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Colorado Joins the Club: No Use-It-Or-Lose-It Vacation Policies Permitted

Published by on December 4, 2015

Colorado recently joined California, Montana and Nebraska in prohibiting “use-it-or-lose-it” vacation policies. As a practical result, employers need to evaluate the nature of their vacation policies to ensure compliance with these shifting standards.

The Colorado Department of Labor and Employment’s Division of Labor has issued new guidance that prohibits employers from maintaining “use-it-or-lose-it” vacation policies for Colorado employees. “Use-it-or-lose-it” vacation policies include those that require employees to use accrued vacation time prior to a specific date or forfeit the right to later be paid for that vacation time.

Effective January 1, 2015, the Colorado Wage Protection Act of 2014 granted the Colorado Division of Labor with enforcement authority to adjudicate administrative complaints for unpaid wages, including earned vacation time.  Based on this authority, the Division of Labor has now issued some formal guidance on how it will interpret the Wage Protection Act in connection with vacation policies.

Prior to the Wage Protection Act, the Colorado Division of Labor had not recently taken a position on the legality of use-it-or-lose it policies. Unfortunately, the recent guidance issued by the Division of Labor is not entirely clear. The Division’s new position, issued in the form of Frequently Asked Questions (“FAQs”), first states:

Q. Can employers in Colorado have “use it or lose it” provisions in vacation agreements?

A. Yes. “Use-it-or-lose-it” policies are permissible under the Colorado Wage Protection Act, provided that any such policy is included in the terms of an agreement between the employer and employee.

The FAQs, however, go on to greatly narrow the scope of a permissible policy:

  • A “use-it-or-lose-it” policy may not operate to deprive an employee of earned vacation time and/or the wages associated with that time.
  • Any vacation pay that is “earned and determinable” must be paid upon separation of employment.
  • The terms of an agreement between the employer and employee will dictate when vacation pay is “earned.”

The Division’s FAQs also state that in the event an agreement is silent or ambiguous as to when vacation is “earned,” the Division of Labor may consider the following factors in determining whether the policy violates Colorado law:

  • The employer’s historical practices;
  • Industry norms and standards;
  • The subjective understandings of the employer and employee; and-
  • Any other factual considerations that may shed light on when vacation time is “earned” under the agreement in question.

Colorado employers’ current policies may violate this new enforcement guidance.

For example, a policy that states that an employee “earns” or “accrues” a set number of vacation days per year or week, may now be interpreted under Colorado law as vacation time that cannot be forfeited at the end of the year or upon termination.

Colorado law does not require employers to provide vacation pay. As a result, this enforcement guidance is only applicable when an employer provides vacation pursuant to a policy or agreement.

Additionally, the enforcement guidance does not prohibit employers that do offer vacation from reasonably capping the amount of vacation time an employee can earn pursuant to the employer’s vacation policy.

It is unclear whether the Division of Labor intends to apply this enforcement guidance to paid time off (“PTO”) or sick pay policies. The Division of Labor’s current FAQs are silent as to this issue.

Under the Wage Protection Act, the Division may issue a citation for the unpaid vacation, plus penalties and fines, if it finds that an employer has failed to pay earned vacation. Employees can file a civil lawsuit for claims of any amount.

Welter Insight:

Colorado joins California, Montana, and Nebraska as states that prohibit “use-it-or-lose-it” vacation policies. Colorado employers with use-it-or-lose-it vacation policies should review those policies in consultation with legal counsel to ensure that they do not create “earned” vacation time that cannot be forfeited.

Image Credit: faungg (Flickr @ Creative Commons)



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