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Unlimited Time or Unlimited Trouble? San Francisco Startup Offers Ex-Employees Cash to Avoid Suits Over PTO Policy Problems

Published by on January 14, 2016

A high-flying Silicon Valley startup recently discovered that “unlimited” does not necessarily mean “unearned” as a result of its careless implementation of a vacation policy that could be questionable under California law.

A high-profile California technology startup that provides online access to insurance and human resource management solutions for small businesses, has found itself in the ironic position of offering to pay cash to former employees to avoid legal liabilities associated with a confusing vacation and Paid Time Off (PTO) policy.

Zenefits, the fast-growing technology company, began a cost-cutting effort to improve financial results in early 2015. One step the company took was to modify its own corporate time off and vacation policy to further clarify that the company would no longer have to pay employees for unused vacation time.

Former employees claimed that they were eligible to be paid for unused vacation pay before the change in the company’s Paid Time Off (PTO) policy, but the company claimed that it always had and continues to maintain an unlimited vacation policy, and therefore employees don’t accrue vacation days at all.

It is widespread practice in Silicon Valley for startups to offer “unlimited” personal time off and vacation policies, in part to avoid the time and expense associated with tracking time off accrued or taken, since they claim that unlimited PTO is a benefit given by the employer, rather than a benefit earned by the employee. However, California law is not (yet) clear on the question of whether “unlimited” always equates to “unearned” when compensation is considered at the time of an employee’s departure.

Significantly in the case of Zenefits, the company’s employee handbook in part used language that implied the presence of PTO as an earned or accrued benefit, and some former employees indicated after their termination during a recent downsizing that they were, indeed, owed monies due to presence of the confusing policy.

In response, the company chose to provide selected former employees with the option of receiving a one-time cash payment in return for the ex-employees signing an agreement that waives and releases any potential claims that the ex-employees may have had about wages including vacation or PTO.

Ironically, Zenefits itself provides somewhat vague guidance to its own customers on the matter of unlimited vacation policies in California and how they impact PTO obligations, ultimately suggesting that employers “Google unlimited vacation policy and your state’s name” to locate a more definitive answer.

Welter Insight:

While it appears that unlimited vacation policies of this kind are probably permissible under California law, employers do face unique risks in choosing to use them — and depending upon how the policy is drafted and implemented, it may be found to be noncompliant.

For one, the policy must be applied equally — i.e. if one employee is approved for an extended absence under the policy and another is not, this creates the risk of a legal exposure.

In addition, unlimited policies can leave the employer unprepared to respond when legal issues arise that require records that the company didn’t bother to keep — precisely because it felt that doing so was unnecessary due to the presence of the ‘unlimited’ policy.

Finally, companies that change from traditional to unlimited policies have to choreograph the change very carefully and consider the risks of creating new liabilities.

California law is clear that accrued, unused vacation time is to be recognized as earned wages which cannot be forfeited. These wages must be paid to the employee, if the accrued time is not actually used, on or before the last day of employment. Cal. Labor Code Section 227.3.

This is why “use it or lose it” policies are generally found to be noncompliant with California law. Therefore, a company may need to fund a pay-out process during the transition to an unlimited policy in order to ensure that all accrued wages have been disbursed effectively prior to the new policy coming into effect.

Image Credit: giueseppemilo (Flickr @ Creative Commons)
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