such as Zenefits manages time and attendance for you. Image source: Author

4. Schedule and production conflicts

Unlimited PTO may not work in businesses where a core staff must be consistently present to produce work or where you have a large contingent of hourly workers.

Some companies give unlimited PTO just to exempt workers, which could affect workplace dynamics. Having separate policies may also trigger legal issues, so you'll definitely want an attorney's advice before taking that path.

5. Transition pains

Some senior employees who have earned generous vacation might have mixed feelings about losing that exclusive perk. You also have to handle their accrued time before transitioning to unlimited PTO.

6. No pay for unused paid leave

Depending which side of the desk you're sitting on, that departing workers don't get paid for unused leave can be considered a drawback instead of a benefit. Some worker advocates have argued that unlimited leave is just a cynical ploy to shortchange employees on the way out the door.

That nearly three out of four employees want it seems to detract from that claim, but pay for accrued leave is something employees give up to get flexible time off.

Should your business have unlimited PTO?

Is unlimited PTO a good idea for your small business? Consider these factors.

When unlimited PTO makes sense

• In results-focused companies: If your company has key performance indicators (KPIs) for everything, unlimited PTO might be right up your alley. You need to be able to measure results on an individual, team, and company level to guide performance.
• Where schedules are flexible: If you're already accustomed to flexible scheduling and remote work arrangements, unlimited PTO is more likely to be a good fit.
• In high-performing teams: Unlimited PTO places a lot of responsibility on your managers and employees to balance their personal and work lives. A high-performing, autonomous workforce is ideal for unlimited PTO.

When unlimited PTO may not be right for you

• Where scheduling is everything: If you're in a business that relies on precision scheduling, unlimited leave might not work for you.
• When facing performance challenges: If your teams are struggling with productivity, attendance, morale, or engagement issues, that's not the time to introduce unlimited PTO.
• In a mix of hourly and salary employees: If your teams are a mix of hourly and exempt workers, granting unlimited vacation to one group might demoralize your hourly workforce. You may find other ways to compensate, however, such as increasing accrued leave or building more flexibility into your accrued leave policies.

All that and a thin mint

Yes, you can have too much of a good thing, but it seems like unlimited PTO is delivering for a lot of companies and employees. And its recruiting power is undeniable. If it works for your business model, unlimited PTO is definitely worth a look, even if the reality doesn't always live up to the allure.