Court Explains When Employer Owes for Vacation Time Under an Unlimited PTO Policy

As we’ve written about here, Massachusetts employers must pay their employees for accrued and unused vacation time on the day they are fired or, if they resign, as part of the next pay period. Employers have begun to roll out unlimited PTO policies as a way to avoid this obligation. Under these policies, employees are entitled to take as much vacation as they want, do not technically accrue a right to a fixed amount, and, as a result, are not technically owed vacation when their employment ends. Not surprisingly, plaintiff’s attorneys have begun to challenge this practice. As explained below, a California court recently addressed this issue in interpreting California’s vacation pay law, a law that closely mirrors Massachusetts’s.

DOES MY MASSACHUSETTS EMPLOYER HAVE TO PAY ME FOR UNUSED VACATION UNDER AN UNLIMITED PTO POLICY?

The short answer is ‘maybe.’ On April 1, 2020, a California appellate court was asked to answer 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 Labor Code section 227.3 when her employment ends? Or does section 227.3 apply only to policies providing a fixed amount of vacation that accrues over time?" McPherson v. EF Intercultural Foundation, Inc., April 1, 2020, (Cal. App. 2nd).

In that case, there was no written policy regarding vacation time, but the employees understood that they could take PTO in the off-season (they worked in education). The lower court ultimately determined that the policy was not for unlimited PTO, but, instead, had an implied cap. The appellate court affirmed that reasoning but went on to discuss unlimited PTO policies, even though the lower court found the policy in question was not unlimited.

According to the court, an unlimited PTO policy may not trigger vacation-pay liability when the policy, in writing:

1. 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;

2. spells out the rights and obligations of both employee and employer and the consequences of failing to schedule time off;

3. in practice allows sufficient opportunity for employees to take time off, or work fewer hours in lieu of taking time off; and

4. is administered fairly 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.

This is helpful guidance as to how a Massachusetts is likely to answer the same question. Employers using unlimited PTO policies, assuming they don’t have to pay out for unused vacation at separation, should take this guidance into account.