Unlimited PTO
How Unlimited PTO Works In States With PTO Laws
Table of contents
Introduction
Unlimited PTO is popular with employees, but can actually bring huge legal and compliance risks to your business. Many states have laws that regulate paid time off. If you’re in a state that mandates paid sick time, requires PTO payout at separation, or bans “use-it-or-lose-it” policies, you need to account for these laws in your policy.
Unlimited PTO in States With Mandatory Paid Sick Leave
There are no federal or state laws that require employers to give paid or unpaid vacation. However, a growing number of states have passed laws that mandate paid sick leave for employees.
U.S. States with Mandatory Paid Sick Leave
States with mandatory paid sick leave also require that employees accrue it with hours worked. Accrual rates are specified in the laws, unless an employer’s policy is more generous than the minimum.
Mandatory Sick Leave Accrual Rates In Each State
1 hour sick leave for every 30 hours worked | Arizona, California, Colorado, Maryland, Massachusetts, Minnesota, New Jersey, New Mexico, New York, Oregon |
1 hour sick leave for every 35 hours worked | Michigan, Rhode Island |
1 hour sick leave for every 40 hours worked | Connecticut, Maine, Washington |
1 hour sick leave for every 52 hours worked | Nevada, Vermont |
Sick leave accrual rate varies based on employer size | Washington, D.C. |
The intersection of unlimited PTO and legal paid sick leave is frightfully complicated.
Many unlimited PTO policies group vacation and sick time off under the same “PTO” banner. But while unlimited PTO does not accrue, paid sick leave is required to.
The upshot: for employers in states that mandate paid sick leave, unlimited PTO policies which lump vacation and sick days together may be automatically out of compliance because the law says that employees should accrue sick leave.
Unlimited PTO and Sick Time Accrual Laws
Some states allow employers to grant the total annual amount in a lump sum, rather than via accrual. At first, this sounds like it solves the “unlimited accrual problem”. But the reality is different.
Many states effectively require sick time to accrue "on the back-end" even under an unlimited policy.
For example:
- New Mexico: "Employers who front-load sick leave must still monitor employee hours worked."
- Oregon: "Your employer is required to let you know how much sick time you have accrued at least once every four months."
- Maryland: “Employers are required to provide employees with a written statement of the employee’s available earned sick and safe leave” (how often is not specified).
Furthermore, PTO records that do not distinguish between vacation and sick leave may create problems in cases where employee complaints are being investigated. New Mexico’s Department of Labor, for example, specifically recommends that you clearly mark paid sick leave as such in your records.
In states such as New Mexico and New York, unused up-front sick leave cannot be revoked, reduced, or recouped. Finally, employers may have to pay out unused accrued sick time at separation if paid sick leave is considered to be a form of wages, as is the case in California, Colorado, and many other states.
If you are an employer in one of these states, thoroughly research your state’s paid sick leave laws and account for them in your unlimited PTO policy.
Pay special attention to where the law refers to paid leave generally, and where it calls out vacation or sick time specifically. Also, make sure you know whether your state considers PTO (including vacation and sick time, as well as other types of leave) to be a form of wages.
Unlimited PTO in States That Require PTO Payout
A number of states require employers to pay out the value of unused PTO at separation. In some states, PTO must be paid out regardless of the reason for separation. In others, it depends on the reason. Make sure you’ve read up on your state’s laws.
U.S. States That Require PTO Payout at Separation
Maine (new: as of January 01, 2023) | |
If you're in of these states, an unlimited PTO policy can mean cost-savings. If employees don’t accrue vacation days, there’s nothing to pay out when you separate.
Simple, in theory. But the reality is messier.
California considers earned vacation time to be a form of wages that has to be paid out at separation. This is standard stuff, but recent case law makes things tricky. According to employment law firm Fisher & Phillips, a California appellate court has ruled that it’s possible for vacation time to accrue “despite an employer’s efforts to establish an Unlimited PTO policy.”
Given that California is typically on the forefront of employee-friendly labor laws, it’s possible that the coming years will see more states cracking down on poorly-defined PTO policies.
In the meantime, don’t fall into the trap of believing that unlimited PTO is a “get out of jail free card” when it comes to liability and accruals. In fact, it’s likely worth consulting a qualified lawyer to ensure that your PTO policy is fully compliant, whether or not it’s unlimited and whether or not it’s a new policy.
Unlimited PTO in States that Ban “Use-It-or-Lose-It”
“Use-it-or-lose-it” is a tool that some companies use to limit their PTO liability. But several states prohibit policies that forfeit unused PTO at the end of the year.
In addition, “use-it-or-lose-it” can be a source of resentment amongst employees who feel like they’re being cheated out of something they’ve earned.
U.S. States that Ban “Use-It-or-Lose-It” for PTO
Nebraska (applies to vacation time only, not sick leave) |
For employers in these states, unlimited PTO can be a compliant way to eliminate PTO liabilities while giving employees freedom, flexibility, and ownership over their time off. However, California employers in particular should be very careful about assuming that simply calling their PTO policy “unlimited” means that employees don’t accrue time off.
Also, carefully read your state's laws to determine whether the "use-it-or-lose-it" ban applies to vacation time, sick leave, or both. Nebraska, for example, prohibits use-it-or-lose-it for vacation time but not for sick leave. Louisiana, on the other hand, bans it for vacation time but is less clear on whether it's allowed for sick leave.
If this is the primary draw of unlimited PTO for you, there are other ways to reduce PTO liabilities without risking non-compliance and angering employees. Encourage employees to use their time off, and look into setting up a PTO conversion program.
Conclusion
Unlimited PTO is not as simple as it seems. If you’re considering a switch to unlimited, or if you already have it, you need to account for state laws that regulate the accrual and payout of paid time off. You also need to account for states that regulate vacation and sick time differently, because a single unified PTO policy may be out of compliance.
If you’re in a state that requires PTO payout, don’t just assume that unlimited PTO is a “get out of jail free” card for PTO liability. And if you’re considering a “use-it-or-lose-it” policy for vacation or sick time, be sure that recent case law hasn’t changed the regulatory landscape, and think about how your employees will feel about it.
Let’s Talk About Unlimited PTO in Your State
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