Learn about the pros and cons of offering unlimited time off to your small business employees.
Overall, unlimited time off is one employee benefit that, like group health insurance, may cost you, but in many ways could potentially improve your small business’ company culture.
An unlimited time off policy allows employees to take any number of vacation and sick days as they need after getting manager approval. While this is a fairly uncommon employee benefit, the advantages of implementing an unlimited time off policy may include saving costs from reduced vacation liability, contributing toward a positive company culture, and helping to recruit and retain talented employees.
What does unlimited time off mean?
An unlimited time off policy, also known as discretionary time off and unlimited paid time off (PTO), typically means that employees are not allocated a specific number of days off. Instead, employees are allowed to use as many vacation and sick days as they need after getting approval from their manager and ensuring the completion of their performance goals.
While the specifications and limitations of unlimited time off policies vary by company and employer, you should know that this policy does not mean that workers can take time off or go on vacation unannounced.
What are the potential advantages of unlimited time off?
Unlimited time off could be a compelling alternative to a traditional vacation policy. The main pros of an unlimited time off policy may include:
- Cost savings – Many employees do not end up using their paid vacation days, which may lead to the considerable financial and administrative liability of having to pay workers for their unused vacation time. Depending on the circumstances and state laws, small businesses may be able to reduce the costs of accrued vacation liability by offering unlimited time off to their employees.
- Positive company culture – Employees may appreciate not only the greater flexibility that goes with an unlimited time off policy, but also the demonstration of trust shown to them by their employer. Such mutual goodwill and responsibility can be part of a positive company culture that rewards productive employees and respects work-life balance.
- Recruitment and retention – According to the Society for Human Resource Management (SHRM), only 1-2 percent of companies currently provide an unlimited time off policy. Offering this employee benefit, along with other popular benefits such as group health insurance, can be a significant differentiator for small businesses that want to keep their best employees, reduce turnover, and attract quality prospective talent.
What are the potential disadvantages of unlimited time off?
Due to the nontraditional nature of an unlimited time off benefit, it may be difficult to put this policy into practice for small business employees. The primary drawbacks may include:
- Implementation challenges – If a small business already has an established paid time off policy, it might be difficult to transition to an unlimited time off structure, especially if unused vacation time that has been accrued is not paid out to employees. Without schedule coordination, staff shortages might occur if too many employees are on vacation at the same time.
- Management expectations – This benefit requires a significant amount of responsibility and trust between the employer and employee to avoid misuse or abuse. As a result, offering unlimited time off may be more successful in a small business that already has a strong company culture, or if the company’s leadership and management set clear guidelines for employees.
- Occupational limits – Unlimited time off might not work as benefit for small business employees for all industries or types of jobs. Examples include non-exempt employees (who do not receive PTO) or unionized employees, or jobs which require being on the premises of the business during specific schedules, such as those in the retail or manufacturing industries.
The reality of unlimited time off for a small business
While there are many pros and cons that may go with an unlimited time off policy, the reality is that this perk remains a fairly uncommon benefit among small business employees.
If a company is concerned about the payout liability of accrued vacation time, it might consider exploring unlimited time off in the future. The per-employee liability from unused vacation days and paid time off was $2,226 in 2016, up from $1,898 in 2015, according to a survey from Project: Time Off. Ultimately, these concerns will depend on applicable state laws and individual company policies.
A small business may also think that employees may take more vacation time under an unlimited time off policy. Small business owners may be surprised to learn that the average U.S. employee has only taken 54 percent of his or her vacation time or paid time off in the past six months, according to a Glassdoor survey.
Ultimately, it may make more sense to stay with a traditional incentive model where more vacation days are awarded to senior or long-term small business employees. Under an unlimited time off policy, a company may consider setting out clearly communicated vacation time recommendations for their employees to give them a better sense of what is an appropriate amount of time to take off from work.
Overall, as a rarely offered and fairly recent benefit, many companies are still working out the gray areas of their unlimited time off policies. However, as long as there are well-established approval guidelines in place, unlimited time off may be a worthwhile benefit to consider for responsible small business employees.
This article is for general information and may not be updated after publication. Consult your own tax, accounting, or legal advisor instead of relying on this article as tax, accounting, or legal advice.