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Unlimited Vacation Policies Have Limits

By Allen Smith  3/6/2014
HR professionals are savvier about so-called unlimited vacation policies than chief financial officers (CFOs) or chief executive officers (CEOs) are, and they realize that these policies can be a bad idea, according to Jennifer Brown Shaw, an attorney at Shaw Valenza in Sacramento, Calif.

HR pros periodically call Shaw and say: “ ‘You have to help. Our CFO wants to switch to unlimited vacation. And I need to convince him it’s a bad idea.’ ”

Typically, all that’s needed to dissuade a company from adopting an unlimited vacation policy is the knowledge that under it, all Family and Medical Leave Act (FMLA) and Americans with Disabilities Act leave must be paid.

“Most businesspeople say, ‘Oh, my God, I didn’t think about that,’ ” Shaw noted.

But Joan Casciari, an attorney at Seyfarth Shaw in Chicago, said, “A lot of care needs to be taken to draft” unlimited vacation policies “so that FMLA and other legally required leave time is considered, and the company does not obligate itself to pay for such time off.”

Unaccrued Leave

Startups adopt unlimited vacation policies mainly to recruit Millennials and avoid having to pay accrued leave upon employees’ departure.

But Shaw warned that if a company puts any restrictions on its so-called unlimited leave, it could create accrued leave that has to be paid out when a worker cuts ties with the organization. And “there goes one of the main business arguments for having an unlimited vacation policy.”

Managers don’t like unlimited-leave policies, Shaw added, because “they can’t predict how long staff will be out.” Also, they can’t grant it to everyone all at the same time, like between Christmas and New Year’s, if the business is to continue operations.

Misnomer

The term “unlimited vacation policies” is a misnomer, according to Casciari.  “I have seen such programs called ‘routine time off policies,’ to distinguish the time off from ‘extraordinary need for time,’ such as FMLA, medical reasons, military leave,” she said. “I have had clients put these policies into play and then, after a few years, have to retool them.”

Jurate Schwartz, an attorney in Proskauer’s Boca Raton, Fla., office, agrees that this type of policy needs a name change: “The better name for it would be ‘professional judgment vacation policy,’ because these policies are for professionals who are not going to risk their careers by taking unreasonable amounts of time off.”

Some Leave Abuse

“Generally speaking, employees understand the concept and do not abuse the time-off benefit,” Casciari observed. “However, a small percentage do abuse it.”

The policy “may work well for a manager of software programmers, all of whom are tasked with an individual, noncollaborative project and timetable to accomplish it,” Schwartz said. “It would obviously be unpopular with a manager who needs to accomplish a project that requires regular collaboration of all members of his or her team.”

He noted that the policy “may be drafted to include a requirement that, to schedule a vacation, an employee is required to give, for example, two weeks’ advance notice and obtain his supervisor’s approval. This will allow front-line managers to approve absences based on staffing needs.”

For Schwartz, the key question is whether employers “are adopting the policy for the right professional environment.”

Administration Challenges

The policies remain rare, noted Jay Hux, an attorney at Fisher & Phillips in Chicago. They work best at smaller companies that are more entrepreneurial and have a flat culture, he added. “At a larger employer, it may not fit well. These policies are not for everyone.”

Even though unlimited-vacation policies sound easy to administer, it can be difficult to apply them consistently, Hux said. And employers that are inconsistent may face a Title VII claim under the Civil Rights Act of 1964.

Also, some employees may not like an unlimited-vacation policy because they may think that if they’re not defining exactly how much time they have accrued, they shouldn’t take any vacation. For them, this policy becomes like a no-vacation policy in that they feel awkward asking for time off, Hux explained.

‘New Frontier of Vacation Policy’

Though Hux calls this the “new frontier of vacation policy,” the question remains whether courts will accept the practice of not paying out vacation time when employees exit the company or whether they’ll view unlimited-vacation policies as an employer’s attempt to circumvent the requirement of paying out accrued leave and, thus, will compel payment.

Shaw compared no-vacation policies to the fad in the 1990s of startups that dispensed with employee handbooks. Then they all got sued and had no fall-back position to rely on; now they all want handbooks.

She thinks they all will also ultimately choose accrued-vacation policies.

Allen Smith, J.D., is the manager of workplace law content for SHRM. Follow him @SHRMlegaleditor.

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