Unlimited PTO Policies: Court Ruling Lists 5 Best Practices

Word to the wise: If your company’s ready to embrace the unlimited PTO trend, you’ll want to make sure you get it right.

A court decision from California provides important guidance.  

A nonprofit claimed it provided that perk, so former employees’ claims for a payout under California law for unused vacation time must fail. But a state trial court found otherwise – and an appeals court agreed.

Special Unlimited PTO Policy for Exempt Employees?

The nonprofit EF Intercultural Foundation ran exchange programs between the U.S. and other countries.

It had a vacation policy for some staff that specified how many vacation days they had and how much unused vacation time they could carry over.

However, that policy allegedly didn’t apply to former full-time area managers who worked from home and in the field. Rather, the exempt employees did not accrue PTO and were only required to notify supervisors before taking time off. As such, the company later characterized it as an unlimited PTO policy.

Former Employees Sue

After leaving the job, the former area managers sued the company, alleging it breached section 227.3 of California’s Labor Code by not paying them for unused vacation time.

California law didn’t require employers to provide paid vacation time, but if they did, the state’s Labor Code required them to pay as wages any “vested” vacation time that a terminated employee had not used.

After a trial, the court found the former employees were entitled to a payout based on 20 days of vacation per year. It awarded them a total of more than $88,590 plus $397,700 in attorneys’ fees.

Company Appeals

On appeal, the company argued its unlimited PTO policy didn’t trigger any duty to pay out staff for vacation time because no vacation time could vest “if there is no fixed vacation bank.”

The problem, the appeals court said, was that the company didn’t actually provide unlimited vacation time.

Testimony established the company expected the former employees to take about the same vacation time as corporate employees: two to six weeks.

The former employees also showed they took an average of two weeks each year and never more than four weeks. Significantly, the employees testified that it could be hard to take time off and still get their work done.

As such, the appeals court found the evidence supported a finding that the company’s paid time off policy had an implied cap and was not truly an unlimited PTO policy.

The appeals court agreed with the trial court, explaining that “an employer cannot avoid section 227.3 by leaving the amount of vacation time undefined in its policy while impliedly limiting the time actually available[.]”

Notably, the court stressed that its ruling did not mean that “all unlimited [PTO] policies give rise to an obligation to pay ‘unused’ vacation when an employee leaves.”

Court Lists 5 Best Practices

Instead, what’s in the policy matters, the court explained. It considered what an unlimited PTO policy might look like if it were to relieve an employer from having to pay out accrued benefits at separation and opined that such an unlimited PTO policy should:

• Be in writing.
• Clearly state that employees’ ability to take PTO is not a form of additional earned wages but instead part of the company’s commitment to providing flexible scheduling for its employees – which specifically includes their ability to decide when and how much PTO they take.
• Clearly identify the rights and obligations of both the employer and the employees, including outlining the consequences of failing to schedule PTO accordingly.
• Describe the benefit of PTO to employees as well as the potential that they’ll essentially leave money on the table by working more hours for the same pay than colleagues who scheduled more PTO.
• Be administered fairly so that it 1) sufficiently allows employees to take PTO, and 2) does not become a de facto use-it-or-lose-it policy.

McPherson v. EF Intercultural Foundation, Inc., 47 Cal. App. 5th 243 (2020).