Historically in Colorado, employers could safely implement use-it-or-lose-it vacation policies without fear of consequences from the Colorado Department of Labor (“CDOL”). Those days are officially over. Effective January 1, 2015, the CDOL assumed new enforcement authority with respect to claim for nonpayment of wages or compensation. Pursuant to that authority, the CDOL issued limited guidance this week with respect to use-it-or-lose-it vacation policies. That guidance indicates that employers can no longer implement use-it-or-lose-it vacation policies without consequences.

The general framework is relatively simple. That is, employers do not have to give paid vacation to their employees. However, if employers give paid vacation to their employees, employees must be paid for all earned vacation time if the employee leaves the company. Employment agreements providing for forfeiture of earned vacation time will be deemed illegal by the CDOL.

While this general framework is simple enough, questions of how to implement this new guidance are more difficult. For example, the CDOL’s new guidance begins by stating 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.” That glimmer of good news is then decimated in the very next sentence which states that employers cannot “deprive an employee of earned vacation time and/or the wages associated with that time.” The take away is that, absent further clarification from the CDOL or the courts, use-it-or-lose-it vacation policies, which generally provide that an employee forfeits earned vacation time if not used by a certain time, violate the CDOL’s new guidelines.

Therefore, while the waters are murky with respect to how a use-it-or-lose-it policy could theoretically be enforceable, employers should consider all of the following in light of the new guidance from the CDOL:

  1. Have a written employment agreement with all employees that clearly states how and when vacation is earned.
  2. Consider placing caps on the amount of vacation employees can earn at any one time, requiring that employees reach set employment anniversaries (1 year for example) before earning vacation time, or requiring that employees actually use certain amounts of accumulated vacation time before they are eligible to earn more.
  3. If vacation is earned, it cannot be forfeited in the future due to failure to use it.
  4. Upon separation, pay the employee for all earned vacation time in accordance with the Colorado Wage Claim Act.

Employers are encouraged to contact their legal counsel to discuss their current policies and what revisions should be made in light of the CDOL’s guidance. This new guidance has the potential to catch employers unaware, and the consequences could be large depending on the current state of an employer’s policy.