Colorado’s new use-it-or-lose-it vacation policy sparks questions

The Colorado Division of Labor has taken a new position on enforcing wage claims based on an employer’s vacation policy, and the position is leaving employers with questions about whether use-it-or-lose-it vacation policies are lawful in the state.

In response to inquiries about whether policies that prohibit employees from rolling over some or all earned vacation or paid time off (PTO) from year to year, the division recently posted frequently asked questions (FAQs) on its website. The FAQs state that such policies don’t necessarily run afoul of the Colorado Wage Protection Act (WPA) and that if an employee challenges the validity of an employer’s policy, the determining factor will be when vacation is earned.

The WPA says that vacation pay “earned in accordance with the terms of any agreement” becomes “wages.” Therefore, many employers have use-it-or-lose-it policies to keep employees from banking large sums of vacation or PTO, which is typically paid out upon separation from employment.

According to the FAQs, an employer can have a use-it-or-lose-it policy as long as it is included in the terms of an agreement between the employer and an employee. But the FAQs go on to state that a use-it-or-lose-it policy may not deprive an employee of earned vacation pay or wages associated with that time. The FAQs also state that vacation pay that is “earned and determinable” must be paid upon separation from employment. The terms of agreements between employers and employees will determine when vacation pay is earned.

Employer takeaways

Because of unanswered questions related to the validity of use-it-or-lose-it vacation policies, Colorado employers are advised to keep in mind that:

  • The division’s jurisdiction is limited to claims of $7,500 or less.
  • The division’s interpretation of the WPA and vacation policies may not be accepted by courts.
  • To avoid a potential lawsuit, employers should consider implementing a maximum accrual policy instead of a use-it-or-lose-it policy. For example, under a maximum accrual policy, once an employee reaches a certain accrual, he won’t earn more vacation or PTO until he falls below the maximum.

The best practice for employers wanting to maintain a use-it-or-lose-it vacation or PTO policy is to review their policy with experienced employment counsel and determine whether to revise the policy in light of the division’s new position.

More information on the division’s new policy will be provided in the next issue of Colorado Employment Law Letter.