Colorado Issues New Rules Governing Employee Compensation for 2022

Fox Rothschild LLP

Fox Rothschild LLP

Changes Include No More 'Use-It-Or-Lose-It' Policies; Guidance on Pay Rate for HFWA Leave; Clarity on Missed Rest Period Penalty; and New Rules for Agricultural Employers

The Colorado Department of Labor and Employment (CDLE) has adopted new rules, effective Jan. 1, 2022, pertaining to overtime and minimum pay, adjusted labor compensation and wage protection.

These changes, adopted Nov. 10, 2021, include Colorado Overtime and Minimum Pay Standards (COMPS) Order #38; 2022 Publication and Yearly Calculation of Adjusted Labor Compensation (2022 PAY CALC) Order; and updated Wage Protection Rules. Here are some key takeaways for employers:

No 'Use-it-or-Lose-it' Policies for Discretionary Leave by Any Name

Under the Colorado Wage Act, vacation pay is considered wages, and unused vacation pay must be paid to employees upon separation. In recent years, there was some confusion about whether and when an employee’s unused vacation pay could be forfeited. However, this is now clear – once vacation pay is accrued it cannot be forfeited.

In June 2021, the Colorado Supreme Court in Nieto v. Clark’s Market, Inc., 2021 CO 48, issued a decision prohibiting “use-it-or-lose-it” vacation policies. The court made clear that all “earned” and “determinable” vacation pay must be paid to employees upon separation and was non-forfeitable. Any agreement that purports to forfeit earned vacation pay is void. While the court addressed “vacation” pay, the new CDLE rules and the definition of “vacation pay” make clear that discretionary paid time off (PTO) will be covered by this prohibition. Specifically, the rules look to the substance of the leave time rather than what it is called, and state:

“Vacation pay” is pay for leave, regardless of its label, that is usable at the employee’s discretion (other than procedural requirements such as notice and approval of particular dates), rather than leave usable only upon occurrence of a qualifying event (for example, a medical need, caretaking requirement, bereavement, or holiday).

In sum, if leave is conditional and usable only upon the occurrence of an event, it is not vacation. This time is not payable upon separation because the employee is not entitled to the leave until and unless the condition occurs. In contrast, leave that is usable at the employee’s discretion is payable upon separation. Further, if the leave time is usable for vacation, it is not forfeitable even if it can be also used for other purposes.

To avoid paying out significant accrued vacation/PTO, employers should impose caps on accrual or consider flexible vacation/PTO policies. Note that nothing in the rules nor in Nieto requires employers to offer vacation time. However, once it is accrued, it cannot be taken away.

Pay Rate for HFWA Leave

Colorado requires paid sick and safe leave and public health emergency leave under its Healthy Families and Workplaces Act (HFWA), which became effective in 2021. We previously discussed employers’ obligations under this law here, here and here. The new Wage Protection Rules detail how to calculate the pay rate for HFWA leave. The rules state the following:

  • 30-day lookback for pay rate: The HFWA pay rate is “determined based upon the employee’s pay over the 30 calendar days prior to taking leave, unless the employee has not yet worked 30 calendar days in which case the longest available period shall be used.” In contrast under the COMPS Order, “regular rate of pay” is calculated based on a single workweek.
  • Bonuses are disregarded: To calculate the HFWA pay rate, employers should use the same rules applicable to calculating an employee’s “regular rate” in the COMPS Order except that bonuses are excluded.
  • Employees with variable pay rates: To calculate the HFWA pay rate for employees with variable hourly rates, employers should use the weighted average method. Under this method, all wages earned performing each job are added together, and this amount is divided by the total number of hours worked in all jobs.
  • Indeterminate shifts: If an employee uses HFWA leave for a shift of indeterminate length, the number of paid leave hours used by the employee is “based on the number of hours actually worked by a replacement employee in the same shift.” If there is no replacement worker, then the number of paid leave hours is “based on the number of hours actually worked by the employee for their most similar shift in the past.”
  • On-call employees: On-call employees may use HFWA leave during any hours they are scheduled to work, including on-call hours when the employer actually requests the employee to work, or any other hours that qualify as “time worked” under the COMPS Order. If the employee and employer have an agreement under which the employee will be paid for a scheduled shift regardless of whether the employee actually works, the employer must provide HFWA leave for that shift.

Recordkeeping Requirements Under the HFWA

The new rules clarify employers’ HFWA recordkeeping requirements. Employers must maintain and provide, upon an employee’s request, the current amount of paid leave the employee (1) has available and (2) has already used during the year, including paid sick and safe leave and any supplemental public health emergency leave. In other words, employers need to keep detailed records of the type of leave each employee has available and has used.

Regular Rate Calculation for Employees With Multiple Hourly Pay Rates

The regular rate of pay “means the hourly rate actually paid to employees for a standard, non-overtime workweek.” It “includes all compensation paid to an employee, including set hourly rates, shift differentials, minimum wage tip credits, non-discretionary bonuses, production bonuses, and commissions used for calculating hourly overtime rates for non-exempt employees.” It does not include “[b]usiness expenses, bona fide gifts, discretionary bonuses, employer investment contributions, vacation pay, holiday pay, sick leave, jury duty, or other pay for non-work hours may be excluded from regular rates.” COMPS Order #38 addresses how to calculate the regular rate for employees working more than one non-exempt job at different hourly pay rates for the same employer within the same workweek. There are two options for calculating the regular rate for these employees:

  • Weighted average method: To determine the employee’s regular rate for the workweek, add the employee’s earnings during that workweek and divide it by the number of hours worked.
  • Rate-in-effect method: The employee’s regular rate can be based on the rate in effect when the work is performed if the employer and employee agree that it will be calculated under this method.

These methods are consistent with federal law. However, employers who want to use the “rate-in-effect” method must have a written agreement with the employee stating that this method will apply in advance of performing the work. Otherwise the weighted average method will apply.

COMPS Order #38 also moves explanation of “regular rate of pay” to the definition section of the order because it applies to other rules including within the COMPS Order and the separate Wage Protection Rules.

New Colorado Exemption for Highly Compensated Employees

Colorado has a new exemption from minimum wage and overtime rules for highly compensated employees (HCE). The exemption largely tracks the FLSA’s HCE exemption, but there are some differences.

First, Colorado’s HCE exemption is more strictly limited to white-collar employees. To fall under the new Colorado HCE exemption, an employee must be one “whose primary duty is office or non-manual work” (emphasis added). In contrast, under federal law the HCE exemption covers “employees whose primary duty includes performing office or non-manual work.” Additionally, the CDLE provides examples of workers who will not qualify for this exemption no matter how highly paid they may be. Such disqualified workers include: “non-management production-line workers and non-management employees in maintenance, construction and similar occupations such as carpenters, electricians, mechanics, plumbers, iron workers, craftsmen, operating engineers, longshoremen, construction workers, laborers and other employees who perform work involving repetitive operations with their hands, physical skill and energy.” These examples paired with the language choice regarding the primary duty demonstrate that Colorado intends to limit the HCE exemption to white-collar employees, perhaps more strictly than federal law.

Second, the salary requirements will be higher than under federal law. The HCE exemption has a weekly salary requirement and an annual salary requirement. Each week it must meet the minimum weekly salary for executive, administrative, and professional (EAP) employees. Annually, it must be 2.25 times the rounded annual salary requirements for EAP employees. In 2022, the HCE exemption covers an employee who is paid at least $865.38 weekly, and $101,250 annually. The weekly and annual amounts will increase each year. For example, the annual amount will rise to $112,500 in 2023, $123,750 in 2024, and thereafter will be adjusted annually for inflation.

Employers relying on the HCE exemption must be careful to satisfy the differences in the duties test and the salary test under federal and Colorado law.

Missed Rest Period Penalty

If a Colorado employee is not authorized and permitted to take a required 10-minute rest period, they are owed an additional 10 minutes of wages for the missed rest period. COMPS Order #38 clarifies that this “rest period penalty” applies to any required rest period time not provided, including incomplete rest periods, rest periods for employees not earning hourly wages, or rest periods under any other law providing rest periods of different duration. In other words, under this penalty, pay will be due for whatever amount of rest period time was not provided at whatever pay the employee would earn for such time.

Some people have interpreted this rule to mean that employers may deny rest periods and instead provide extra compensation. In its Statement of Basis, Purpose, Specific Statutory Authority, and Findings for the COMPS Order #38, the CDLE clearly states that the contention that extra pay eliminates an employer’s obligation to provide rest periods is incorrect. Compensation for rest period violations is intended as a remedy and is not an excuse for such violations.

New Rules for Agricultural Employers

In June 2021, Colorado passed the Agricultural Labor Rights and Responsibilities Act. COMPS Order #38 contains rules covering agricultural employers and employees pursuant to the new law. Notably, except for range workers, agricultural employees are now entitled to minimum wage. Range workers must be paid a minimum weekly salary.

Agricultural employees, who were previously exempt, may be eligible for overtime pay in certain circumstances starting Nov. 1, 2022. However, overtime for these workers will be different than the standard weekly (over 40 hours per week) and daily (over 12 hours per day) overtime thresholds.

As to daily overtime, agricultural employees will remain exempt as long as certain requirements are met. Specifically, for days over 12 hours, the third paid rest period must be 30 minutes long instead of the typical 10-minute paid rest period to allow time for extra rest, eating, and drinking. For days longer than 15 hours, agricultural employees must receive an extra payment of at least one hour of the Colorado minimum wage. With respect to weekly overtime, the rules include a phased-in approach over several years, with the first requirements taking effect Nov. 1, 2022. The weekly overtime requirements will depend on seasonality of the employer.

Posting and Notices

Every employer must display the applicable COMPS Order poster, with the current dollar figures as stated in the PAY CALC Order “in an area frequented by employees where it may be easily read during the workday.” If it is not practical to physically post the notice, the employer must provide a copy of the order or poster to employees within the first month of their employment and, upon request, must make it available to workers. Employers that attempt to minimize the effect of the posters or notices, including by communicating positions contrary to them, or discouraging the exercise of rights covered by them, will be deemed to be noncompliant with the posting and notice requirement. The COMPS Order poster (and other posters) are updated annually and made available in the first week of December. The CDLE provides its posters here.

The New PAY CALC Order

The PAY CALC Order is a new set of rules that publishes pay and income levels for minimum wage and various exemptions, including the new exemption for highly compensated employees, in a straightforward table. Note that the Colorado minimum wage for 2022 is $12.56 per hour, or $9.54 per hour for workers receiving enough in tips for their total pay to be at least minimum wage. COMPS Order #38 regularly refers to the PAY CALC Order, and employers will begin seeing references to this new order. It includes information about future annual adjustments, but we anticipate regular updates.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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