We have a new CFO who is upset by the huge amount of accrued vacation we have to carry on the books. We have a cap of two times the annual accrual. He says most high tech companies like ours have unlimited vacation plans and that this eliminates the need to carry accrued vacation. Is this a new trend? And can we implement a new unlimited vacation policy immediately?
Your question touches upon several issues related to vacations: (1) how does an unlimited or honor vacation plan work; (2) what are the legal issues it presents and (3) what do you do with the existing accrued vacation. There have not been any lawsuits or legislative changes that directly address these issues.
An unlimited vacation policy provides that there is no accrual of vacation time and employees can take vacation as desired subject only to the requirement that their job is satisfactorily performed. The proponents of these policies agree that employees must take time off if they are to sustain high performance and an unlimited plan fosters an environment of respect, trust and accountability. Originally, the trend was to use these policies only for exempt employees who are theoretically charged with managing their own time effectively. Employers of professional employees whose performance can be measured quantitatively, for example, lawyers and accountants who bill by the hour, sales persons with set quotas, or engineers who work to build a completed project, have found that these policies were administratively easier. An accountant who is required to and does bill 2000 hours annually arguably can perform satisfactorily when taking either 6 days or 30 days of vacation so long as he remains available to service clients in a timely fashion.
Your CFO is correct that many high tech companies have also switched to unlimited vacation policies. However, most of those companies very actively monitor employee contributions and performance. Goals and timetables are set and consistently enforced and employees must actively and responsibly manage their work to account for desired vacation time. The challenge for many companies is that management does not perceive that employees will be responsible and therefore they seek to implement “guidelines” on the unlimited vacation policy, thereby setting, officially or unofficially, the reasonable amount of vacation employees should take. For example, a manager might tell his employees that they should take one week of vacation in the first year and 2-3 weeks of vacation thereafter, concepts more appropriate for traditional earned vacation policies. While there have not been any court decisions on these new policies, employees can expect legal challenges if their unlimited policies become limited by guidelines and practices.
Two other challenges presented by unlimited vacation policies are coordination with paid and unpaid leave benefits (i.e. FMLA, pregnancy, workers compensation, military leave) and discrimination claims due to an unfavorable impact on groups of employees. Employers must enact policies to eliminate inconsistent applications of leave policies and vacation approvals to minimize the risk of claims that leaves are being discouraged or certain classes of employees are receiving preferential treatment.
With respect to shifting from a capped vacation plan to an unlimited vacation policy, you did not say what state you are in, but in many states whether by statute or under a contract theory, an employer may not take away earned but unused vacations. In the states that include vacation in the definition of wages, such as California, Illinois and Maryland, you will have to set up a mechanism for using up the accrued time or paying it out prior to making your proposed changes to your current vacation policy. In other states, under statute or contractual theories, you must give advance written notice of your policy with respect to vacations.
In summary, whether an unlimited vacation plan is right for your company depends on the foregoing factors. An informed decision will require a review of the laws of all the states in which you have affected employees, and you will need to talk with your accountant to see if your design actually eliminates the need to pay out unused vacation on termination such that they will allow the company to eliminate accruals for financial reporting purposes.