Companies with unlimited vacation policies operate on an honor system where employees can take time off whenever, and as often, as they like.

What are Unlimited Vacation Policies?

In an unlimited policy, time off is generally not tracked and there is no accrual. The focus is on the successful completion of tasks, instead of the specific amount of time spent on a task.

Some prominent companies, such as LinkedIn and Netflix, have adopted these policies, but smaller companies with flexible work environments have also adopted the approach.

However, despite reports on the “trend,” only a small percentage of companies have transitioned to unlimited paid vacation policies.

The question remains as to whether unlimited vacation policies are practical. Some types of jobs are ill-suited to unlimited vacation policies, such as:

  • Hourly nonexempt positions;
  • Positions where it is difficult to measure productivity;
  • Positions where staffing/coverage needs must be met (such as retail or restaurants);
  • Jobs requiring a great deal of face-to-face interaction; or
  • Jobs where the work pressures are intense and employees may feel like they can never actually take any time off.

Legal Risk #1: Can You Avoid Vacation Accrual?

In California, unlimited vacation policies do create legal risks.

Under California law, earned vacation time is considered wages, and vacation time is earned, or “vests,” as work is performed. Vacation accrues as it is earned, cannot be forfeited (no “use it or lose it” policies), and must be paid out at time of termination (Suastez v. Plastic Dress-Up Co., 31 Cal. 3d 777, 781 (1982). Employers can place reasonable caps on vacation accruals that prevent an employee from earning vacation over a certain amount of hours.

Generally, the Labor Commissioner has taken the position that a reasonable cap is one that is no less than 1.5 times the annual accrual rate (e.g., if you offer 40 hours of vacation a year, you could put a cap of 60 hours on the total amount an employee can accrue).

Companies with unlimited vacation plans argue that there is no accrual and, therefore, no vesting and no vacation pay out at termination. But the California Labor Commissioner and California courts may see this as a subterfuge to avoid paying out accrued vacation.

There is an argument that unlimited vacation policies are more like “use it or lose it” policies and are, thus, unlawful:

  • If an employee chooses to work, the employee forfeits the vacation and also does not receive any payment for not using the days;
  • Employees may not have a fair opportunity to actually take any days off because of workload factors; and
  • There is never any balance of accrued time available.

Arguably, unlimited vacation does vest. If the vacation is unlimited, an employee might claim that he/she receives one usable vacation day for every day of employment. The open and untested question remains as to whether there is any vested benefit and subsequent forfeiture.

Courts may also look to see what is actually going on in practice. For example, despite the company’s stated policy, is the unwritten practice really that employees are given two weeks of paid vacation? Do supervisors chastise employees if they take more than a certain amount? Do supervisors communicate “guidelines” or expectations regarding recommended usage?

If so, a court could say that the plan is not really an unlimited plan but, in practice, is a traditional accrual policy that may need to be paid out just like under any other type of vacation plan.

The other question to ask is whether your company would be comfortable telling employees that they can take unlimited time off without any prior approval. For instance, would your company be OK allowing an employee to take four weeks of vacation without asking anyone in advance?

If, under your unlimited vacation policy, you still tell employees they cannot take more than two weeks without prior approval, California agencies and courts will likely find that your employees have an entitlement to at least two weeks of vested vacation per year — if not more, depending on your company’s practice. The same goes if you offer employees “guidance” about how much vacation would be appropriate.

Back in 1987, the Division of Labor Standards Enforcement (DLSE) issued an opinion letter calling out the policy of a company that, in the DLSE’s opinion, was trying to avoid paying out vacation by saying that it is “unlimited” and nothing accrues or vests:

“To approve your policy, as written, would make Suastez a dead letter since every employer would tell employees they have unlimited vacation (though none is accruing or vesting), but can only take more than one or two or three weeks with approval.”

One thing is certain: the Labor Commissioner takes the issue of wage theft seriously and may choose to focus on an employer who decides to do away with its vested vacation policy and switch to an unpaid vacation plan.

Legal Risk #2: Tracking Obligations

One of the supposed benefits of the unlimited vacation plan is to relieve the administrative burden of tracking time off. But employers in California have an obligation to keep track of time worked for nonexempt employees.

The dangers of unpaid vacation plans and non-tracking for nonexempt employees in California are substantial, including liability for unpaid overtime.

If you have an unlimited vacation policy for exempt employees, then you probably won’t be tracking at all and cannot discipline an employee for abuse of the policy. If you choose to track the time, the result may again lead to arguments that the vacation is actually accrued and needs to be paid out.

Legal Risk #3: Unfair Treatment

Unlimited vacation policies also may lead to claims of unfair or discriminatory treatment. Employees may argue that the policy is applied inconsistently. There may be problems of favoritism or, the opposite, arbitrary denials or crack downs.

If your company wants unlimited vacation only for your top-level exempt employees or for a certain department, you should look closely at the demographics of that particular subset of employees. Examine whether there are racial or gender differences that may be perceived as discriminatory.

A standardized vacation benefit policy, instead of an unlimited policy, ensures that all employees are treated equally and reduces this risk.

Legal Risk #4: Coordination With Other Benefits

Unlimited vacation policies may conflict, or create coordination problems, with other paid and unpaid leave benefits, including, federal and state family and medical leave, pregnancy leave and military leave. For example:

  • Federal and state family and medical leave is unpaid, but employees can use any accrued vacation time during their unpaid leave of absence as a way to receive compensation during the time off. If an employer offers an unlimited vacation policy, the employee could argue that he/she is entitled to pay for the entire 12 weeks.
  • An employee has already exhausted four months of pregnancy disability leave but argues that she is entitled to stay out additional time under the unlimited vacation policy.
  • Coordination with other forms of wage replacement benefits, such as state disability insurance and paid family leave, will also be affected.

The confusion caused by the interaction of an unlimited vacation policy with other leave laws/policies may create more of a legal and administrative headache than any benefit the unlimited vacation policy could provide.

Problems of Abuse and Morale

Regardless of the legal minefields, there is also the general problem of abuse. Any attempt at an unlimited vacation policy would need to ensure that strong controls are in place. There will certainly be those employees who take undue advantage of the system.

Introducing the concept into your company can cause tension between those who end up taking off a lot of time for various personal reasons and those who do not. High performers who take little time off may begin to resent those who are frequently out of the office.

There is also the concern that employees will really see this as a “no vacation” policy, instead of an unlimited vacation policy. Without a pre-set amount of allotted vacation time available to them, employees may believe that the company is really just expecting them to take even less time off.

With more and more Americans reporting that they work during “vacation,” this skepticism may not be unwarranted.

What Companies Should Do

Unlimited vacation policies for California employers pose many legal risks, even more than those outlined briefly here. Employers interested in such policies should consult with labor and employment counsel prior to implementation of any such policy.

Content Courtesy of CalChamber.