In September 2015, the Colorado Department of Labor and Employment (CDLE) published new guidance as to how it will interpret and enforce an employer's vacation-time policies. While an employer is not required to offer vacation time in Colorado, if it does, it needs to draft the policy providing for such time very carefully. Under Colorado statutes, the term "wages" includes "[v]acation pay earned in accordance with the terms of any agreement."
The Department's FAQs state that “[u]se-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." However, the FAQs continue to further narrow that statement: "[A]ny vacation pay that is 'earned and determinable' must be paid upon separation of employment."
If an employer's policy establishes how and when an employee "earns" vacation time, then once that time is "earned" under those terms, it is payable upon separation of employment, which renders a typical use-it-or-lose-it policy unenforceable.
Example: An employer's vacation time policy provides that an employee earns 10 days at the beginning of each year. The employer cannot tell the employee at the end of the year that he or she must use their 10 days or they lose it and start over. Why? Under the terms of the policy, the days were "earned" at the beginning of the year. At that moment, the vacation is "earned and determinable" and cannot be forfeited.
Example: The same is true for an employee that earns vacation time at a rate of X hours per pay period. Each instance that those hours are earned during the pay period, they become "earned and determinable."
The Department's authority to investigate wage complaints is limited—by the statutory definition of "wages"—to "vacation" time. Absent any guidance to the contrary, the Department's authority may not reach an employer's sick pay or combined "PTO" policies. This leaves employers with a few creative drafting solutions to ensure compliance in Colorado.
What can employers do? It depends on the underlying concern and/or culture of the organization. If an employer wishes to continue offering payout upon separation, but wants to limit its exposure, there are creative ways to cap an employee's accrual without running afoul of these anti-forfeiture provisions. If an employer has no tolerance for payout upon separation, but still wants to offer some type of vacation-time policy, then the policy must be carefully crafted to avoid the time being "earned" before it is used. It is unclear as of yet whether simply moving to a "PTO" policy avoids the Department's scrutiny because it covers more than just "vacation."
Colorado employers with use-it-or-lose-it policies should review those policies with legal counsel (e.g., policies where the employee has to forfeit their earned time at the end of each year or the employee has to forfeit their earned time upon separation). Employers with operations in multiple states should be mindful of how policy language may be interpreted and enforced across the various jurisdictions.