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Why unlimited vacation is basically a no-brainer for employers

(AP Photo/Audrey McAvoy)

It sounds like the ultimate example of corporate beneficence: Take as much vacation as you like, as long as you get your work done. And in the right company, with the right culture and the right manager, such "unlimited vacation" policies could be a pretty fabulous perk.

Yet they're not being offered purely out of altruism. The obvious benefit to companies is that the promise of such flexibility helps them attract and retain more employees, setting them apart from more traditionally minded, we-don't-trust-you employers.

But unlimited vacation policies also have another benefit for employers that gets far less attention: a financial upside. When employers stop doling out a set amount of vacation days, they no longer have to pay out unused days if workers quit or get laid off from the company.

"That’s a very large financial advantage to the employer," says Carol Sladek, a partner who leads work-life consulting at Aon Hewitt. "They eliminate that financial liability."

While unlimited vacation policies are still rare in Corporate America—just 1 to 2 percent of companies offer the benefit, according to the Society for Human Resource Management (SHRM)—the perk is starting to seep into industries outside Silicon Valley, where it first became popular. Earlier this year, about 30,000 of General Electric's more senior U.S. salaried employees became eligible for its "permissive time off" policy, which doesn't set a limit on the number of days they can take off.

And last week, the accounting and consulting firm Grant Thornton touted its switch to a similar approach. "We believe our flex time off policy is the model for the professional services firm of the future,” the firm's chief culture officer said in the announcement.

Under a traditional vacation policy, employees either accrue vacation time over the course of the year, or start off the year with a bank of days that are owed to them. If they leave the company before they have used up all the time they accrued, employees are typically paid out their unused time. Not so at companies with unlimited vacation policies—they no longer have to carry any liability on their books for what goes unused.

Sladek says companies have been showing more interest lately in the concept, particularly for their executive or professional employees. "For whatever reason, there's been an increased amount of scrutiny in the financials associated with paid time off," she said.

That could be because, in today's hyper-charged work culture, people are taking less and less time off, leading to bigger and bigger piles of accrued time on companies' books. The U.S. Travel Association reported late last year that the average worker took 16 days of vacation in 2013, down from about 21 days in 2000.

Or it could simply be because there's a lot of money at stake. Other research from USTA's Project:Time Off initiative, conducted by the economic analysis firm Oxford Economics, looked at SEC filings for 114 public companies. It found that the average vacation liability per employee is $1,898, and that U.S. companies carried $65.6 billion in accrued paid time-off costs forward on their books last year.

To deal with that liability, companies have several options, says Adam Sacks, president of tourism economics for Oxford Economics. They can actively encourage people to actually use their vacation time. They can make their plan a "use it or lose it" program, where days won't carry over from one year to the next (something roughly a quarter of U.S. companies do now). Or they can adopt an unlimited vacation policy.

"The policy itself encourages employees to take time," Sacks said, "because effectively, they can't get the time back if they don't use it."

Grant Thornton said its new policy, which will go into place Nov. 1, should accomplish multiple goals: incentivizing people to take more time off and to balance their professional and personal lives, while also reducing financial liability and providing a tax benefit for the partnership. "As a company without products, factories or equipment, this financial benefit will be reinvested in our people," a company spokesman wrote in an emailed statement. "While the policy change does benefit the company financially, the real benefit is the long-term ability to attract and retain the best and the brightest talent."

To make the transition to the new policy, employees will get a lump sum payout of any accumulated vacation time at the end of the year and then will not continue to accrue time off after that.

"There really isn't anything wrong with there being an upside for management as long as management is not applying any smoke and mirrors here," said Bruce Elliott, the head of compensation and benefits at SHRM. "If you're going to implement this, you better be prepared to live up to it."

And that, of course, is the key challenge for any company adopting such a policy. A few have already reversed course after finding that workers needed better parameters or were actually taking less time off under the anything-goes approach. That's why HR experts stress the importance of giving some kind of guideline about how much time away is expected, and clearly explaining the multiple motivations behind the switch.

"The devil here really is in the details of the communication," Sladek says. "It sounds like a great idea, and it's very much a win-win for organizations—as long as people really understand what the benefit is both for the employee and the employer."

Read also:

The catch of having an unlimited vacation policy

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