The Colorado Department of Labor and Employment's Division of Labor has promulgated new guidance on "use-it-or-lose-it" vacation policies.  While the Colorado Division of Labor has taken no enforcement position on use-it-or-lose it policies for many years, the Wage Protection Act of 2014 gave the Division new enforcement authority to adjudicate complaints for unpaid wages (including earned vacation time).  As such, the Division now feels that it is in a position where it must take a formal position on vacation policies.

Last month, the Division suggested that Colorado employers could not lawfully maintain use-it-or-lose-it vacation policies, but then advised that it was reconsidering and that new guidance would be forthcoming.  The Division's new position, issued in the form of Frequently Asked Questions, starts out with what appears to be a solid endorsement of use-it-or-lose-it vacation policies:

Can employers in Colorado have "use it or lose it" provisions in vacation agreements? 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 FAQ then narrowed the scope of permissible policies:

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."

Many use-it-or-lose-it policies, as currently written, may run afoul of this enforcement position.  For instance, any policy that provides that employees "earn" 15 days of vacation per year, or that they "earn" a set number of vacation hours per week, could result in accrued vacation that cannot be forfeited.  This suggests that employers must carefully word use-it-or-lose it vacation policies so that vacation time is never "earned" before it is used, because once "earned," it cannot be forfeited at the end of the year or upon termination from employment.

The FAQs also state that during a wage complaint investigation, the Division will review the employer's use-it-or-lose-it vacation policy in conjunction with the remaining terms of the agreement between the employer and employee.  In the event an agreement is silent or ambiguous as to when vacation is "earned," the Division may consider the following factors in determining whether the policy violates Colorado law:

• 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.

The Division's authority to adjudicate vacation pay claims arises from the Wage Claim Act's definition of wages to include "vacation pay earned in accordance with the terms of any agreement" between employer and employee.  Because the statute specifies only vacation and not paid time off ("PTO") or sick pay, the Division's enforcement position presumably applies only to vacation policies.  However, while this distinction was specified in the prior (withdrawn) guidance on use-it-or-lose it vacation policies, the new FAQs do not speak to this issue.   

Colorado law does not require employers to provide vacation pay, and employers that do offer vacation pay may cap how much an employee can earn.  That remains unchanged in the Division's enforcement position. 

Under the Wage Protection Act, if the Division finds that an employer has failed to pay earned vacation, it may issue a citation for the unpaid amount, plus penalties and fines.  The Division's decision can be appealed through an administrative hearing process and to Colorado district court.  The Division's enforcement authority covers claims of $7,500 or less.  Employees can bypass the administrative process and file a lawsuit for claims of any amount.

What Should Employers Do Now?

• 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. 
• Multistate employers also should consider whether any policy changes directed at compliance with Colorado law could impact their compliance with vacation laws in other states.
• Colorado employers may also want to consider "unlimited vacation" policies where employees do not accrue or earn any particular amount of vacation, or transition from vacation to PTO policies, which may fall outside the scope of the Division's new guidance.