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Ask the Hotline | New Options for Vacation Policy

Posted on April 4, 2023

Question

My company is considering altering its long-standing vacation policy but we’re not sure the best way to do it or what options may be available. Do you have any information that would help us consider some different vacation policy options? What are the potential issues?

Answer

There is no state or federal law mandating the type of vacation policy an employer must offer or whether the employer must offer vacation time at all. Employers are free to establish the vacation policy they wish within some parameters discussed below.

According to the Massachusetts wage and hour law (MGL c.149 §148), if an employer offers any holiday or vacation payments to an employee as part of an oral or written agreement, these payments will be considered wages. The wage law also states that any accrued but unused vacation pay must be paid to an employee at the end of his/her employment.

If the employee voluntarily resigns, the owed vacation pay may be included in the final wages on the next regularly scheduled payday. If the employee leaves due to an involuntary termination, the employee must receive all wages, including owed vacation pay, on the final day of employment.

The final payout requirement has presented a challenge for some employers over the years due to the challenge of making the final payment on the day of an involuntary termination. The statute is clear, and the Supreme Judicial Court has interpreted the law to mean that any final wage payments made after the final day of employment violate the law and subjects the employer to potential enforcement action by the Attorney General’s Fair Labor Division (FLD) or treble damages plus attorney’s fees, if the former employee brings a successful private right of action. Employers are urged to pay any outstanding wages, including unpaid vacation, on the final day of employment or alternatively extend employment another day to ensure the final wages can be delivered on time.

The FLD is the state agency responsible for the enforcement of Massachusetts wage-and-hour laws. In 1999, the FLD issued a two-page advisory to explain how the agency interprets the law as it applies to vacation and what constitutes a compliant vacation policy. The guidance discusses several topics including:

  • affirming that vacation payments are deferred wages,
  • describing how employers should treat the accrual of vacation time,
  • clarifying that no vacation policy can require forfeiture of earned vacation time and
  • explaining how an employer should handle prorating vacation time.

Other information about Massachusetts law as it relates to vacation policy is available here.

Alternative vacation policies

While most companies have vacation policies that are based on length of service (e.g., two weeks per year in years 1-5, three weeks in years 6-10, etc.) there are less traditional ways of providing time off to your workforce.

Unlimited vacation policy

One of the newer trends is the emergence of the unlimited vacation policy. While a quick internet search may find multiple definitions of unlimited vacation policy, we’ll define it as a policy permitting employees to take as many vacation days as they want, as long as they complete their assigned tasks.

Like many new ideas, it comes with promises of dramatic improvements to the workplace.

Some examples of benefits include it being a valuable recruiting tool because it suggests a workplace culture of trust or autonomy that many employees and applicants value. It may also foster an environment that seeks to avoid burnout and focus on meeting objectives instead of focusing on years of service to accrue vacation time. An unlimited vacation policy also has significant benefits for an employer. For example, if an employee does not accrue vacation, then there is no need to pay out unused vacation days at the end of the employment relationship.

But like many new ideas, unknown risk looms.

Because the concept of unlimited vacation is relatively new, there are few court cases and legal articles on the topic. That means that it is not yet clear where the legal minefields may be. Any change to a vacation policy is likely to cause some consternation among employees if they fear that something is being taken from them. Consider the issue of no payout of vacation time at the end of employment. That has been the practice in Massachusetts for decades so anything that alters that will likely be viewed with suspicion and may lead to a legal challenge.

Another alternative is Flexible Time Off.

Flexible Time Off (FTO) is a time-off policy that combines vacation time, sick time, and personal time in a basket of paid time off (PTO) days. In most cases, the hours that employees take off do not have to first be earned or accrued. Rather, the time is allocated at the start of the year. Employees may use their flexible time off for vacation, sick leave, personal days or other reasons that would otherwise cause them to take time off from work.

Any company adopting a policy like this would have to make some decisions. Will the FTO provide an unlimited number of days, or be tied to a set number of days employees can use each month or year? The most significant aspect of flexible time off is that the total time is bundled together. So, rather than receiving five days of sick leave and 15 days of paid time off per year, an employee would instead receive a total of 20 flexible times off days that they can use as they please.

Flexible time off works by offering employees a greater amount of flexibility regarding their time off from work. This increased flexibility allows employees to enjoy their allotted or unlimited time off as needed without the pressure to “use it or lose it” or to characterize a desire for time off as a wellness or mental health day just to get a day off from work.

Typically, employees seeking to use FTO will need to get management’s approval for the time they plan to take off. Management may also limit the maximum amount of time used at once and limit the number of people in a department that may take time off at once.

Flexible time off is not paid time off.

Some of the differences include:

  • A traditional paid time-off policy requires employees to accrue days throughout the year. Flexible time off is typically provided upfront making accrual unnecessary.
  • Because it is not accrued, flexible time off is not typically paid out if an employee leaves or it is unused at year-end.

Furthermore, FTO is different than unlimited time off in that employees are given a set number of days to be used as time off.

Case Summary

There is one California case from 2020 that may provide some insight as to what would happen if Massachusetts courts considered an unlimited vacation time policy. A decision from another state’s court matters because when a state court considers an issue for the first time, the court often looks to other states that have addressed the same or similar issues.

In the 2020 case, a California appeals court considered the following question:

  • When an employer’s policy allows an employee to take an unspecified amount of paid time off without accruing vacation time, does the employee’s right to that paid time off vest so the employer must pay her for unused vacation under California law, or does the law only apply to a vacation policy with a fixed amount of time that accrues over time?

The California court ruled under the specific facts of this case that the company’s “unlimited” vacation policy had an implied cap and so was subject to the payout rule. The appellate court went on to discuss unlimited PTO policies in general. In doing so the court offered employers some bright lines about policies that would avoid the payout requirement. According to the court, an unlimited PTO policy may not trigger vacation-pay liability when the policy, in writing:

  • clearly provides that employees’ ability to take paid time off is not a form of additional wages for services performed, but perhaps part of the employer’s promise to provide a flexible work schedule—including employees’ ability to decide when and how much time to take off;
  • spells out the rights and obligations of both employee and employer and the consequences of failing to schedule time off;
  • in practice allows sufficient opportunity for employees to take time off, or work fewer hours in lieu of taking time off; and
  • is administered so that it neither becomes a de facto “use it or lose it policy” nor results in inequities, such as where one employee works many hours, taking minimal time off, and another works fewer hours and takes more time off.

Massachusetts employers regularly include a provision known as “use it or lose it” in their vacation policies. While such a policy is legal in Massachusetts, employers should be aware that at least four states, California, Colorado, Montana, and Nebraska ban such policies. Any employer operating in multiple jurisdictions needs to check to see what the state of the local law is in fashioning its vacation policy.

Final Thoughts

Making an adjustment to a long-standing vacation policy is going to raise concerns among existing employees that they may be losing benefits to which they are accustomed. The company should carefully weigh its options prior to making changes, especially if a company is going to make large-scale changes such as adopting an unlimited or FTO policy.

The employer must also carefully consider the timing of the transition to the new policy; if vacation is routinely granted or accrual begins in January, it is best to implement the new policy at that time.  Any employer considering such a decision may want to consult with their outside counsel or the AIM Employer Hotline to consider the different options.

AIM members who wish to discuss this, or other human resources issues may call the AIM Employer Hotline at 1-800-470-6277.