Q If we offer unlimited paid time off (PTO) and employees don’t accrue PTO, do we have to pay anything out at termination?
Generally, the answer is no, but there is limited case law on this question, and the answer may change based on how the unlimited PTO is administered. Under Colorado and other state laws, vacation is considered a wage. Therefore, vacation cannot be forfeited, and any accrued, unused vacation must be paid upon separation from employment. PTO is typically viewed as a form of vacation, and therefore, it is arguably subject to the same rules.
With unlimited PTO, however, no PTO is accrued. Hence, no PTO is payable upon termination of employment. But that can change if the unlimited PTO is not truly unlimited. The Colorado Division of Labor and Employment provides the following guidance on this topic:
If an employer provides “unlimited PTO,” that ordinarily is not payable upon separation, because the amount isn’t “determinable.” But if an employer says it offers “unlimited PTO,” yet actually doesn’t let employees take more than a certain amount of paid time off, then what it provides isn’t really “unlimited,” it’s a limited, determinable amount of PTO.
[Say, for example,] Company C states that it provides “unlimited” PTO, but doesn’t actually let employees take over 120 hours in any year. What Company C provides isn’t actually “unlimited” PTO, it’s 120 hours of PTO per year. So departing employees must be paid any unused portion of their 120-hour allotment.
In other words, a cap—even an informal one—placed on the use of unlimited PTO may result in the employer owing accrued PTO upon separation. And because the employer may not track the use of unlimited PTO, it can be difficult to defend against a challenge seeking payment under such circumstances.
To avoid potential issues, be sure your policy and practice don’t limit PTO to a specific amount. That doesn’t mean employees should be allowed to take time off whenever they want. You always have the right to manage PTO to ensure deadlines and other business needs are being met. Also, if an employee isn’t meeting productivity standards because of excessive time away, you can deny requests for further time off.
Unlimited PTO policies can offer more flexibility and eliminate the need to pay out accrued time off upon termination, but as with all policies, the devil is in the details.
Mark Wiletsky is a partner with Holland & Hart LLP in Boulder, Colorado. He can be reached at 303-473-2864 or mbwiletsky@hollandhart.com.