Unlimited Vacation Policy: Does it Work?

According to the SHRM Employee Benefits Survey of 2020, approximately 7% of companies in the United States offer paid open or unlimited leave, up from 4% in 2016. Although this is still only a small percentage of companies, the unlimited paid time off (PTO) policy does seem to be increasingly catching on.

This is especially true for startups and tech companies, with notable examples including Netflix, Sony Electronics, and Evernote. And although the policy in many ways sounds equally enticing to employers (no pay for unused vacation time at contract end, for example) as to employees, there are downsides to it as well.

So the question is: Does unlimited annual leave work? And is it only a US thing or should European companies consider it as well?

Below, we walk you through what an unlimited paid time off policy is, the pros and cons for employers and employees, and how the policy works differently in the US and Europe. We also explain how to actually create the policy if you do decide it’s right for your business.

• What is unlimited paid time off and how does it work?
• The pros and cons of an open vacation policy
• Why it works better in the US than in Europe
• How to successfully implement an unlimited vacation policy for your business

What is unlimited paid time off and how does it work?

When we first heard of this policy we thought the concept sounded too good to be true for employees and too ridiculous for words for employers. Won’t all your employees just work three-day weeks? And take six-week holidays to lay on a beach in Bali while you pay for it?

Although this is technically possible, it turns out this is not quite how the unlimited vacation policy works. Unlimited paid time off in practice means that the employee has the freedom to take time off as and when they please, as long as they ensure the tasks assigned to them are done.

So even though it’s called unlimited time off… in reality the time the employee can take off is most certainly not unlimited.

A beautiful concept

The idea behind the policy is that an employee can take days off when they feel like they need to. This can be for whatever reason, from going on holiday or staying home sick with a migraine, to spending a day volunteering in the community.

This, in turn, increases the employee’s productivity at work. They feel less stressed and better rested as they can take time off work when needed and the employer gets a highly motivated employee in return.

Studies consistently confirm this assumption. For instance, one study found that employees were in a better mood and slept better for weeks after they had a vacation while another study showed how vacations positively affect workers’ health and well-being. Although the exact number of vacation days is up for debate, the fact that employees taking days off is good for business is well established.

As such, this policy is meant to create a win-win situation for both parties, resulting in a happier, healthier, and more productive workforce that achieves better results for the business. The employee is given full flexibility and responsibility to determine how many days they need. That’s why it’s sometimes called a ‘responsible vacation policy’ or ‘flexible vacation policy’.

How does an unlimited vacation policy work?

The exact details of how the unlimited vacation policy works differ from company to company and country to country. Whereas some businesses, such as Roku, give complete freedom to the employee, others have put some rules in place, such as a minimum number of holiday days.

In most cases, the employee will still have to check with the team and inform their manager about taking some annual leave. They also still track their days off in HR software, whether just so the team knows or to ensure the company still complies with country-specific vacation day regulations (more on this below).

Furthermore, many businesses still ask employees to categorise days off by reason for the time off. This means that a holiday is recorded separately from, say, compassionate leave.

So although it initially sounds like a crazy policy only suited for the coolest Silicon Valley tech companies, in practice the policy is often far less radical.

Companies with unlimited paid time off (PTO)

So what companies offer unlimited PTO? As mentioned, the vast majority of them that have implemented this policy have their headquarters in the United States.

However, as many of them have offices across the globe they tend to offer the same perk to their employees in other countries. This is also one of the reasons why the policy—although much more beneficial for the US labour market—is slowly gaining ground in other parts of the world as well.

Here is a list of some of the best-known companies offering the policy:

• Buffer
• Dropbox
• Evernote
• Glassdoor
• Hubspot
• Indeed
• Kronos
• Roku
• Sony Electronics

The pros and cons of an open vacation policy

Whether an open holiday policy works for your business will depend on multiple factors, such as your company’s culture, the industry you operate in, and the location of your office. That said, there are both general benefits and bad parts to the policy.

Advantages of an open vacation policy

As an employer, you want nothing more than a highly engaged, productive workforce. Because at the end of the day that’s what will make you the most money. And that’s exactly what the unlimited vacation policy promises you. Together with a few other benefits.

• It can improve productivity

Giving employees the freedom to create their ideal work-life balance will make them feel less trapped and more in control of their own lives. They decide what’s best for them, which in turn will also be better for you. It can increase employee happiness, engagement, and, ultimately, productivity.

• It’s less hassle for your HR department

This point may differ from company to company but, in general, this policy results in less admin for your HR department. They don’t have to check with every holiday request if there is a legitimate reason for the request. Similarly, they don’t need doctor’s notes or other documents for proof anymore. This means they save more time and you save more money as a business.

• It saves you money when employees leave

When an employee leaves the company they generally have a certain amount of built-up vacation days. As the employer, you have to repay them for any days not taken. With the unlimited holiday policy, the employee doesn’t accrue vacation days, which means you don’t owe them anything at the end of the employee contract.

• It’s a great way to attract new employees

To many (younger) employees this policy sounds like the dream perk. In fact, a MetLife study from 2019 showed that 72% of workers in the US expressed interest in the policy. Adding this to your list of company benefits can give your business a solid boost in talent acquisition and work as a strong incentive for future hires. You can promote it as something that sets you apart from the competition and use it to paint your brand as a great place to work.

• It shows you trust your employees

By letting your employees decide for themselves you show you trust them to make the right decisions for them, the team, and the company as a whole. This increases empowerment and ownership, which will lead to stronger, better functioning teams.

• The policy is rarely abused by employees

Generally, the first thing employers think when hearing about this policy is that employees will straight away abuse this freedom. Looking at companies who have implemented it, however, shows the opposite to be true.

In many cases, such as at Buffer, the policy led to employees actually taking fewer days off than before the implementation of the policy.

Disadvantages of unlimited annual leave

Sounds good so far, right? But before you get too excited about implementing this policy you need to be aware of why unlimited vacation is bad in some cases (when not done right).

• The policy is often underused, if anything

To pick up where we left off with the advantages, many employees end up using fewer holiday days. And no, that’s not something to look forward to. Employees need vacation days to perform better at work. That’s the whole point of this policy in the first place. So if your employees don’t use it and actually start taking fewer days off, you aren’t helping them or your business.

• Employees feel pressure and guilt

Employees tend to feel guilty for taking time off. With a constant workload there simply never seems to be a right time for it. People feel like they’re letting the team or higher management down by not coming to work.

So if employees don’t have a set number of days per year that they are simply forced to take off, they often end up taking less time off to not feel that guilt. And constant workload and pressure further fuel the feeling that “maybe now is not the best time for it”.

• High burnout potential

As employees become reluctant to take time off, they push themselves more than they otherwise would. And this can result in unhealthy situations with a higher chance of burnout.

So instead of a highly productive team of happy employees, you end up with an overworked and tired workforce. Not quite the point of the policy!

• Not all employees think it’s a good idea

Although you might think you’re giving your employees the best perk ever there will be employees who won’t be thanking you any time soon.

By taking away a clearly defined number of vacation days for everyone you may inadvertently create a workplace culture where vacation time becomes an element for competition. The overachievers will try to impress higher management by taking as few days off as possible, supposedly showcasing their great work ethic.

For many employees, this won’t be the type of work environment they want to work in.

• There is still the possibility of abuse

Although rare, as explained, there is of course still the possibility of the policy being abused. Unfortunately, this is a reality employers face with almost any type of company policy. So although in theory, this policy offers complete freedom, you probably want to add some rules to prevent abuse.

• Country-specific rules might make implementation more difficult

If your company operates in multiple countries it might be difficult to create a fair unlimited vacation policy that works the same in all countries. Each country has their own rules when it comes to statutory paid time off. And that’s why the open policy works better in some countries than in others.

Why it works better in the US than in Europe

What works in one country doesn’t have to work in another. In particular, the open holiday policy has much more appeal for employees in the US than it does for employees in Europe.

In the US, paid time off is not a statutory right. This means that the number of vacation days an employee receives depends on the company they work for and the contract they have with that company.

In general, the longer an employee works for a company the more annual leave they will accrue. But even after 20 years of experience the average worker was still only given 20 paid vacation days, with the number for workers with 1 year of service being just 10 days. Compare this to the EU where four weeks is the statutory minimum (regardless of years of service) with many countries offering 25 or even 30 days on average.

Now, say you would introduce the unlimited holiday policy in your company. As we’ve seen earlier, a lot of employees will end up taking fewer holiday days as a result. But in the EU this wouldn’t be possible due to the statutory minimum.

That’s why companies like Indeed offer a different holiday policy in countries in Europe than in the US to comply with countries’ statutory paid time off regulations. This also means that it wouldn’t save your HR staff as much time, as they are still legally obliged to check that all workers take enough holidays every year.

Furthermore, the monetary incentive of not having to pay your employees their accrued holiday days when they leave the company wouldn’t apply in European countries either. Due to the statutory minimum, you would still have to pay employees for any statutory holidays not taken.

Add to this several other country-specific regulations that might provide further gaps in the profitability of the policy, such as statutory sick pay, and you end up with a far less appealing company policy. No wonder that unlimited time off is still very much a US thing!

That said, this does not mean it can’t work for countries outside the US. And as an employer, you might still be interested to try and implement it in your company.

How to successfully implement an unlimited vacation policy for your business

There is no clear winning formula for implementing this policy and a lot of it will depend on where you are based. That said, we’ve collated a few learnings from companies who’ve tried and tested it to see what works best.

• Create a clear company policy

You want to write a clear policy and share this with your employees as you implement it. This way you won’t leave anything open to interpretation, reducing the chance of confusion or abuse.

• Establish a clear minimum

It’s of vital importance (literally) that employees take enough time off in the year. That’s why an important part of an effective unlimited time off policy is to set a minimum.

Whether this is sticking to the regulatory minimum in the country you operate in (e.g. in countries in the EU) or implementing a different minimum that works best for your business. This prevents the chance of burnout and helps keep your workforce healthy and well-rested.

• Let employees still track their days off

Even if you are based in the US and you don’t necessarily have to provide paid time off, we still advise you to let your employees or HR department track their vacation days. This ensures that everyone has an eye on how many days people are taking and ensures nobody is underusing or abusing the policy.

• Keep a requesting system in place

You don’t want employees to just announce to the team on Friday afternoon that they’ll be out of office for the next two weeks.

Instead, implement a process for employees to request time off in advance and ensure that this is always communicated clearly within the team and with any relevant stakeholders. This way, the team won’t run into surprises due to people taking unexpected time off.

• Encourage employees to take time off

Especially in the beginning, your employees might be hesitant to take time off. Try to encourage them and send out specific reminders to people who aren’t making the most of the policy.

• Show them how it’s done

If the higher management only takes 15 holidays per year the rest of the employees will feel pressured into following suit. Instead, lead by example and show your employees how it’s done.

• Promote open communication

To make a process like this work for all employees, as well as the business as a whole, everyone needs to feel comfortable to openly communicate. This may require quite a cultural shift from how your organisation operates at the moment, but it’s crucial to make sure the policy works for all parties involved.

• Embed it in your company culture

To effectively implement this policy you need to ensure that you set clear rules. But making the most of it goes beyond just writing a policy. Your company culture has to adapt to this way of working and your collective mindset has to truly embrace it to make it work.

If you implement this policy without an employee-focused culture that promotes trust and personal responsibility you will just be setting yourself up for failure.