Top Three Risks Associated With Implementation of an "Unlimited" Vacation Policy and How to Mitigate Them

“Unlimited” vacation (or otherwise known as nonaccrual of vacation) policies can provide a benefit with appeal to both employers and employees. For employers, providing an “unlimited” vacation benefit can alleviate some of the administrative and financial burden associated with promulgating and maintaining a formal vacation policy. Likewise, these policies can also be attractive to employees since they have the ability to take vacation when convenient without having to bank hours just to make it home for the holidays. However, while these policies can be a win-win for both employers and employees, they are not without some legal risk. The following are the top risks associated with such policies:

• Vacation payout upon termination. Some states, such as California and Massachusetts, consider vacation pay to be “wages” which may not be forfeited. Thus, at termination, employees are entitled to receive the amount of all accrued vacation in their final paycheck. In an unlimited (or nonaccrual of) vacation policy, since employees do not accrue vacation time, the employer typically does not pay out any vacation at termination. At this time, no guidance exists concerning treatment of these policies and it is thus unclear whether the administrative agencies (such as the California Labor Commission) view this practice as permissible or as a means to avoid paying out accrued vacation.
• Discrimination Claims. Unlimited vacation policies often will simply say “employees may take vacation subject to business needs.” But what does “subject to business needs” or “work permitting” really mean? For example, does your policy contemplate whether an employee may vacation in the Caribbean for two months while working intermittently? And if you grant a request for one employee, do you have an objective and reasonable justification for denying another’s employee’s similar request? Unless administration of the policy is managed fairly, an employer may be subject to claims of unfair or discriminatory treatment.
• Leaves of Absences. Various federal and state laws provide for protected leaves (e.g., family and medical leave), and typically employees are not paid for the duration of those leaves. However, most of the laws providing for the leave explicitly permit employees to utilize accrued vacation while on leave. Under an unlimited vacation policy, there is a risk that an employee may argue that s/he is entitled to utilize vacation while on leave. (Thus, if entitled to 12 weeks of family leave, the employee may argue that s/he intends to apply his/her vacation to the leave to obtain 12 weeks of pay.)

Since these policies are relatively new, many laws have not yet directly addressed how to handle them. Given the risks involved with unlimited vacation policies, the following are some tips to help you mitigate the legal risks involved:

• To avoid possible abuse and claims of unfair treatment, consider how to implement a process to approve vacation requests fairly.
• Ensure that your policy makes clear that, while employees may take time off subject to work demands and management’s discretion, they do not accrue any vacation time for purposes of payout at termination (if applicable in your jurisdiction) and/or payment during leaves of absences.
• Communicate your expectations to employees with respect to under what circumstances employees may take time off and what is the process for obtaining approval for time off.
• Monitor usage to ensure that the policy is being administered fairly.