The Colorado Wage Protection Act, which amended the existing Colorado Wage Act, § 8-4-101, et seq., governs payment of wages for work performed in Colorado. The Act became effective on January 1, 2015, and is enforced by the Colorado Division of Labor (“Division”).

Under the Act, vacation pay, earned in accordance with the terms of any agreement, is classified as wages or compensation. In October 2015, the Division issued guidance on vacation “use it or lose it” provisions. Specifically, in its Q&A (https://www.colorado.gov/pacific/cdle/vacation), the Division answered the question on the permissibility of “use it or lose it” provisions in vacation policies as follows:

“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. 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 light of this guidance, Colorado employers who intend to maintain a permissible version of “use it or lose it” provisions need to review carefully their vacation policies and practices. As “earned” vacation time cannot be lost or forfeited, the language that addresses when vacation time becomes “earned” is key. The only vacation days that can be “lost” under the “use it or lose it” provision are the days that have not yet accrued.

Consider the following examples (where vacation year coincides with calendar year):

Sample Vacation Policy Accrual Language 1: Employees accrue 12 days of annual vacation on January 1 of each year to be used during that calendar year.

Sample Vacation Policy Accrual Language 2: Employees accrue .5 days of vacation for each completed bi-monthly pay period of work.

Sample Vacation Policy Accrual Language 3: Employees accrue 6 days of vacation after each completed 6 months of work. Employees, however, are permitted to take advance vacation prior to their accrual of vacation days subject to appropriate approval.

Assume an employee who took no vacation in a given calendar year is terminated on April 1. The employee would have to be paid for 12 vacation days under Sample 1, and 1.5 vacation days under Sample 2, because those vacation days had “accrued.” Under Sample 3, the employee would not be entitled to compensation for unused vacation because no vacation time had accrued until the completion of 6 months of work under the terms of the policy.

According to the Division, if a party challenges the validity of a “use-it-or-lose-it” policy, the Division will initiate a wage complaint investigation, which will include the review of the policy, as well as the remaining terms of the agreement between the employer and employee. In the event that an agreement is silent or ambiguous as to when vacation is “earned,” the Division may consider the following (non-exhaustive) list of factors to determine whether a “use-it-or-lose-it” provision is permissible under the Colorado law: (i) the employer’s historical practices, (ii) industry norms and standards, (iii) the subjective understandings of the employer and employee, (iv) and any other factual considerations which may shed light on when vacation time becomes “earned” under the agreement in question.

Given this guidance, all vacation accrual rules need to be clearly spelled out in the policy. Employers must be cautious in their vacation pay practices to insure that no “earned” vacation time is lost by virtue of a “use-it-or-lose-it” policy.