Deciding Between Unlimited vs. Flexible PTO: Which May Be Best for Your Business?

An unlimited PTO (paid time off) policy might be on your company's list of potential benefits to consider this year. According to the Society for Human Resource Management, 4 percent of organizations now offer unlimited paid time off. That number may continue to rise as startups and large organizations alike continue experimenting with this policy. Equally important, however, is considering the advantages of a flexible paid time off (FTO) policy, which offers distinct differences and may better align with your business's needs and operational styles. For HR managers considering a change to their time off policies, a key question is whether an unlimited PTO or FTO policy may be right for the business.

Unlimited and Flexible Paid Time Off (PTO) Policies, Explained

Paid time off (PTO) is an employer-provided benefit in which an employee is allotted an amount of paid leave time that typically may be used for vacation, illness, or personal reasons at their discretion. Depending on state and local law, employers can either frontload an annual allotment of PTO or require employees to accrue PTO based on time employed or hours worked.

What Is Unlimited PTO?

Unlimited PTO is a PTO policy that allows employees to take as much time as they need—when they need it—as long as it doesn't interfere with their work. Under unlimited paid time off policies, employees don't accrue paid time off, nor are they given a set number of days at the beginning of the year. Instead, employees request the time they'd like off, and their managers can approve or deny the requests.

Understanding Unlimited PTO

Employers should remember that "unlimited PTO policies" do not necessarily mean that employees will use an unlimited amount of paid time off. For many organizations, an unlimited time off policy is best administered with specific parameters for appropriate employee use.

In fact, employers with these policies often see underuse as a more significant issue than an employee taking too much time off. In such cases, business owners and management should encourage the appropriate use of PTO with the message that they want employees to recharge and refresh.

Of course, employers must be conscious of shifting circumstances that might negatively affect operations, such as seasonal workloads or long-range projects that risk being interrupted without available team members. Some businesses adopt a master calendar that helps them monitor which employees are present in the workplace and which are not.

Another approach to managing this benefit involves encouraging employees to spread out their PTO over a year rather than taking it all at once around a holiday like Christmas. With unlimited PTO, employees feel less burdened with the need to "save" their time off for holidays or vacations, which might help with avoiding gaps in work coverage.

How Does an Unlimited PTO Policy Work?

In many ways, unlimited PTO policies closely resemble a standard PTO policy but without accruing days or granting a prearranged number of available days off. With their manager's approval, an employee may use as much time as they need (for vacation, sickness, and other reasons).

As with PTO policies where time off is accrued or frontloaded, the employee's manager must generally sign off on requests by an employee to use their unlimited PTO. Also, an organization's recognized employment schedule and/or flextime benefits typically remain unchanged.

Companies should have a clear, documented PTO policy that's communicated during hiring and orientation for all workers while including these policies in the employee handbook. Make sure the policy clarifies when employees can take time off, how far in advance requests must be submitted, and what approvals are required.

Highlight any busy periods when it may be more difficult—or even impossible—to approve PTO requests. Keeping track of employees' PTO requests may feel overwhelming. However, investing in a time and attendance solution can help you gather information and track attendance efficiently while keeping you more informed and organized about each employee's schedule.

Why Do Employers Offer Unlimited PTO?

Employers that adopt unlimited paid time off (over traditional policies that provide separate banks for vacation, sick, or personal time) seek to help ease the burden of administration and tracking of time off (by type and time taken) by having one simple policy. Eligible employees can use the time for vacation, illness, personal time, or whatever need arises. This flexibility allows employees to manage and use their time in a way that best fits their needs and wants.

The approach may also curtail the potential abuse of leave benefits. For example, some employers encounter employees who call in sick to use up the time they have available to them.

What Is Flexible Time Off (FTO)?

Unlimited PTO is often referred to as flexible time off (FTO). However, unlimited PTO and FTO have distinct differences.

Where unlimited PTO is often practically unrestricted (meaning that employees can take as much or as little time off as they desire), flexible time off – or flexible PTO – is not unlimited. However, like unlimited paid time off, employees can use FTO for whatever reason.

Understanding Flexible Time Off

Like unlimited PTO, employees can use their flexible paid time off for sick leave, vacation, or any other reasons requiring an employee to miss work. Some employers may provide an unlimited amount of FTO, essentially mimicking an unlimited PTO policy. However, others will offer a set number of days employees can take at their discretion.

Flexible time off allows employees to enjoy their time off without facing a "use it or lose it" policy where employees may feel pressured to find ways to take time off just so they don't lose their time off days. However, by giving employees the flexibility to take time off when they need it – not when they're scared to lose it – you can boost your employee satisfaction and well-being by putting your employees in the driver's seat when it comes to needed time off.

How Does a Flexible Time Off Policy Work?

In most companies with an FTO policy, employees must get their manager's approval for the time they'd like to take off, similar to unlimited paid time off programs. This helps you better control lapses in employee coverage that could impact workflows.

Although a flexible PTO policy can vary from company to company, employers should consider the following when creating flexible paid time off programs:

• A procedure for requesting time off, such as completing a request form
• How and when manager approvals are communicated
• How unused time rolls over, including any limits (such as a maximum number of days to roll over to the next year)
• The amount of FTO available to each employee
• Any policies around leaves and how these intersect with FTO
• How FTO days are treated when an employee separates from employment

Employers should not forget remote employees when crafting their flexible time off policies. Even though remote employees often have more flexibility built into their workdays, they deserve to unplug from work just like those employees who work on-site.

Why Do Employers Offer Flexible Time Off?

Employers offer flexible time off to promote a healthy work-life balance, reduce employee stress, and improve employee retention, loyalty, and productivity. Additionally, flexible time off can help reduce burnout while increasing employee satisfaction and happiness in the workplace.

Because employees can take time off when they need it—as opposed to taking time off just so they don't lose their PTO days—they can better align their time off with religious holidays, school functions, or family care.

Comparing PTO Types

PTO benefits can vary from company to company. Understanding the different types of paid time off can help you determine which program best fits your organization.

PTO vs. FTO

Traditional PTO policies typically allow paid time off for holidays, vacation days, sick days, and any other personal time—from doctors' appointments to seeing your child's play at school.

Employers should keep in mind that certain states and localities may require a stand-alone paid sick leave policy, or other type of leave policy. Employers should consult legal counsel when implementing or adjusting their time off policies.

Most traditional PTO policies include a set number of days per year and accrual calculations (allowing you to accrue time for each hour, week, month, or payroll period worked). Additionally, paid time off benefits may allow employees to roll a certain number of days over to the next year where others may implement a use-it-or-lose-it policy (meaning all days off must be taken by year-end or else they'll be forfeited).

Flexible PTO, or FTO, is a type of PTO policy. Typically, under flexible time off policies, employees don't have to accrue days off, and employers don't have to track hours. Instead, the employee can take time off for any reason – such as sickness, holidays, vacation, or other personal time – if it doesn't impact their job duties.

Depending on the employer, FTO policies may include unlimited or limited time off.

FTO vs. Unlimited PTO

Although FTO and unlimited PTO are sometimes used interchangeably, key differences exist. Unlimited PTO policies allow employees to take all the time (or as little time) off as they want. Some flexible PTO policies allow an unlimited amount of paid time off, but more often, flexible refers to taking time off for various employee wants and needs, but with specific limits on how much time can be used for PTO (generally at the employer's discretion).

Pros and Cons of Unlimited PTO

Increasingly, more companies are focusing on results-based flexibility strategies, which may involve allowing employees to work wherever and whenever they want. As long as the job is getting done and specific results are achieved, employees can choose when to use their time off, although this is subject to manager approval.

When examining this type of practice, organizations must consider many factors, including, for example, business operations, company culture, specific job duties, and/or customer needs.

Benefits of an Unlimited PTO Policy

Unlimited PTO policies can help:

• Build trust between an employer and employees
• Serve as a powerful recruitment, retention, and engagement tool
• Reduce situations where employees feel obliged to come to work when they're ill
• Reduce administrative time and resources spent monitoring individual time-off accrual or assessing individual employee time-off needs

Disadvantages of an Unlimited PTO Policy

Employers should consider the disadvantages and challenges when contemplating adding an unlimited PTO benefit.

• Assuming a culture of a flexible, results-based workplace can be difficult — change can be uncomfortable.
• The time and effort needed to create, provide, and communicate a written policy outlining the unlimited PTO benefit provisions to all affected employees.
• Abuse (or perceived abuse) of the policy may result in employee morale issues.
• Unlimited PTO is not feasible for all organizations. Working environments where coverage is critical, such as call centers, manufacturing facilities, healthcare establishments, or retail stores, may not be able to adopt this type of benefit easily, if at all.
• There may be employee discontent over the inability to accrue time to be paid out, where applicable by law.

Offering unlimited paid time off does not relieve an employer from compliance with federal, state, and local laws and regulations.

Pros and Cons of Flexible Time Off (FTO)

Before implementing an FTO policy in your workplace, you should consider the pros and cons of flexible time off.

Advantages of FTO

Employers see many benefits of offering flexible paid time off. For example, FTO may help you:

• Attract and retain top talent.
• Reward productive employees by enabling them to take more time off when they need it.
• Nurture your workforce by showing you trust and value them.
• Support your employees' well-being by encouraging them to take time off and recharge.
• Improve your employees' loyalty and commitment to your organization, ultimately increasing productivity and reducing turnover rates.
• Eliminate PTO backlogs, where employees must use or lose their days off before year-end, if your FTO policy establishes an unlimited number of days off.
• Reduce any administrative burdens on tracking paid time off, such as accruals and days off used.

Challenges of FTO

Like any HR policy, FTO also comes with its own set of challenges. An FTO policy:

• May conflict with your other leave policies, such as parental leaves or leave under the Family Medical Leave Act (FMLA). Ensure that you align your FTO and other leave policies to avoid confusion.
• Could potentially result in employee abuse, with certain employees taking excessive time off (if there is no cap on days off). Continually review your employees' use of the flexible time policy, ensuring it's used appropriately. Also, make sure that you communicate to your employees that they must still meet their performance goals and expectations, no matter how much time they take off.
• May cause misunderstandings if employees don't understand the policy's expectations. Continually communicate with your employees about the purpose of the FTO policy and how it works. (You should already have outlined this policy in your employee handbook.) Do this when employees onboard and throughout the year so that employees take advantage of this benefit.
• Could result in overlapping time off, where employees request to take the same window of time off, causing gaps in workflows or responsibilities. Since managers approve FTO, employees must communicate their requests ahead of time, allowing the managers to plan accordingly for employee absences.

Legal Considerations for PTO Policies

Understanding the Role of State and Local Laws

Some state and local laws regulate certain aspects of paid time-off policies. For example, some states require that any earned but unused paid time off be paid out upon an employee's termination or separation. Some states may regulate the accrual of paid time off, consider paid time off as a form of wages, or even require that these policies be provided to employees in writing.

There are also wage statement and protected use considerations. For example, an employer using an unlimited PTO plan to follow California's paid sick leave requirements would need to ensure their plan meets the minimum requirements imposed by the state for sick leave.

Employers must understand state and local laws when providing PTO benefits. Employers should consult an employment attorney if they have questions about PTO policies.

Compliance Tips for Implementing Flexible and Unlimited PTO

Employers should watch out for potential pitfalls when implementing a flexible or unlimited PTO program. Here are some tips to help keep your time off program compliant:

• Be wary of discrimination. For example, granting inconsistent access to time off could violate certain state and federal discrimination laws. Further, if you retaliate against an employee for taking time off or treat an employee in a protected class differently, you could open yourself up to liability.
• Watch out for other leaves. Ensure your paid time off policies integrate with other leave types, such as FMLA. Differentiating requested time off and protected leave is critical to ensuring compliance with your paid time off benefits.
• Carefully document your FTO or PTO program, ensuring it is well written. A confusing policy could create ambiguity about how it's administered, potentially leading to compliance nightmares.
• Watch out for state and local laws, especially around paid sick leave programs. These laws can often create difficulty when administering your PTO policies. It's best to work with an employment attorney to help you navigate these laws when implementing your FTO or unlimited PTO program.

Implementing and Managing PTO Policies

Like any employee benefit, your PTO policy should be carefully considered, planned, and documented. You must also ensure that you comply with all applicable federal, state, and local laws. Here are some tips on transitioning to and implementing unlimited PTO in your organization.

How To Transition to Unlimited PTO

Moving to unlimited PTO often involves specific steps, such as determining how to handle current paid time off that employees have accrued to date. For example, employers can:

• Compensate team members for accrued, unused time off before transitioning to the new PTO policy.
• Offer a period of time (and advance notice) when employees can use the time they've accrued before the new policy is implemented. PTO may be lost if not used in this time period.

State laws may prohibit certain practices. For example, Option 2 is likely not allowed in certain states or localities.

However, when the transition is planned, employees should receive advance notice of the coming change. Some states and localities require specific notice periods when changing time off policies. This "grace period" can also serve as a training time for supervisors to become knowledgeable about the forthcoming switch to unlimited PTO.

Effectively Implementing an Unlimited PTO Policy

Successful unlimited PTO policies require solid guidelines, good management, and support from senior leaders and human resources. Different companies with similar policies can experience dissimilar outcomes.

Key action steps include the following:

• Make sure the unlimited paid time off policy is clearly communicated to employees and issued in a manner that conveys company expectations.
• When developing these policies and flexibility strategies, understand local, state, and federal time off and wage and hour laws. Offering unlimited paid time off may create additional compliance issues that must be addressed.
• Speak with an HR subject matter expert or an employment attorney to review the risks.

Document and Communicate the New PTO Policy

Embracing an unlimited PTO policy requires clear communication and documentation:

• How far in advance must employees get time off requests approved?
• What is the approval process?
• Is there a maximum number of days employees can take off in a row?
• What arrangements must be made — or work completed — before an employee uses PTO?
• Define your policy so that guidelines are clear, and then put the documentation and processes in place to ensure it is enforced consistently.

Managing PTO Use and Abuse

Employers must continually monitor their PTO benefits, making certain that their policies aren't being abused – inadvertently or intentionally.

What Happens if a Team Member Abuses the Unlimited Time Off Policy?

Problems with unlimited PTO can be prevented by clearly stating the policy's specifics in easy-to-understand language. Also, ensure that your policy is continually updated to comply with federal, state and local law changes. Your policy should indicate that violations of the policy may result in disciplinary action.

Employers may wish to consult legal counsel on how to apply disciplinary action consistently.

Finally, the policy should be communicated and displayed so employees know its contents.

Monitoring and Addressing PTO Usage

HR professionals and team leaders must remain vigilant in monitoring and addressing PTO usage to ensure that it is being used appropriately and not abused.

Clear communication and consistent application of your PTO policies are essential to preventing paid time off abuse. Implementing HR time and attendance tools can help you identify patterns and misuses you might not otherwise see.

Additionally, regularly checking in with your employees about their paid time off benefits can help you determine if you're meeting their needs by making them feel valued and supported.

Financial Implications of PTO Policies

Paid time off policies can have financial implications for employers. According to the U.S. Bureau of Labor Statistics, paid leave accounts for 7.4 percent of an employer's total costs, just behind wages, payroll taxes, and insurance. Because of this, it's critical to consider the costs of implementing different types of PTO.

Is It Necessary To Compensate for PTO in the Event of an Employee's Departure?

State and local regulations differ regarding the payment of unused time off in the event of an employee's departure. Generally, unlimited PTO policies do not provide time to departing employees because these workers haven't accrued PTO. Make sure to check relevant state and local laws to determine your responsibility.

Deciding Whether Unlimited or Flexible PTO Is Right for Your Business

If you're considering unlimited or flexible PTO policies, think about the potential benefits and challenges from your employees' perspective. Would they look at this benefit as an attractive one or one that is too confusing to use? Also, consider applicable local, state and federal laws related to paid time off when creating this benefit.

Whatever your decision, it's crucial to communicate any benefit changes effectively in a way that resonates with your employees. Here are valuable tips on change management and information on how Paychex can help with your business's human resources needs.