An increasing number of companies are offering unlimited vacation days as a key benefit of employment. Known as “unlimited vacation” or “unlimited paid time off (PTO)” this trendy benefit presents several important legal considerations for employers and employees in Massachusetts and across the country.
For employees, an unlimited vacation policy seems like a win-win—you have access to an inexhaustible bank of paid time off, and you do not have to spend months or even years accruing vacation days before taking an extended vacation, particularly upon starting with a new company. Employee morale typically increases under an unlimited vacation policy, as the arrangement encourages trust between employers and employees, promotes flexibility, and prioritizes employee well-being.
Employers are relieved from the administrative burden of tracking accrued vacation days and time away from the office, which in turn reduces administrative costs. An unlimited vacation policy also prevents the accrual of vacation time that is payable upon termination of employment, a significant cost-saving strategy.
U.S. employers are not required to offer vacation days to employees, but once an employer does offer paid vacation time, any unused vacation time is treated like a wage, with varying implications depending on the state in question. In some jurisdictions, workers cannot be forced to forfeit accrued but unused vacation days. Other states, including Massachusetts, have adopted different versions of a “use it or lose it” approach, allowing employers to enact a deadline for the use or forfeiture of some or all accrued vacation time. A “use it or lose it” policy limits the total amount of vacation time an employee may accrue during the term of their employment, but an employer must provide adequate prior notice of the policy to its employees and must ensure that employees have a reasonable opportunity to use their accumulated vacation time. Otherwise, a “use it or lose it” policy may result in an illegal forfeiture of earned wages.
Massachusetts employers must make several important considerations when transitioning to an unlimited vacation policy. Although Massachusetts is a “use it or lose it” jurisdiction, employers transitioning to an unlimited vacation policy should continue to track employees’ accrued vacation days earned before to switching to an unlimited policy. An employer may require employees to use accrued vacation days prior to switching over to an unlimited vacation policy. If an employment relationship terminates during the transition to an unlimited vacation policy, and an employee has unused vacation time earned under the prior accrued policy, the employee must be paid out for all vacation time earned and not forfeited. Finally, and because Massachusetts is a “use it or lose it” state, an employer may establish a deadline for the use or forfeiture of accrued but unused vacation time upon instituting an unlimited vacation policy. In this scenario, an employer must ensure that employees are provided with a reasonable opportunity to use the accrued vacation time—otherwise, the policy may result in an illegal forfeiture of earned wages.
Most workers welcome the offering of unlimited vacation time from their employer, and many employers are reaping the benefits of providing employees with the flexibility stemming from unlimited vacation policies. Nevertheless, employers should be careful not to violate any wage laws when transitioning to and administering an unlimited vacation policy, and both employers and employees must be mindful of any time earned under an accrued vacation policy. Massachusetts employers should hesitate to “claw back” benefits or other compensation already earned by their employees, including vacation time earned by an employee under an accrued vacation policy. Accordingly, any accrued vacation time should be paid out or used by an employee prior to transitioning the employee over to an unlimited vacation policy. Alternatively, an employer must provide its employees with an ample amount of time to use accrued vacation time before eliminating that time and transitioning to an unlimited policy.
RECOMMENDATIONS
1. After instituting an unlimited vacation policy, continue to track accrued vacation time to avoid violating wage laws.
2. Update all employee handbooks and other benefit materials upon switching to an unlimited vacation policy.
3. Require each employee to use existing, accrued vacation days before transitioning each employee to an unlimited vacation policy.
4. If eliminating accrued vacation days upon transition to an unlimited policy, ensure provision of a generous amount of time for employees to use accrued vacation time prior to forfeiture.
5. Require employees transitioning from an accrued vacation policy to an unlimited vacation policy to sign documentation clearly outlining the terms of the transition, including:
a. The number of days accrued and not used under the prior accrued vacation policy;
b. Requirements on using accrued vacation time before unlimited vacation time;
c. Deadlines on the use or forfeiture of accrued vacation time; and
d. Terms of vacation time payout upon termination of employment.