Several years ago, Netflix introduced a controversial employee policy that other companies would attempt to imitate. The policy eventually became known as "unlimited vacation."

Unlimited vacation, which Netflix actually refers to as the "No Vacation Policy," in essence puts employees in charge of deciding for themselves when to work and when to take a break. Advocates of the policy love the freedom and flexibility unlimited vacation offers. But opponents claim it actually undermines employee freedom, as people end up working more out of fear of losing their jobs.

So, who's right?

In his new book, No Rules Rules, Netflix CEO Reed Hastings tells the story of how the no vacation policy came into existence. In the process, he explains where many companies that try to implement the policy go wrong, and how a little emotional intelligence can help you make it right.

How it started

Until 2003, Hastings says, Netflix allocated and tracked days off like everyone else. But a single employee's suggestion led the company to consider a change.

"'We are all working online some weekends, responding to emails at odd hours, taking off an afternoon for personal time," said the employee. "We don't track hours worked per day or week. Why are we tracking days of vacation per year?"

Hastings realized he didn't have an answer. 

"Today, in the information age, what matters is what you achieve, not how many hours you clock," writes Hastings"I have never paid attention to how many hours people are working. When it comes to how we judge performance at Netflix, hard work is irrelevant.... So, why should I care if [an] employee works 50 weeks a year or 48 weeks a year?"

Additionally, Hastings realized that many of the company's biggest innovations happened after people came back from vacation.

"Time off provides mental bandwidth that allows you to think creatively and see your work in a different light," explains Hastings. "If you are working all the time, you don't have the perspective to see your problem with fresh eyes."

Still, Netflix's chief executive feared that doing away with a vacation policy altogether would give rise to two potential nightmares. In the first, the office is crippled: Everyone's missing as important deadlines loom. In the second, workers turn into zombies after working years without taking a vacation.

As it would turn out, both those fears were valid.

For example, Hastings recounts how just one year after implementing its no vacation policy, the accounting department at Netflix would close their books late. The reason? A member of the team, in an attempt to avoid the annual crunch period, took off the first two weeks of January. 

Chaos ensued.

And then there's "Donna." Donna was a marketing manager who worked late nights and got up early. At one point, she hadn't taken a true vacation in four years. The problem? Her boss and teammates were all workaholics. Donna was afraid to take a vacation because she didn't want to appear like she wasn't pulling her weight.

"The Netflix culture has great ideals but sometimes the gap between the ideals and practice is big, and what should bridge that gap is leadership," explained Donna. "When leaders don't set a good example...I guess I'm what happens."

But while there was certainly a learning curve, there were also employees who loved the new arrangement. 

Like John, an engineer who said he didn't think his bosses even knew how much vacation he had taken the year he was interviewed. (For the record: seven weeks. And it was only October.)

"I bike, I'm a musician, and my kids need me," said John. "I often think, I'm making all this money...shouldn't I be working more? But I'm getting a ton done, so I tell myself that this incredible work-life balance I's OK."

Another employee said that the greatest thing about the freedom Netflix affords is "not that you can take more or less days off, but that you can organize your life in any crazy way you like--and as long as you do great work, nobody bats an eyelid."

In time, company leaders learned from their mistakes and made needed adjustments. Those learnings included outlining two vital steps for any company looking to implement its own no vacation policy.

Leaders have to set the example

As a leader, you can encourage your employees to take vacations all you want. You know what's really going to get them out of the office?

Going on vacation yourself.

"In the absence of a policy, the amount of vacation people take largely reflects what they see their boss and colleagues taking," says Hastings. "Which is why, if you want to remove your vacation policy, start by getting all leaders to take significant amounts of vacation and talk a lot about it."

Hastings sets the tone by himself taking six weeks of vacation a year. And since lifting the company's vacation policy, he's started talking a lot more about those vacations--"to anyone who's willing to listen."

Set and reinforce context

When Netflix initially removed its vacation policy, Hastings and his colleagues hadn't thought much about the need to set context. But this was a mistake--one that led to problems like the accounting fiasco.

"When you remove a policy, employees don't know how to operate with the absence," writes Hastings. "If you don't tell them, 'Take some time off,' they won't. Others will imagine they have complete freedom to behave in wildly inappropriate ways, like going on vacation at a time that causes pain to everyone else."

He continues, "In the absence of a written policy, every manager must spend time speaking to the team about what behaviors fall within the realm of the acceptable and appropriate."

In other words, not every employee will see things the same way. What's fair and reasonable to one won't be to another. That's why communication is vital: Managers must set parameters, like how many team members can be out at a time and advance warning for lengthy vacations. And team members need to communicate, too--to let colleagues know if they'll be out of touch and make sure they won't hold up anything time-sensitive.

This communication flow must stay constant, and it's on company leaders to ensure that's the case. At Netflix, Hastings uses quarterly meetings as one opportunity to do so.

"Whenever I hear stories floating around about people not taking time off, it's time to put vacations on the agenda of a [quarterly] meeting," he writes. "This gives me an opportunity to talk about the type of environment we aspire to have and gives our leaders a chance to discuss, in small groups, techniques they use in order to achieve a healthy work-life balance for our workforce."

Benefits of "unlimited vacation"

When done right, an "unlimited vacation" policy can empower your people, increase employee satisfaction, and prove to be a powerful recruiting tool. It reduces bureaucracy and administrative costs, and, according to Hastings, it helps attract and retain top talent, "especially Gen-Z-ers and Millennials, who resist punching clocks." 

But the best thing about removing constraints on your people's vacation time is the emotionally intelligent message it sends.

"Most important, the freedom signals to employees that we trust them to do the right thing, which in turn encourages them to behave responsibly.... We'd found a way to give our high performers a little more control over their lives, and that control made everybody feel a little freer."