Consider all the pros and cons of unlimited paid time off policies

By Tony Poland, LegalMatters Staff • While unlimited paid time off (PTO) policies may potentially benefit both employers and employees, it is a concept that needs to be carefully evaluated before being implemented or accepted, says Toronto employment lawyer Ellen Low.

Low, principal of Ellen Low & Co., says many organizations have been moving to unlimited vacation or PTO in recent years and it has proven to be an effective recruitment tool.

Because it essentially gives employees the freedom to set their time-off schedule, it is considered to be a goodwill gesture by employers to foster worker well-being and promote a culture of accountability and trust, she adds.

However, Low says while unlimited PTO has its advantages, it is important to examine how it works and its potential impact on the organization and its employees.

Seriously consider the pratfalls

“Before taking the leap, employers and employees should seriously consider the pratfalls of unlimited paid time off policies,” she tells LegalMattersCanada.ca. “In many ways, it is a great idea. It is designed to prioritize healthy and happy workplaces, keeping people engaged while potentially leading to higher retention.

“However, as an employer, it is essential to ensure your contracts are meeting Employment Standards Act, 2000 (ESA) minimums,” Low adds. “An organization must also clearly articulate what happens not only to any unused ‘vacation time’ when an employee exits but also have a robust accounting system to record used PTO time.”

She says at first blush, employees who may only have been offered a week or two of vacation time at other jobs may see unlimited PTO as an enticing perk. 

However, it has been reported that employers may have more to gain from the concept. It has also been suggested that workers could take less time off if they have limitless vacation days, Low says.

“With unlimited paid time off it has been shown that employees may spend more time at work than they otherwise would if there was a more structured policy,” she says. “For example, if you are employed at a job that is constantly busy, you may be less inclined to take time off knowing that your work must still be done.”

While a structured policy can dictate when you need to take a vacation and how many days you are entitled to, workers under the limitless PTO scheme essentially decide for themselves and may have to wait for a slowdown in their routine that never comes, she says.

‘This looked really good on paper’

“It is not that they don’t take any time off. However, they may be taking less than they would under a structured plan,” says Low. “From the employee side, I get inquiries from people who say, ‘This looked really good on paper, but now I’m not so sure.’”

For employers, it is crucial to give unlimited PTO serious consideration before making it policy, especially considering their obligations under Ontario’s Employment Standards Act, she says.

Employers are permitted to offer whatever vacation pay plan that best serves their organization as long as it meets the minimum standards of the ESA, Low explains.

She also notes that an amendment to the Act contained in Bill 149 that took effect in June changes the language of vacation pay provisions to clarify that a written agreement is necessary if vacation pay is paid any other way than a lump sum.

What should be of particular concern to employers, however, is their duty to accurately record vacation pay, says Low.

“There can be complications when dealing with an unlimited PTO situation because the employer bears the record-keeping obligations under s.12 of the ESA,” she says. “The employer must be able to demonstrate that the employee has had a greater right or benefit than what is prescribed by the Employment Standards Act for both vacation time and vacation pay. 

Accounting aspect could get tricky

“There is an accounting aspect to it which gets tricky because, at minimum, each employee in each year must get at least four or six per cent vacation pay, regardless of the amount of time that they take off.”

A problem can arise under a limitless PTO plan if the employer assumes the traditional record-keeping obligation no longer exists because there is no set amount of vacation to be used by employees, Low warns.

“What is supposed to be an incentivizing employee perk can effectively become an administrative nightmare for employers, and also employees,” she says. “It is important to remember that while vacation time can be waived, vacation pay cannot. Under any circumstances. I worry about unlimited PTO leading to Ministry of Labour complaints or possibly litigation.”

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Low says when an employee resigns or is terminated, they are entitled to all earned unpaid vacation when they leave. 

“That could mean that any vacation earned during a previous vacation entitlement year,” she says. “With an employer offering unlimited PTO, it can be challenging to determine what is owed.”

A court can use a failure to properly document vacation time and pay to rule in favour of a plaintiff in a lawsuit, says Low.

“Someone can claim they never took their vacation entitlement. But what if there is no record they did?” she asks. “If this was supposed to be paid time, what was the rate? Is it base salary? Is it all wages? How is it even calculating and then how far back in time can you go?

‘A judge may draw an adverse inference’

“Now a judge may draw an adverse inference from the employer’s failure to comply with ESA record-keeping obligations and accept or prefer the plaintiff’s evidence.”

Low points to the recent Ontario Superior Court ruling in Boyer v. Callidus, 2024 ONSC 20 to illustrate the danger of failing to properly document vacation time and pay.

Court heard Craig Boyer, a vice president of underwriting and portfolio management, was entitled to four weeks of vacation per year. 

He told court that during his employment his company knew he had been unable to take all his vacation due to his heavy workload and that the organization allowed him to carry his unused time forward.

Callidus countered it had a “use it or lose it” policy, and all unused vacation was forfeited at the end of each calendar year unless the employee had written approval. However, the company did not have a written contract with Boyer or any other communication to support its claim. 

Court awarded $93,000 in vacation pay

Ultimately the court found in favour of Boyer, awarding him more than $93,000 in vacation pay.

“The court effectively talks about the employee’s entitlement to vacation or pay in lieu as being a fundamental part of an employment contract,” says Low. “The court basically put the onus on the employer to make it a condition of the contract of employment that Boyer must take his vacation days or that he was precluded from carrying them over and make that clear to him.”

What should grab the attention of employers with unlimited PTO policies is that in Boyer’s case, it was clear how much vacation he was entitled to each year when determining his compensation, she says.

“How do you calculate what that might look like if you have an unlimited paid time off policy?” Low asks. “That is why employers need to be extremely cautious and think critically about what unlimited PTO might look like in application.”