Effective January 1, 2015, new amendments to the Colorado Wage Act went into effect. These amendments gave the Colorado Department of Labor & Employment’s Division of Labor (“Division”) new enforcement authority to adjudicate complaints for unpaid wages, including earned vacation time. Recently, the Division issued an advisory stating its intent to start finding “use it or lose it” vacation policies or agreements in violation of the Colorado Wage Act, which was a change in the Division’s prior position regarding such policies. (Typically, “use it or lose it” policies require employees to use their accrued vacation leave by a certain date or risk forfeiting the time). Previously, the Division had opined that such policies or agreements were permissible so long as there was a clear policy outlining the risk of forfeiture.

Last week, in response to numerous concerns raised regarding this change, the Division issued guidance clarifying its position.

Essentially, the Division has stated that employers may establish “use it or lose it policies” so long as any such policy is included in the terms of an agreement between the employer and employee, and such “use-it-or-lose-it” policies may not operate to deprive an employee of earned vacation leave and/or the wages associated with such accrued leave. The Division further states that any vacation pay that is “earned and determinable” must be paid upon separation of employment, and the terms of an agreement between the employer and employee will dictate when vacation pay is “earned.” In its guidance, the Division stated that in the event the agreement or policy is silent or ambiguous as to when vacation becomes “earned”, the following factors will be used to determine if the specific “use it or lose it” provision is permissible under state law:

  • The employer’s historical practices
  • Industry norms and standards, the subjective understandings of the employer and employee, and any other factual considerations which may shed light on when vacation time becomes “earned” under the agreement in question.

The Division cautioned that these factors are not exhaustive and may vary in each case.

While the guidance is slightly unclear and questions remain, it appears that employers may adopt “use it or lose it policies” but that the consequence of not using any such leave is that only the ability to use the leave time is lost; the monetary value associated with such time must be paid out upon separation of employment.

According to information from the Division, this new guidance will only be applied to vacation time earned after January 1, 2015. As a reminder, 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. (In other words, employers can require employees to bring their accrued vacation leave below a predetermined amount before being allowed to continue accruing additional vacation leave).

In light of this new guidance, any company who currently has a “use it or lose it policy” in place is encouraged to a) revise its policy; b) establish clear rules about when vacation leave is “earned”; and/or c) make sure to account for the monetary value of any “lost” vacation leave so that it is paid out to the employee either at the time it is “lost” or upon separation of employment.

Please note that this change does not apply to quasi-municipal corporations, which includes special districts, as such employers are not subject to the Colorado Wage Act.

Please contact us to discuss your current vacation leave policies and how best to bring them into compliance with the Division’s new guidance.

What is written here is intended as general information and is not to be construed as legal advice. If legal advice is needed, you should consult an attorney.