Finance and Accounting Benefits of Unlimited PTO Policies
Before we get started, it's important for you to know that unlimited paid time off (PTO) is a very controversial topic in the workplace. Like many things, the outcome of such a policy heavily depends on the company's internal environment and execution. Today, I'm going to shed some light on why companies want this policy from a Company’s financial perspective ONLY. There are plenty of reasons to want or not want such a policy from a more people-focused perspective, but that is not what we are talking about today. I'm doing this not to justify any policy but to provide insight on some of the potential motivators and benefits of such policies so you can have more productive conversations on the topic while being able to see the other side’s perspective.
No PTO Liability on the Balance Sheet
When a company has a PTO policy that accrues and rolls over every year, it is very likely that the company is liable to pay out any unused PTO upon termination. Some companies may find themselves in situations where multiple employees are carrying three or more weeks of PTO, and those hours add up, especially if the company needs to payout the unused hours at the employee’s current rate (which could be higher than when the PTO was accrued in the first place). As a result of this treatment, a liability needs to be reported on the company's financial statements. This liability can impact certain financial decisions because the company will need to maintain extra cash reserves to pay people out and not draw from its line of credit whenever someone quits.
No Tiered Policies
At many companies, PTO benefits are partially dictated by the years of service that an employee has with the company. As companies grow and adapt to the modern working environment these policies can change, but there are companies out there that have an older policy that allows for someone who's been with a company for 15 years to earn more than a month of PTO every single year while at the same time giving a new hire only a couple of weeks. Keeping track of an employee's years of service and balancing benefits like these with the operation of the company can be burdensome. Switching to an unlimited PTO policy and setting rules for PTO approvals can allow for similar results without the tedious tracking and rebalancing of formal policies.
Less Maintaining Financial and HR Schedules for PTO Hours
When a company has an established PTO policy with accruals, carryovers, forfeitures, and payouts, it also needs a system to track all that information for both human resources purposes as well as financial reporting purposes. This means taking time and energy to see if any personnel are nearing the carryover limit, over the carryover limit at the end of the year, negative in their balance, and accruing the right amount of PTO each pay period. If a company has many employees with a complex PTO policy, this can be a lot of effort. When switching to unlimited PTO, there is nothing to be accrued or tracked. So long as the leave is approved in accordance with the policy there is no longer in need to maintain schedules of what you still owe employees. That being said, good HR departments will keep track of the amount of leave taken by individuals under the new policy and compare it to the old policy to see the changes in employee behavior and how it can affect the organization.
If your employer is thinking about switching to an unlimited PTO policy, it is very likely that at least one of these three reasons is an important factor. If you are in a position where you can give feedback to your employer on the switch, consider these three reasons for the sake of empathy. That way, you can understand the potential benefits in their eyes before bringing up any of your concerns. Also remember that these are not the only benefits to switching to such a policy, as many of the potential benefits (and drawbacks) surrounding employee behavior and productivity. Many would argue that the qualitative losses associated with downsides of employee morale and productivity when compared to a traditional PTO policy outweigh the benefits listed above. Each Company will be different, and now that you know some of the potential benefits from an employer’s perspective, you can have a more productive conversation around the motivations, expectations, and impacts surrounding an unlimited PTO policy.