In recent discussions with local high-tech executives, I realized that an accelerating number of small and emerging high-tech companies are discontinuing their traditional paid time off (PTO) policies based on a set number of vacation/holidays/sick days per year in favor of “unlimited” or “use your best judgement” PTO policies.

Well, “unlimited” is not really unlimited. In most companies, employees can take time off when they need it, based on their best judgment, as long as it doesn’t prevent them from getting their job done because they’re never there.  Some of the companies have suggested guidelines that managers can point to in case of possible abuse.

Also, this is not a completely informal or orderless process: these companies still require advance notice other than for sick days and several of them require formal approval if an employee wants to take 2+ weeks off in order to manage the company workload and customer service.

There are four main reasons cited for the abandonment of the traditional PTO policies and the adoption of an unlimited PTO policy:

1. increase in employee motivation
2. positive differentiation in competitive recruiting situations
3. reduction of administrative work
4. lower company cost and liability

Apparently, the flexibility offered by these “unlimited” PTO policies is seen by the employees as a plus to help accommodate what life throws at them in terms of personal events, the need for periods of rest with family and friends and to properly recover when sick. They feel treated like adults who can manage their time off without oversight.

Employers tend to highlight the unlimited PTO policies during interviews with prospective employees as a positive differentiation factor compared to other companies. The response by the candidates is generally of positive surprise and appreciation. They see these policies as a reflection of a positive company culture that values trust and personal responsibility.

On the administrative side, employers cite the relief by the HR departments of not having to chase down  employees to properly report the days that they actually took off as well as dealing with the challenge of maintaining accurate accruals and carryover balances.

When it comes to the impact to company cost and long term liabilities, I was struck by the findings of the companies that have been adopting these new PTO policies for some time now. Employees (in the high tech industry, that has a highly educated and responsible workforce), while appreciating the flexibility provided by these new policies, appear not to abuse them and tend to take the same number of days off no matter what the policy is.

The other interesting finding is the material savings that these new PTO policies can provide to a business, which may be one of the strongest reasons for their adoption by employers. Traditional PTO policies allow employees to carry forward unused vacation days into the next fiscal year. Even though most companies cap these accruals up to a maximum number of days that they can carry over, these numbers can add up to significant amounts across an entire workforce.

In M&A or some financing situations, the accrued PTO is treated as an actual cash liability that in some cases must be paid upon the sales of the company or its assets. For emerging companies, this can amount in a reduction of the company’s sales price by several hundreds of thousands of dollars. With most of these new “unlimited” PTO policies there are no accruals and vacation days are expensed as they are incurred. This eliminates any liability driven by unused paid time off from the balance sheet. It is no wonder then to see many employers giving these new policies a second look and being encouraged by their investors to do so.

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Please share your personal experiences and opinions in the comments section below, so we can learn more about the subject from one another.