On October 19, 2015, Colorado’s Department of Labor and Employment, Division of Labor (CDLE) issued new answers to Frequently Asked Questions (“FAQs”) concerning the state’s vacation rules. As in many states, Colorado employers are not required to provide their employees any vacation at all, are not required to provide paid vacation, and are not required to have a vacation policy. Last year, Colorado passed the Wage Protection Act of 2014, giving the CDLE new powers to enforce the state’s wage laws, and setting up a new system within the Division of Labor to allow a hearing officer to adjudicate complaints for unpaid wages and compensation up to $7,500. Under the Wage Protection Act, employees can file a complaint for non-payment of unused vacation pay earned in accordance with an employer’s policy.
In September 2015, the CDLE had issued an informal announcement that it interpreted the Wage Protection Act of 2014 law to prohibit “use-it-or-lose-it” provisions with respect to vacation pay earned on or after January 1, 2015 (the effective date of the Wage Protection Act). Under a “use-it-or-lose-it” policy, an employee forfeits accrued vacation that is not used by a certain date, such as the end of the calendar year, or the date the employee leaves the company. In reaching its conclusion that vacation forfeiture was unlawful, the CDLE relied on Colorado Revised Statutes (Section 8-4-101(14)(a)(III)), which provides that “wages” include vacation pay “earned in accordance with the terms of any agreement, ” and 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 CDLE announced that, based on its interpretation of Colorado wage statutes, once vacation pay has been earned, it cannot be “unearned.” Employers may cap vacation accrual, but once vacation time has been earned, it must be paid out upon separation from employment. Any type of forfeiture clause in vacation agreements, including “use-it-or-lose-it” provisions, was prohibited by Colorado law.
Before the CDLE’s September 2015 informal announcement, some Colorado companies had interpreted the Colorado wage statutes differently. They argued that payment of vacation pay upon separation of employment was not required in all cases. This interpretation posed risks for employers in light of the CDLE’s September 2015 announcement.
Clearing up this confusion, the CDLE’s newly released FAQs expressly state that “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 FAQs also make it clear that:
- 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.”
- In evaluating a wage complaint alleging non-payment of owed vacation, the CDLE will review the employer’s vacation policy in conjunction with the remaining terms of the agreement between the employer and employee.
- Where the agreement between the employer and employee is silent or ambiguous as to when vacation becomes “earned, the CDLE may consider the following factors in determining whether a “use-it-or-lose-it” provision is permissible:
- The employer’s historical practices
- Industry norms and standards
- The “subjective understandings” of the employer and employee
- Any other factual considerations which may shed light on when vacation time becomes “earned” under the agreement in question.
The FAQs state that the above four factors are not exhaustive, and may vary from case to case.
The FAQs do not address whether PTO (paid time off) policies will be analyzed in the same fashion as vacation policies. However, since the FAQs are intended to answer questions about the Wage Protection Act, and the Act does not address PTO, then presumably these FAQs do not apply to PTO either.
WHAT SHOULD EMPLOYERS DO?
The Colorado Division of Labor has now made it clear that it will enforce a “use-it-or-lose-it” policy only when it is included in a clear, written agreement between the employer and employee. Therefore, Colorado employers who wish to enforce a “use-it-or-lose-it” vacation provision should examine their written vacation policies, procedures and employment agreements very carefully to ensure the following:
- The policy clearly sets forth the rate at which vacation is accrued (e.g., 1 hour of vacation for every 40 hours worked; 1 day per month).
- The policy clearly defines when vacation is “earned” (i.e., on the date of hire, after a certain period of employment).
- The policy makes it clear that, once an employee “earns” vacation time, it will not be forfeited.