Is Use It or Lose It PTO Right For Your Business?

Use It or Lose It PTO is a leave management policy that has come under a lot of scrutiny in recent years.

For businesses, Use It or Lose It can save a lot of money – just ask the city of Jacksonsville, who paid out more than $400,000 to an employee in 2015 in unused PTO.

However, there are questions over whether Use It or Lose It is fair for employees, and by attempting to save money for the business, you may end up driving away your best employees.

Keep reading to learn all you need to know about Use It or Lose It PTO, and whether it’s the right approach for your PTO policy.

Contents

What is Use It or Lose It PTO?

“Use It or Lose It” PTO is a policy in which employees must use their allocated PTO within a specific time frame (often a calendar year) or lose it.

Any unused PTO at the end of the period is forfeited and does not roll over into the next year.

Is Use It or Lose It Legal?

Depending on your company’s location, Use It or Lose It may or may not fly with local labor laws.

Currently, four US states ban Use It or Lose It vacation policies completely:

California
Montana
Colorado
Nebraska

In each of these states, vacation time is considered to be a form of wages, and once earned, a company cannot take it away – meaning they can’t strip an employee of unused vacation time.

Companies do not have to provide employees with vacation time, however. And in most cases it’s legal to cap or pause PTO accruals when an employee’s unused balance hits a certain amount. You just cannot take away any vacation time an employee has already earned.

In all other US states, it is within the rights of a company to have a Use It or Lose It policy.

Some states require a written policy clearly stating the conditions for PTO to expire, and some – Illinois and North Dakota, for example – require that employees are given a reasonable opportunity to use their vacation time before it is allowed to expire.

Outside the US, laws again vary from country to country, and in some cases from region to region within each country.

Use It or Lose It is actually common practice in many European countries, but the law also states that employees must be allowed to take a certain number of days off (usually within a period of a few months over summer), so it’s less likely there will be any issue with unused PTO.

To get complete and accurate information on what’s allowed in your area, make sure you contact a legal professional.

Is Use It or Lose It Only for Vacation Time?

Use It or Lose It is usually discussed in relation to vacation time – if someone says “Use It or Lose It PTO”, they’re likely referring to a Use It or Lose It vacation policy.

However, it can apply to any type of PTO, and indeed, most other forms of PTO are usually treated as Use It or Lose It.

It’s much more common that sick days, or personal days, or bereavement leave, reset at the end of each year.

Vacation time (aka annual leave) is more likely to be considered an “earned” benefit than something like sick leave or personal leave, which is why there’s more debate over whether employees should have the right to roll over any unused time without losing it.

Pros and Cons of Use It or Lose It

The biggest benefit of Use It or Lose It for the business is the ability to limit financial liability.

As we mentioned in the intro, unused PTO can seriously add up, and companies can be left on the hook for huge payouts when employees take minimal PTO for multiple years in a row.

Compounding this is the fact that, in most cases, vacation pay is paid out at your current pay rate.

This means a worker can stockpile PTO for years, receiving multiple pay increases along the way, and when they eventually take their PTO, it will cost the business more than if they’d regularly taken PTO each year.

However, it’s not all positives. By trying to save money for the company, you can upset your employees.

Many feel that Use It or Lose It is unfair, and it can seriously sting to see your hard-earned vacation time just disappear.

This policy can therefore damage your company culture, cause some of your best workers to leave for better opportunities, and hurt your chances at attracting new, talented employees.

When Use It or Lose It Is Actually Employee-Friendly

Looking at it from another angle, however, Use It or Lose It can actually be beneficial for employees.

It puts a real incentive on employees to take their vacation time, which offers numerous benefits for their mental and physical health.

In contrast, workers in companies with no Use It or Lose It often hoard their PTO, dreaming of one day when they might need to take 165 days off, or thinking about the big payday they’ll get when they leave.

As a result, they’re more likely to be overworked and burn out, because they rarely take time off.

In this sense, Use It or Lose It is a positive, but it requires careful management.

The company needs to ensure that employees get every opportunity to use their PTO, and careful planning is needed to avoid a mad rush from everyone at the end of the year to use their vacation time before it runs out.

How Do Workers Feel About Use It or Lose It?

If you ask workers, the sentiment around Use It or Lose It is overwhelmingly negative.

Just look at this post on the Work Reform subreddit for an example:

“I don’t understand how it’s legal that a company can have a policy where unused vacation/pto time at the end of the year is just lost. The employee earned that time. They worked for that time. It should be protected just like if you worked for your pay, they can’t just say “well we’re not paying you.” Vacation time earned is time earned and it should be a right that the employee can keep it going into a new year. I understand many companies do let you carry all or some over or cash it out, but many do not, and it’s not right.”

As discussed earlier, this policy can be enacted in good faith, with the worker’s best interests in mind.

However, it’s difficult to convince someone that this is true, and often it isn’t true – it’s just a cost-cutting measure.

If this is the case, the money saved for the business may not be worth what you lose in employee engagement and talent.

Alternatives to Use It or Lose It PTO

Let’s look at a few alternative ways to structure your PTO policy and handle unused PTO.

PTO Rollover

The most direct alternative to Use It or Lose It PTO is to roll over unused PTO into the following year.

This means if someone has a few days left over from their yearly PTO allowance, it will be added on to their allowance for the following year.

If, for example, an employee gets 15 days per year, and only uses 10, the 5 unused days will be rolled over and they will start the following year with 20 days of PTO.

Paying Out Unused PTO

If you want to avoid people stacking up huge amounts of unused PTO, you could give employees a payout for any time off not used at the end of the leave year.

With the same example above, if the employee had 5 days not used, at the end of the year they would get an extra payment of 5 days at their regular working rate, and their allowance for the following year would start back at 15.

This can make a decent compromise, limiting long-term financial liability while ensuring it’s fair for employees.

Accrual Caps

A similar approach to Use It or Lose It is to set an accrual cap or balance cap.

This means there’s a total limit to the number of days an employee can have in their balance at any given time.

Once they hit this limit, they will stop earning PTO until they take some of their earned time off, and their balance once again drops below the limit.

Accrual caps don’t cause employees to lose any benefits they’ve already earned, which generally makes this a more employee-friendly way to prevent employees from hoarding PTO indefinitely.

Unlimited PTO

One more alternative is to have an unlimited PTO policy.

With unlimited PTO, there is no unused PTO, no expiry, no loss of earned PTO, because there’s no actual limit or allowance in the first place.

Employees can essentially take as much time off as they like (within reason of course), removing the need to handle rollover, unused PTO, or paying out large amounts of earned PTO.

Like Use It or Lose It, unlimited PTO can be employee-friendly with the right management and in the right culture, but often doesn’t work out so well in practice. Generally, we’d advise not to do unlimited PTO, unless you’re sure your company culture can support it.

Read more: Unlimited PTO vs Accrued PTO

Final Thoughts: How to Do Use It or Lose It the Right Way

Use It or Lose It is a tricky topic, and can be divisive with employees, as well as employee rights advocates.

It’s not a good feeling to lose a benefit you’ve earned through hard work and toil, and in some parts of the world, it’s also not legal.

If it is legal for you, and you want to put a Use It or Lose It policy in place, you need to manage it well to keep employees happy and preserve company culture.

Make sure you give employees clear notice of the policy and ample opportunity to use their time off.
Encourage employees to take time off throughout the year.
Deny time off requests as rarely as possible (don’t make employees feel like it’s difficult to actually take their time off).
Give employees a way to easily find out (such as a self-service portal) how much time off they have remaining, so they can work out a plan to take it before it expires.

Use a time off tracker like Flamingo to keep a clear record of how much time off each employee has earned, and has remaining.

If you think it’s too much work to manage all this and keep employees happy (or, of course, if Use It or Lose It is not legal for your business), there are plenty of alternatives that can benefit both the employee and employer.