TICK-TOCK

TIME FOR EMPLOYER’S TO REVIEW “USE IT OR LOSE IT” VACATION POLICIES

Submitted by Catherine Tallerico.

On January 1, 2015, a new Colorado Wage Protection Act (“Act”) went into effect, expanding wage claims under the Colorado Wage Act.  The Act gives the Colorado Department of Labor & Employment, Division of Labor (DOL) new enforcement authority to adjudicate complaints for unpaid wages, including earned vacation time.  The DOL’s authority to adjudicate vacation pay claims arises from the Wage Act’s definition of “wages” to include “vacation pay earned in accordance with the terms of an agreement.” Additionally, “if an employer provides paid vacation for an employee, the employer shall pay upon separation from employment all vacation pay earned and determinable in accordance with the terms of any agreement between the employer and the employee.” Colo. Rev. Stat. § 8-4-101.

Last summer, the DOL made statements indicating an intent to find “use it or lose it” vacation policies in violation of the Act.  Such statement would have constituted a change in the DOL’s prior position in which it had permitted such policies so long as the risk of forfeiture was clearly set forth in an agreement.

In response to concerns raised about the position change, the DOL issued clarifying guidance in an October 2015 Frequently Asked Questions (FAQ) document.  The relevant FAQ is available at https://www.colorado.gov/pacific/cdle/node/20161

In that FAQ, the DOL states that “use it or lose it policies” are permissible if the following factors are met:

• the policy is included in the terms of an agreement between the employer and employee, and
• the policy does not operate to deprive an employee of “earned” vacation leave and/or the wages associated with previously earned but untaken leave.

The DOL’s FAQ states that “earned and determinable” must be paid upon separation of employment, and the terms of the agreement between employer and employee will dictate when vacation pay is “earned”. The DOL states that in the event the agreement or policy is silent or ambiguous as to when vacation becomes earned, the following factors will be relevant to determine if the specific “use it or lose it” provision is permissible:

• Historical practices;
• The subjective understanding of the employee and employer;
• Industry norms and standards; and
• Any other factual considerations which may shed light on when vacation becomes “earned” under the agreement or policy in question.

The guidance is not completely clear.  A reasonable interpretation of this guidance is that an employer cannot refuse to pay an employee accrued, un-used vacation at the time of separation from employment.  More concerning is an interpretation that once vacation is earned under a policy, it cannot be lost as a result of a carryover limit or use requirement.

Additionally, the DOL did not address whether paid time off (PTO) policies, which combine sick leave and vacation leave, are subject to the same requirements.  The Wage Claim Act refers only to “vacation” so arguably, the guidance does not apply to PTO policies.

The Colorado Court’s have not issued decisions relating to the DOL guidance and therefore the guidance may be later clarified or modified by a Court.

Options and Strategies:

Colorado law does not require employers to provide vacation pay.  Employers that do should review vacation policies and employment agreements.  Possible options include:

• If policies contain vacation carryover/use limits, review the same to ensure that there are clear rules about when vacation leave is “earned”;
• Cap how much vacation an employee can earn by limiting accrued vacation leave to a predetermined amount, or;
• Provide exempt employees with “unlimited vacation” or “self-managed vacation” whereby employees do not “earn” a specific number of vacation days.

The DOL guidance does not apply to quasi-municipal corporations, special districts or school districts who are not subject to the Colorado Wage Act.