When Switching to Unlimited PTO, Coordinate with FMLA

When switching to unlimited paid time off (PTO) for the C-suite, employers should consider their Family and Medical Leave Act (FMLA) obligations to ensure that FMLA time off, which is typically unpaid, doesn't become 12 weeks of paid leave, management attorneys recommend. 

And before unlimited PTO takes effect, employers should decide whether to pay out remaining accrued leave or offer a grace period during which employees can use that accrued leave.

C-Suite Benefit

Companies that switch to unlimited PTO typically do so only for executives, who are unlikely to abuse the policy and "arguably are most in need of the flexibility that an unlimited leave program provides," said Robin Shea, an attorney with Constangy, Brooks, Smith & Prophete in Winston-Salem, N.C.

They may need a nudge, though, to take time off. Upper-level managers will "either feel too committed to their jobs to take the time off, or they will worry about whether they're taking off too much time compared with their colleagues, or they will fear that by taking too much time off their opportunities for advancement will be limited," Shea said.

An employer might want to require that C-suite employees take at least a set amount of time off each year, "although they are free to take more as their schedules and needs allow," she said. She noted that such a directive might need to come from an organization's board of directors and that it can create an expectation that other leaders will also go on vacations and take time to spend with their families.

There is nothing legally wrong with granting unlimited PTO to the C-suite and no one else, Brett Coburn, an attorney with Alston & Bird in Atlanta, noted. "The main risk with doing it this way is that the people who are just below the so-called C-suite might feel slighted by not being given the same flexibility, even though they likely feel they work just as hard," he said.

An approval process should be in place with unlimited PTO to ensure there isn't abuse, however low the risk of abuse among executives may be, said Chuck McDonald, an attorney with Ogletree Deakins in Greenville, S.C.

FMLA Coordination

Coordinating an unlimited PTO policy with the FMLA is key.

Sloppy administration can complicate administration of the FMLA, paid sick leave and other forms of leave and can potentially be a basis for discrimination claims based on inconsistent application of the policy, cautioned Marc Mandelman, an attorney with Epstein Becker & Green in New York City.

"If employers allow unlimited [paid] vacation to be used during FMLA leave, there may be unintended consequences in the use of FMLA leave," he said. For example, employees may use more FMLA leave if it becomes paid due to the running of unlimited paid time off concurrently with the FMLA time off. "It will also be difficult and potentially discriminatory to deny the use of the 'unlimited' vacation for other similar types of leave that are not covered by FMLA or for employees who do not qualify for FMLA."

Other similar types of leave include leave under the Americans with Disabilities Act (ADA). Employees qualify for FMLA leave only after they've worked for an employer for at least 12 months and 1,250 hours within that year at a site with at least 50 employees. If an unlimited PTO policy results in the concurrent running of paid time off during FMLA leave, unlimited PTO arguably may be required for ADA leave or pregnancy leave for new employees, unless the policy has exceptions for ADA and FMLA leave, clarifying that they are separate from unlimited PTO. Otherwise, there might be a claim under the ADA or Title VII of the Civil Rights Act of 1964 of discriminatory application of the policy.

[SHRM members-only HR Q&A: Can we require an employee to use PTO if he or she hasn't requested it? Can we limit when an employee can use PTO?]

"There is likely a significant difference between unlimited paid time off and unlimited vacation," said Kimberly Ross, an attorney with FordHarrison in Chicago. With the latter, she said, an employer can more easily control whether it has to pay an employee during an FMLA or other type of short-term absence, and whether it has to pay for an employee taking sick leave, short of an FMLA leave. With unlimited PTO, an employer may need to pay an employee during an FMLA leave, she added.

McDonald recommended making the FMLA, workers' compensation and ADA leave entirely separate from unlimited PTO. And he said employers with unlimited PTO "need to take into account paid-sick-leave laws" in various states and cities. "Either say, 'entitled to paid sick leave in addition to unlimited PTO,' or say 'sick leave is included within unlimited PTO' " in the unlimited PTO policy, he recommended.

Transition Period

When changing from an accrued to unlimited vacation policy, in some states, such as California, the existing amount of accrued vacation is treated as a nonforfeitable wage and must be banked for use or paid out before the switch, Mandelman noted.

In other states, whether there must be a payout will depend on whether the employer's PTO policy has a provision stating that the employer can change the policy at any time, Coburn said.

"Whether required by law or not, employers who choose to pay out accrued PTO have several ways they can approach the transition from accrued vacation to unlimited time off," he noted. "They can cut checks to employees for remaining time off. They could also give employees a reasonable period to use the accrued vacation time before the new policy takes effect. Additionally, employers could opt to track the accrued time separately from the newly implemented vacation policy and pay the accrued balance to the employee upon termination of employment."

Was this article useful? SHRM offers thousands of tools, templates and other exclusive member benefits, including compliance updates, sample policies, HR expert advice, education discounts, a growing online member community and much more. Join/Renew Now and let SHRM help you work smarter.