Will an Unlimited Vacation Policy Work for Your Small Business?

A funny thing happened when MammothHR decided to offer unlimited vacation time to their employees: They took the same amount of time off as they did the previous year, when there was a limited vacation policy.

Nonetheless, Mammoth’s unlimited vacation policy ranked highly among its employees. Why?

Because it conveyed the trust the company had in its employees. Could unlimited vacation time work for your small business? Here’s what the research says, how you can implement a plan, and how to get your employees to embrace it.

Why Implement an Unlimited Vacation Policy

Here’s the issue: Employees do better work when they take vacation, but under the current vacation and PTO programs at most businesses they don’t take as much time off as they should. Would an unlimited vacation policy pave the way for your team to take more restful time off?

Nick Tommarrello, co-founder of Wefunder, has nine employees and wants them operating at their best. That means taking time off now and then. “I believe people do their best creative work when they have time to unwind,” Tommarrello says.

An ongoing study by Project: Time Off found that Americans took 16.2 days of vacation last year, down from an average of 20.3 days in the years between 1978 and 2000. U.S. workers are taking fewer breaks today than the generations to have that preceded them.

Multiple studies say that’s a mistake; time off increases productivity.

In a 2013 survey of HR managers conducted by the Society of Human Resource Management (SHRM) for Project: Time Off , 77% said that employees who take most or all of their vacation time are more productive in their jobs than those who do not.

A growing number of businesses large and small are combating the trend to skip vacation by implementing unlimited vacation policies.

Should you join them?

Unlimited vacation sounds great in a job ad and can be very appealing to new hires. And it also instills a sense of loyalty in your current employees. But how will it affect the day-day functioning your business? Is your business even set up to support that kind of perk for employees?

Here are a few questions to consider:

1. Are you prepared to deal with an employee who abuses this perk? You may want to update your employee handbook and ensure that there are some guidelines around “unlimited” —like not taking off 6 weeks in a row for, instance.
2. Are you operating in a retail or service environment, like a local store, restaurant or salon? Chances are unlimited vacation time will not work for you or your business.
3. Will it be OK for employees to be out at the same time?

Giving your employees unlimited vacation is essentially relying on the honor system that they will not take off six weeks in a row or dip out with little notice during your busy season. You may get a much more productive team when they are in the office, but you do still have to have a plan in place to support your business goals and customers when they’re out.

Have You Hired For Unlimited Vacation?

Relying on the honor system can have its drawbacks. Just ask Jamal Asskoumi, founder of London-based LeagueofTrading.com, who says his two key engineers began abusing the company’s unlimited vacation policy from the moment he introduced it. Both left for a six-week holiday last summer — barely a year into the business’s existence.

“In [a 10-person] team, each person is essential for the running of a business and when they are missing it can really take a toll,” Asskoumi says. In this particular case, LeagueofTrading.com suffered technical errors and downtime, which led to two days of lost sales and the end of its unlimited vacation policy.

In its place, Asskoumi says that he now grants his five remaining full-time employees — the two engineers were let go — six weeks off annually. But all of this time cannot be taken at once. The difference is that all cannot be taken in one go as the former engineers did. Vacation requests are pre-approved and structured to make sure that jobs are properly covered.

At Wefunder, employees are responsible for making sure work is covered before taking leave because there’s no formal process for requesting time off.

“They use their own judgment,” says Wefunder’s Tommarrello. “For example, we have two very critical engineers and they generally don’t take off at the same time. They just figure it out among themselves.” And, more importantly, they don’t need to ask for permission to be away.

You’d think Tommarrello would see that as a risk, but he doesn’t. Rather, because all nine of Wefunder’s workers went through what he calls “an intensive hiring process” everyone knows what he expects, and in return, he knows what he can count on from his team. “I trust them,” he says. Hiring well allows Wefunder that luxury.

The Difference Documentation Can Make

While protecting against abuse is the most obvious reason to document an unlimited vacation policy, preventing confusion can be just as important.

At Juris Digital, a 10-person digital marketing agency that serves law firms, employees conflated the company’s unlimited vacation policy with the company’s prior policy for granting “work at home” time. Going unlimited had suddenly made it difficult to know who was just working at home and who was taking time off.

“Sometimes people would mix the two up or tell us one while really taking the other,” founder Casey Meraz says. That was 2013. He’s since developed and documented a formal policy where managers must first approve time off. Employees seem to appreciate the structure; Meraz says that most take at least two weeks off while others take as much as four weeks.

“It … really gives our employees more breathing room in the work place, which we have found to be very effective. It’s also been a great morale booster,” Meraz says.

“Unlimited” Usually Means Three Weeks

While the words “unlimited vacation” read great on a job ad, in reality, many workers feel uncertain about how much time [off] is really okay. Is four weeks OK? What about six? Without a firm policy or at least some guidelines in place, employees could find themselves overreaching.

Evan Liang is CEO and co-founder of LeanData, a 30-person maker of analytical software that’s had an unlimited vacation since its founding almost four years ago. He had to speak up recently when one employee was found taking significantly more time off than the average. In response, Liang says he had to “set a basic guideline that most companies have 2-3 weeks of paid vacation.”

LeanData uses HR software from Zenefits to track how much time employees take off. Liang says the average is about three weeks of vacation per employee per year. Wefunder’s Tommarrello says “the majority [take] under two weeks” of annual time off. Unlimited vacation doesn’t necessarily lead to more breaks for those employed by small businesses.

More than Morale at Stake

While LeanData’s Liang admits there are attractive cultural benefits to unlimited vacation, financial reasons are what drove him to implement it at his company.  Specifically, the CEO dictated that teams take big chunks of time off at the end of the year in order to reduce non-cash expenses on the company’s income statement and “boost” profits.

“As I was running product, half of my development team took the first half of December off. The other half took the second half of December off, so we got nothing done for the whole month … just because I wanted to reduce a non-cash related liability. I just didn’t want to repeat that,” Liang says.

By going to an unlimited vacation policy a company is no longer required to accrue and pay out unused days when an employee quits or is laid off, thus eliminating a potentially significant liability on its balance sheet. “Unlimited vacation eliminates the need for accrual and the associated “unnatural acts” required to unwind it”, Liang says. LeanData is easier to manage as a result.

Culture Matters

Whatever your vacation policy looks like — formal or informal, with or without limits — employees will take their cues from management. The more time off leaders take, the more empowered employees will be to take time off as well. Knowing this, Netflix CEO Reed Hastings takes six weeks off annually to “try and set a good example.”

At LeanData, Liang says that he’s mindful that his company exists in the entitled environs of Silicon Valley, where lunch is catered and big signing bonuses are common. Local recruits may not be demanding unlimited vacation, but they’re looking for more than average.

“I would think if we said to folks that we offer two weeks of vacation, that would probably be a negative,” Liang says. Unlimited vacation is his way of competing for talent. Small businesses in other industries or other regions may not feel as pressured.

Either way, the evidence suggests that some form of unlimited vacation is here to say. Know your team and your market before deciding whether it’s worth implementing at your small business, and then document accordingly.

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