Permissibility of “Use It or Lose It” Policies in Colorado – Update

 

As many of our clients are already aware, in late September, the Colorado Department of Labor (CDOL) announced that “use-it-or-lose-it” vacation policies would no longer be permitted pursuant to its enforcement policy.  A few short weeks later, that same office reportedly acknowledged to the Denver Post that the materials it issued on this subject were “not clear.”  Something of a kerfuffle followed, as employers, and the attorneys who counsel them, went all a-flutter.

In a response to the outcry of confusion, if not overt irritation, CDOL’s Division of Employment released a Frequently Asked Questions posting on its website.  While we have provided a link to the FAQ below, we’ve attempted to decode some of the points here.  As seasoned practitioners, we still aren’t certain that the Division is clear on what it is saying, suggesting that 2016 will prove to be an interesting year on this topic.

Use-It-Or-Lose-It Policies: When Are They Permissible?
According to the Division, “use-it-or-lose-it” policies are “permissible” under the new Colorado Wage Payment Act.  However, such policies “may not operate to deprive an employee of earned vacation time and/or the wages associated with that time.”

What does that mean?  Let’s turn to the text which provides:

Can employers in Colorado have ‘use-it-or-lose-it’ provisions in vacation agreements?
Yes. ‘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.’

How an employee can lose vacation time, without being deprived of vacation time, is not explained, and no examples are provided to address that question.

Capping Vacation Hours
Based on the Division’s FAQ, it appears that employers may cap vacation time, and may require employees to use some of their accumulated vacation time before additional time or pay may be earned.  It seems that a policy stating that vacation time or pay is not earned until employees work the specified amount of time and actually schedule time off, may be valid.

Considering the confusing statements in the FAQ text, and until further clarification comes from the Division or through court decisions, recognize that you are taking a risk when adopting any policy that causes employees to lose vacation benefits they’ve already earned.

The Division’s FAQs can be found at: https://www.colorado.gov/pacific/cdle/node/20161

Smart Tips:
Ensure that your vacation policy is in writing, particularly if you intend it to be a “use it or lose it” policy.  Having a signed acknowledgement by an employee may constitute an agreement for this purpose and is strongly encouraged.  If you want to change your policy now, you may do so, but it may only be changed prospectively, not retrospectively, assuming you intend to implement a “use it or lose it” provision.  Keep in mind that all vacation pay that is “earned” and “determinable” at the time of termination must be paid upon separation.  Finally, be sure to define when vacation is “earned”.  Remember that it can be accrued and possibly not “earned” or it can be earned and simultaneously accrued.  Much turns based on drafting. Be careful.