How does unlimited PTO work in California?

NAVIGATING CALIFORNIA’S “Unlimited” PTO

Employees everywhere dream of how they will spend their two weeks paid vacation, and it is no secret that everyone loves their paid time off. But when it comes to more paid time off (PTO), is it really merrier? In recent years, there has been an uptick in California-based technology companies like Netflix, Oracle, LinkedIn, and Twitter, offering benefits like unlimited paid time off to their employees. As such, many companies vying for California tech talent feel pressure to offer the same. However, this growing trend of unlimited paid time off may be too good to be true for both employers and employees. 

Traveling - Unlimited PTO

What is Unlimited Paid Time Off?

Unlimited PTO is exactly what it sounds like. Subject to employees still completing their work, this policy is designed to allow employees to take time off whenever they want, for whatever amount of time they want, and as often as they would like. This time off is usually not tracked, and there is no accrual. 

The Pros and cons of unlimited PTO for employers

For companies, unlimited PTO promotes strong morale among its current employees and attracts new talent with the generous benefits package. It also allows for employees to rejuvenate more often, which, in turn, decreases burnout and increases productivity. Unlimited PTO also alleviates the administrative burden of having to track employees’ use of their time off. However, there are a number of risks that come with this policy, particularly in California. 

Under the California Labor Code, earned vacation time is considered wages, with the time being earned as work is performed. “Use it or Lose it” policies that are commonly found in other jurisdictions are prohibited by the statute. Use it or Lose it policies require employees to forfeit their unused vacation time if not used by a designated time and do NOT require employers to pay employees for unused time. Use it or Lose it policies also typically do not allow unused vacation time to roll over into the next year. In California, however, when an employee does not take all of their vacations day, “all vested vacation shall be paid to him as wages at his final rate in accordance with such contract of employment.” Despite this broad grant of benefit to employees, the California statute does permit employers to impose a “reasonable cap” on the number of vacation days that employees can accrue.

The McPherson v. EF Intercultural Found., Inc. Factors

Due to this stricter California policy, employers with California employees should be cautious to ensure that they have a truly unlimited PTO policy to prevent setting off California Labor Code Section 227.3 ‘s final vacation wage payment obligations. In McPherson v. EF Intercultural Found., Inc. 47 Cal. App. 5th 243, 268-69 (2020), the California Court of Appeals laid out five factors that a policy must have in order to avoid triggering this section of the code:

  1. Most importantly, the policy should be in writing.
  2. Clearly provide the employees’ ability to take paid time off is not a form of additional wages for services performed, but perhaps part of the employer’s promise to provide a flexible work schedule, including the employee’s ability to decide when and how much time to take off.
  3. Spell out the rights and obligations of both employee and employer and the consequences of failing to schedule time off.
  4. Allow in practice sufficient opportunity for employees to take time off or work fewer hours in lieu of taking time off.
  5. Be administered fairly so that it neither becomes a de facto “Use it or Lose it” policy nor results in inequities.

Despite its ruling in this particular case, the Court explained that it “appreciate[d] the benefit and [understood] the appeal the unlimited time off policies.” In addition, the Court also expressly stated that it “did not hold that Section 227.3 necessarily applies to truly unlimited time off policies.”

Additional RISKS OF UNLIMITED PTO

In addition to potentially provoking Section 227.3, there are various additional risks in California with maintaining unlimited vacation policies, for example:

  1. Vacation Payout Problems. If employees are not truly given the opportunity to take unlimited vacation time, then an Employer still may be forced to pay for accrued vacation time at termination under California law.
  2. Discrimination Claims. In order to avoid discrimination claims, employers must be sure to apply an unlimited PTO policy fairly.  As a result, all employees must be given equal opportunity to take their vacation days as they please. 
  3. Other types of leaves of absence. Since family and medical leave are traditionally unpaid, with an unlimited vacation policy, employees could be entitled to pay for the entire 12 workweeks under the Family and Medical Leave Act (FMLA) or California Family Rights Act (CFRA).
  4. Scheduling Conflicts. Under the terms of an unlimited policy, employees are allowed to take their time off whenever they want. This could lead to potential scheduling conflicts with employees taking off at the same time, which could lead to issues in workflow. 
  5. Abuse of Unlimited PTO. The fear of many employers when considering implementing an unlimited PTO policy is employees abusing it. Although studies show it is unlikely, there is always the possibility of employees taking off more time than the company anticipates, and this could lead to issues with the employee being able to successfully fulfill their job duties.

THE PROS AND CONS OF UNLIMITED PTO FOR EMPLOYEES

At first glance, unlimited PTO sounds great for the employee. In fact, 72 percent of employees interviewed expressed interest in receiving the emerging benefit of unlimited PTO, according to MetLife’s 2019 U.S. Employee Benefit Trends Study. For those who take full advantage of the policy, it can be a generous and persuasive benefit to joining a company. However, this policy often leads to employees taking less time off. 

One study showed that employees under the unlimited PTO plan took an average of only 13 days off per year, whereas those with a traditional PTO plan took an average 15 days annually. This comes as a result of unclear expectations set by employers which leave their employees feeling stymied by the unlimited nature of the plan. Finally, even under California’s liberal labor laws, employees who work under a truly unlimited PTO policy do not accrue vacation time and, therefore, do not have the opportunity to collect any pay out. As an employee, it is important to weigh all of the pros and cons of this kind of policy.

TAKEAWAY

For employers and employees alike, unlimited PTO seems like a cure-all solution for a  company’s vacation policies. However, there are many risks to consider when determining if this policy is the right fit for your company as an employer. When making this decision, it is vital to consult with legal counsel to fully understand the scope of potential liability and lawsuits. 

Here at Founders Legal, we can advise you through this process and draft employment agreements that account for the nuances discussed herein and other important factors, including intellectual property assignment and confidentiality. 

For any additional questions about navigating employment practices and other foundational issues relating to your technology business, please feel free to reach out to David H. Pierce.

David Pierce, Corporate & Technology Attorney

David Pierce, JD, MBA
Senior Associate Attorney
[email protected]

David Pierce, JD, MBA is a former tech sales leader who now devotes his legal practice towards building out legal infrastructure and facilitating deals for his technology clients.

*Disclaimer – David Pierce is licensed to practice law in the State of Georgia and is not barred in the state of California.
Ceclila Von Mann, Summer Associate

Cecilia Von Mann
Summer Associate
[email protected]

Cecilia Von Mann is a summer associate, working closely with the corporate practice at Founders Legal. Cecilia obtained her undergraduate education at Spring Hill College as a double major in PR/Advertising and History. She is currently a student at Emory Law with a focus on corporate and trademark law.

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