Traditional ‘Use-It-Or-Lose-It’ Vacation Policies Barred In Colorado—At Least For Now

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Under a recent regulation interpreting the Colorado Wage Claim Act (CWCA), Colorado employers are now barred from having policies that permit accrued vacation time to be forfeited if not used within a particular time frame. Instead, under the new regulation, they must compensate employees for all accrued but unused vacation at the time of separation and are otherwise prohibited from having policies requiring the forfeiture of accrued but unused vacation time.

CWCA’s ‘use-it-or-lose-it’ conundrum

The legality of use-it-or-lose-it vacation policies under the CWCA has long been a subject of debate. Section 8-4- 101(14) of the Act defines “wages” and “compensation”— which must be paid out at separation of employment— to include “vacation pay earned in accordance with the terms of any agreement.” The section further provides that 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.”

The language has caused widespread confusion. The Colorado Department of Labor and Employment (CDLE), which administers the CWCA, recently acknowledged vacation pay issues account for almost 25 percent of the thousands of complaints the agency receives each year.

Employers, and the Colorado Court of Appeals in a recent case, have taken the position that the CWCA’s definition of “wages” and “compensation” permits employers to have use-it-or-lose-it vacation policies that allow for the forfeiture of accrued but unused vacation pay—at either the end of employment or the conclusion of particular time frames (e.g., at the end of each calendar year). Proponents of such flexibility argue the Act expressly requires only the payout of vacation time “earned in accordance with the terms of any agreement” and suggest employers and employees may agree on policies that mandate forfeiture of accrued but unused vacation time when it isn’t used within a particular time frame.

The CDLE, by contrast, has taken the opposite position in recent years, arguing the Section 8-4-101(14) language— and a separate section of the CWCA relating to the waiver of employees’ rights—prohibits employers from mandating the forfeiture of accrued but unused vacation time, regardless of what the two sides agree to in specific policies.

Colorado Court of Appeals weighs in

In June 2019, the court of appeals issued an opinion interpreting Section 8-4-101(14) and bolstering employers’ arguments. The court found the section permits the forfeiture of accrued but unused vacation time when it’s mandated by employers’ vacation policies.

In the case, the employer had a vacation policy that entitled employees to payout for accrued but unused vacation if they voluntarily resigned from their employment and gave two weeks’ notice. If they were instead discharged or failed to give the required notice, however, the policy stipulated any accrued but unused vacation time would be forfeited upon separation.

An employee was discharged from her job, and the employer—consistent with its policy—refused to pay out her accrued but unused vacation time. The court of appeals found the policy didn’t violate the CWCA and upheld the employer’s decision not to pay the employee her accrued but unused time. Nieto v. Clark’s Market.

Amended CWCA rule

Expressly disagreeing with the court of appeals’ decision in Nieto, the CDLE issued an emergency regulation in August 2019, which became permanent in December 2019. The new, permanent regulation clarifies the agency’s interpretation of Section 8-4-101(14). In particular, it provides the section “does not allow a forfeiture of any earned (accrued) vacation pay, but does allow agreements on matters such as” whether there is vacation pay at all; the amount of vacation pay per year or other period; whether vacation pay accrues all at once, or proportionally each week, month, or other period; and whether there is a cap of “one year’s worth (or more) of vacation pay.”

On the latter point, the regulation prohibits traditional use-it-or-lose-it vacation policies but permits caps on accrued vacation time—which can limit an employer’s payout liability upon separation. As the CDLE explained in the regulation, “employers may have policies that cap employees at a year’s worth of vacation pay, but that do not forfeit any of that year’s worth.”

Under the new regulation, employers still have discretion but cannot draft policies that would result in employees forfeiting any accrued vacation time. Instead, they may minimize the payout liability at separation by capping the amount of vacation pay employees accrue each year. The amount must be carried over from year to year (since any accrued vacation time cannot be forfeited), and—importantly—the cap cannot be less than one year’s worth of vacation pay. But if employers impose such a cap, they can limit their maximum payout liability at separation.

What employers should do

You should review your vacation policies now to ensure compliance with the new regulation. Another case challenging the regulation, however, is already pending before the court of appeals, so it could be invalidated (or changed) in coming months.

Unless or until the new regulation is modified, your vacation policies should clearly state:

  • Whether employees earn vacation pay;
  • Whether and how it is accrued; and
  • The amount of vacation pay accrued.

You should further replace any traditional use-it-or-lose-it requirements in your vacation policies with maximum caps on vacation time accrual (in amounts of at least one year’s worth of vacation pay). That will limit your organization’s maximum payout liability at separation.

Use-it-or-lose-it vacation policies continue to be hotly contested at the agency level and in the courts, and the Colorado General Assembly might ultimately weigh on the issue  depending on how the courts rule. But you should revise your vacation policies now pending any further guidance on the issue to ensure ongoing compliance with state law.

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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