Paid vacation time is a perk that can attract and retain the best and brightest employees. It can also impact your balance sheet, as earned but unused vacation days remain a liability until used or paid out. A small, but growing number of companies are trying a new approach, offering unlimited vacation to certain segments of their workforce. Netflix, Best Buy, Virgin America, LinkedIn, General Electric, and others have adopted unlimited vacation policies, or “discretionary time off (DTO),” as it is sometimes called.

Colorado employers, along with organizations in other states, may be wondering whether to scrap existing paid time off or vacation policies and replace them with unlimited vacation. That is especially true given the recent—and sometimes conflicting—information from the Colorado Department of Labor and Employment concerning “use-it-or-lose-it” policies. To help you decide whether unlimited vacation policies are right for your organization, we’ll highlight the pros and cons. But first, some background.

Legal Implications For Vacation Pay

Generally, employers are not required by law to provide paid vacation time to employees. If you choose to provide paid time off for vacation purposes, you get to decide what your vacation policy will be. This includes specifying how much paid vacation you’ll provide, any eligibility requirements, which categories of employees are entitled to it, when it accrues or is “earned,” in what increments it may be taken, the request and approval procedures, whether it carries over from year to year, and other vacation procedures.

That said, state laws will factor into the implementation of your vacation policy. For example, many states classify accrued vacation as compensation or wages and will specify that earned vacation pay may not be forfeited. Such provisions mean that unused, earned vacation must be paid out upon separation of employment. These state laws also can prohibit “use-it-or-lose-it” vacation policies where an employee who fails to use his or her accrued vacation time within a specified time frame loses the accrual of paid time.

By way of example, Colorado wage law states that vacation pay earned in accordance with the terms of any agreement is considered “wages” or “compensation.” Colorado employers who provide paid vacation to employees must pay all vacation “earned and determinable” upon separation of employment. Although the Colorado Department of Labor and Employment recently indicated that a “use-it-or-lose-it” vacation policy is permissible, the Department also noted that such a policy may not operate to deprive an employee of earned vacation time. The Department will look to the terms of the agreement between the employer and employee to determine when vacation pay is “earned.”

Pros - Why Unlimited Vacation May Make Sense

Some organizations have implemented a single paid time off (PTO) policy, allowing employees to accrue a set amount of paid time off to be used for virtually any purpose, such as vacation, sick time, attending kid’s school events, going to appointments, etc. Getting away from traditional (and separate) vacation and sick time policies is believed to offer employees more flexibility while cutting down on administrative headaches for employers. Unlimited vacation, or DTO, goes even further. Here are the potential benefits of an unlimited vacation policy:

  • More Flexible Work Schedules – employees can take advantage of more flexibility to manage their work and personal time; often a great recruiting and retention tool
  • Avoid Keeping Accrued Vacation On Your Books – in many states, because vacation time is no longer “earned,” you arguably will no longer need to pay out any unused vacation time upon separation of employment, effectively eliminating the liability of carrying accrued vacation time on your balance sheet
  • No Cost/Little Cost Perk – if employees take about the same amount of time off under an unlimited vacation policy as under a traditional accrued vacation and sick time policy, employers do not experience any additional cost for the program; as long as the perk is not abused, there may be little financial cost to the company
  • Increased Productivity – reports suggest that employees become more efficient and productive while at work in order to ensure that they suffer no ramifications when utilizing their time off under the unlimited vacation policy
  • Morale Booster – trusting that employees can properly manage their time on and off the job can build morale and loyalty; it can shift the focus from putting in hours to getting results
  • Streamlining of Record Keeping Practices – by eliminating the need to track vacation accruals and usage, you may cut down on the administrative headaches associating with a traditional vacation policy

Cons -  Why Unlimited Vacation May Not Work

An unlimited vacation policy may not be appropriate for all organizations. Depending on the nature of your business and the make-up of your workforce, you may determine that the following risks negate any good that could come from an unlimited vacation policy:

  • Perception That Unlimited Vacation Means No Vacation – some employees may feel that taking away a specific accrual for vacation means that they’ve lost an important perk, especially if they believe that the company or their supervisor will not truly allow them time off when they want it
  • Additional Cost If Abused – if overall time off exceeds previous accrual amounts, and that additional time off is not offset by increased productivity, the perk may cost you more and be less predictable than an accrual-based vacation policy
  • Less Black and White – whether an employee is “abusing” unlimited vacation can be rather subjective; one employee may produce excellent work product while taking six weeks off per year while another employee fails to meet expected output taking only three weeks of vacation; as a result, supervisors may struggle with how to handle discipline and performance issues and create a perception of unfair or, even worse, discriminatory treatment
  • Not Tested, So Liabilities Unknown – it is unclear how state agencies and courts will handle potential wage claims based on an unlimited vacation policy
  • Scheduling Uncertainties – it can be difficult to cover shifts, schedule projects and meet production deadlines when employees have greater flexibility to use unlimited time off
  • Pay Issues For Non-Exempt Workers – an unlimited vacation policy would be difficult to apply to non-exempt hourly employees (e., employees who are eligible for overtime pay) as you need to track all hours worked and ensure that you pay minimum wage and an overtime premium according to applicable state and federal law

Bottom Line: Use Caution

If your workforce utilizes exempt employees (i.e., employees who are not eligible for overtime) who have a great deal of autonomy, such as in technology and creative fields, an unlimited vacation policy may attract and incentivize your employees. If you employ mostly non-exempt hourly workers, have a lot of turnover, or need more predictability in covering shifts and positions, an unlimited vacation policy may not work for you. Your best bet is to compare the pros and cons with the nature of your business to evaluate whether this new type of employee perk is appropriate for your organization. If in doubt, it’s always a good idea to consult with your employment counsel.