“Unlimited Vacation” Policies Gaining Traction

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In California and elsewhere, several companies have moved away from traditional vacation accrual policies to an unlimited vacation (or “honor system”) policy, and many more companies are seriously considering such a move. These new policies arguably give employees relatively greater freedom to take vacation as needed, subject to the demands of the business. Moreover, the process and burdens of accruing leave on the books and tracking absences are eliminated. An unlimited vacation policy may be an attractive option for employers seeking to simplify the administration of their vacation benefits and minimize costs, while at the same time providing employees with greater flexibility to manage their work schedules and personal time. However, implementation of such a policy has inherent challenges and is not without legal risk.

Employers are not required to provide employees with vacation benefits. Once they do, state law obligations are triggered, and they can be onerous. For example, California law prohibits both “use it or lose it” vacation policies and unreasonable caps on vacation accrual, requires vacation benefits to vest as labor is performed, and prohibits forfeiture of vested vacation benefits upon termination. These requirements significantly impact the administration of traditional vacation benefits.

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