Unlimited Paid Time Off (PTO): How it Works + Free Policy Template
Charlette has over 10 years of experience in accounting and finance and 2 years of partnering with HR leaders on freelance projects. She uses this extensive experience to answer your questions about payroll.
Jennifer Hartman is an HR Specialist and staff writer for Fit Small Business, with over 15 years of experience in accounting, payroll, and human resources.
An unlimited paid time off (PTO) policy allows employees to take as much vacation time as they want with virtually no limits. Some companies are experimenting with unlimited PTO to improve work culture, give exempt employees more work/life balance, and allow senior staff more vacation and travel time. There are pros and cons to offering unlimited PTO vs traditional PTO, but creating a solid policy outlining clear expectations can help make it successful.
Download Our Unlimited PTO Policy Template
How to Offer Unlimited PTO
To offer unlimited PTO to your employees you should first create and distribute a policy that outlines the structure of your PTO. Be sure to include the timeline for when the policy will roll out to employees and what happens with the old policy once the new one is in place.
Clearly Spell Out Your Policy
Even if you want to avoid putting limits on employees’ PTO, you should include parameters in your policy to make sure important work gets completed, deadlines are met, and the policy isn’t abused. Be sure to put this policy in writing and be clear about who is eligible for unlimited PTO. Consider these simple rules when implementing your new unlimited PTO policy.
- Require employees to request leave and get it approved by their supervisor five to 30 days before their time off to ensure proper coverage during their absence.
- Make it clear if employees are not able to request time off during key business events that require them to be on-site, such as key project dates, system implementation dates, and budget or strategic planning periods.
- Provide a limit to the number of people in one department that can be on PTO at a time.
- Require that individual or team performance and productivity are not impacted by employee absences based on your department’s performance standards, metrics, or KPIs.
- Make sure it’s clear in your policy that flexible leave cannot be accrued, rolled over, or cashed out.
Offering unlimited PTO can improve employee morale and lead to increased productivity. In fact, according to a MetLife study, 72% of employees said that a company that offers unlimited PTO created a culture that showed a deeper level of care for employees.
Separate PTO from Sick Time
To avoid confusion with labor laws that mandate paid sick time, unlimited PTO should apply to vacation time only. Several states mandate how much sick time must be provided to employees, and that bank of time should be tracked separately from vacation. Often, traditional PTO combines both, but unlimited PTO should only refer to vacation or personal time.
Pay close attention if you’re in a state or locality that requires businesses to provide a minimum amount of sick leave, such as:
- New York, which requires 40 hours per year earned sick time if you have between five and 99 employees, and 56 hours per year earned sick time if you have more than 100 employees
- Illinois, which requires a mandatory 40 hours per year for sick leave
- California, which requires three days (24 hours) per year for sick leave (up to six days in some counties)
Other policies, like those dealing with the Family and Medical Leave Act (FMLA), the Americans with Disabilities Act (ADA), and Maternity/Paternity Leave, require specific amounts of time for leave as well. Refer to our Federal Labor Laws Every Small Business Should Know to learn more.
Most payroll systems, like Gusto, can track both vacation and sick time. Gusto also allows you to customize your paid time off to fit your business needs and your employees can request time off online or through a mobile app.
Limit Who Is Eligible Under the Policy
Businesses that provide unlimited PTO/vacation can make it available to certain types of employees only—exempt salaried employees being the most common. There are, however, different groups of people that unlimited PTO will work well for, as well as those it may not be right for.
Unlimited PTO May Work Well For: | Unlimited PTO May Not Be Right For: |
|---|---|
Exempt salaried employees. An unlimited PTO policy allows these employees to take off work as needed, as long as they meet their strategic performance objectives. Learn more about exempt vs non-exempt employees. | Non-exempt staff. Non-exempt employees must be paid for all hours worked, even while on vacation. If an employee prefers to spend their nights answering emails, you’d have to pay for that time, even if it’s overtime. |
Consultants or information technology (IT) or project-based employees. These salaried employees are typically available 24/7 already, making sure their programs are running or systems don’t crash. An unlimited PTO policy allows them to take time off on an as-needed basis. | Staff with no backup. For example, if you only have one person in a role who goes on a two-month safari, who will manage the work while they are gone with no internet/cell service? |
Sales employees with commissions. Commissioned salespeople work odd hours for travel and trade shows and are typically required to meet financial objectives each month. It’s a good idea to include these workers in an unlimited PTO policy. | New hires. You may wish to offer new hires traditional PTO for a certain amount of time (i.e., 90-360 days) before making them eligible for an unlimited PTO policy. |
If you’re looking for a policy that gives your employees the flexibility to work when they want and from where they want as long as they meet performance objectives, you may be interested in implementing a flexible work environment.
Pros and Cons of Unlimited PTO
There is a good side and a bad side to offering your employees unlimited PTO. While it can increase job satisfaction among employees, it can also lead to abuse of the policy.
| PROS | CONS |
|---|---|
| Employee job satisfaction and performance may increase as they feel they have adequate work/life balance. | Employees could take advantage of the policy by taking time off every week or taking a long paid leave of absence. |
| Your employees may be more readily available at the end of the year, as they will not be trying to use their PTO before they lose it. | May be limited to certain employees in the company, which can lead to dissatisfaction for those not able to participate. |
| Helps with hiring and retention when a company offers a robust PTO policy. | Employees may not use as many PTO days as they feel they would be accused of abusing the policy, leading to stress and the feeling of being overworked. |
| May save the company money. Since there is no time accrued, there is nothing to pay out when employees leave their positions. | Your company could be left without enough employees to handle daily activities if a good policy is not put into place. |
Managing Your Unlimited PTO
Some companies consider unlimited PTO a free pass not to track or manage the time used. However, there is still a level of management responsibility that comes with any PTO policy, along with the benefit of knowing how much time your employees are taking off to gauge their productivity.
Unused/Accrued PTO
If you are switching to an unlimited PTO policy from a traditional PTO policy, this may come with unused, accrued, or rollover PTO in an employee’s bank. So, what do you do with this extra time? Some companies don’t pay out time since the new policy is essentially unlimited. Others may pay out accrued vacation once they replace their old PTO with a new unlimited PTO policy, and reset everyone’s balance to 0 at that time.
You may want to make the transition to unlimited PTO during a natural time frame, such as calendar, fiscal, or benefits year-end, and be clear that the old policy will be replaced, and any unused vacation at the end of the prior timeframe will be lost.
Tracking PTO
Unlimited PTO does not mean that there is no need for tracking of days taken by employees. HR specialists may still want to keep track of when employees are on PTO. This can be implemented using an employee scheduling or calendar system or a project management system to simplify PTO tracking.
Bottom Line
For small businesses, unlimited PTO can improve morale and make your workplace more desirable, allowing you to attract top talent. Additionally, it works best in a company with freedom and autonomy, affording trust between co-workers and creating the desired work/life balance. However, be sure when creating your policy that you’re aware of state/federal leave laws and even local mandatory sick leave requirements that may impact the exact wording of your PTO policy.
