In December 2019, the Colorado Department of Labor and Employment, Division of Labor Standards and Statistics, issued a final rule clarifying the statutory prohibition on “use it or lose it” vacation time payouts. This rule, 7 CCR 1103-7 2.15, begins by repeating the statutory definition of “vacation pay” which is part of the definition of “‘[w]ages’ or compensation”:

“Vacation pay earned in accordance with the terms of any agreement. If an employer provides paid vacation for an employee, the employer shall pay upon separation from employment all vacation pay earned and determinable in accordance with the terms of any agreement between the employer and the employee.”

Previously, this definition created confusion and led to contrary interpretations, including an unpublished Colorado Court of Appeals opinion holding an employee could forfeit vacation time according to the terms of an employment agreement.

To clarify, the new rule goes on to explain that the “earned and determinable in accordance with the terms” provision in the statute disallows forfeiture of any earned and accrued vacation pay. Thus, employees cannot lose vacation pay, once it is earned and determinable, for any reason.

The new rule also clarifies how employers may limit vacation pay, by stating employees and employers may have “agreements on matters such as (1) whether there is any vacation pay at all; (2) the amount of vacation pay per year or other period; (3) whether vacation pay accrues all at once, proportionally each week, month, or other period; and (4) whether there is a cap of one year’s worth (or more) of vacation pay.” The new rule permits a cap that limits the amount of vacation time an employee may earn. Once an employee reaches a cap, he or she will stop accruing vacation time until the balance falls below the cap. This requires employees to use vacation time in order to continue accruing it. So long as there is no loss of accrued time, such a cap is permitted.

The new rule helps employers minimize large vacation time payouts when employees leave. But it still leaves open questions about paid time off, sick time, and other accrued leave, which the rule does not expressly address.