Compliance considerations when transitioning to unlimited PTO
After an employer decides to offer unlimited PTO, they will have a few compliance considerations when it comes to transitioning from a more traditional PTO or vacation plan: developing a policy that outlines the parameters of their new program and creating a robust change-management plan to communicate the new program to all impacted employees effectively.
Developing a policy that outlines the parameters of their new program
From a compliance perspective, two of the most critical aspects of the transition to unlimited PTO are managing each employee’s existing PTO or vacation balance and complying with any applicable state or local accrued sick leave requirements. A few states treat accrued but unused PTO and vacation as wages, meaning that employers are prohibited from utilizing any process or policy in which an employee is forced to forfeit their earned but unused PTO or vacation. The employer cannot simply zero out or eliminate those existing balances in those locations. Although this might be technically compliant where forfeiture of PTO and vacation is allowed, it would almost certainly be poorly received by employees and potentially harm the employer-employee relationship. Therefore, treating all employees’ PTO and vacation balances the same, regardless of employee work location, is recommended.
Employers have a few options, each with their pros and cons that must be weighed as part of the decision:
- Payout existing PTO balances: The employer could payout all existing PTO balances as of the effective date of the unlimited PTO program. This brings a significant one-time expense for the employer but also has its positives. It is easy to understand for employees, removes any administration of prior PTO/balances, and eliminates any ongoing liability.
- Freeze and maintain existing PTO balances: The employer could freeze and maintain existing PTO balances as of the effective date of the unlimited PTO program. In some cases, the employer may allow the use of the frozen PTO and vacation balances with very limited use, such as when unlimited PTO is unavailable or only as required at termination. This method avoids the immediate payout costs but requires the employer to carry the liability forward, potentially indefinitely. It also requires employees to maintain balances and usage in their tracking system(s). Plus, some of the PTO hours will be paid out at a higher rate to any employees who receive a salary or wage increase before the PTO is paid out.
- Incorporate a transition period for utilization: The employer could define a transition period that allows or requires employees to utilize existing PTO and vacation before accessing unlimited PTO. This is typically done in one of two ways:
- First, create a defined term for the transition, in which all absences will draw from the existing PTO and vacation balances until they are depleted, then pay out any remainder upon the official transition. This requires unlimited PTO to be launched at some date in the future, allowing more PTO and vacation to be used. However, it does require administration during that time and ongoing for any employee who slowly draws down their PTO and vacation balance due to low utilization.
- Second, the use of PTO and vacation is required on an ongoing basis, even after the launch of unlimited PTO, with all existing PTO and vacation used before unlimited PTO or existing PTO and vacation being used at the start of any absence. For example, each absence’s first three days (or 24 hours) are considered PTO and vacation, and the remainder is unlimited PTO. This method reduces or eliminates many positives of unlimited PTO because it requires continued administration, avoids a one-time cost, and reduces liabilities over time.
Employers will want to balance their intended goals of launching unlimited PTO with the negative aspects of each approach to determine which method makes the most sense.
Employers should also double (or triple!) check any accrued state and local sick leave requirements that may be impacted by the transition to unlimited PTO. Many employers utilize their PTO policy to comply with state and local sick leave requirements. Utilizing unlimited PTO for compliance may add another complexity regarding specific requirements. For example, when state and local sick leave regulations require that sick leave accruals, usage, and balances are displayed on each employee’s paystub, employers need to understand how to meet that requirement with unlimited PTO. Employers must research and check with their compliance or legal team to understand any potential challenges or conflicts between state/local sick leave requirements and unlimited PTO.
Creating a robust change-management plan to communicate effectively
After considering the compliance challenges, employers should shift their focus to documentation and communication. Drafting an unlimited PTO policy can be challenging. Employers should establish:
⦁ Clear requirements around which employees are eligible
⦁ When unlimited PTO can be used, including whether sick leave reasons are covered, excluded, and covered under a separate policy
⦁ How unlimited PTO will interact with other benefits, such as short-term disability or statutory paid leaves, such as paid family and medical leave
⦁ Plus a variety of other details, such as the notice and approval process, any minimums or restrictions on use, and more.
After the policy is drafted and a transition date set, employers should work backward from that date to communicate the changes to impacted employees. Those communications should focus on the employees’ perspective and attempt to answer any potential questions employees may have. This will likely include providing employees with a clear timeline, a summary of the new policy, who is impacted, details about what happens to existing PTO and vacation, and who employees can contact with questions.
