Colorado Employers Can’t Take Away Accrued Vacation Pay

As previously reported, the Colorado Department of Labor and Employment (CDLE) has been considering major changes to the state’s Wage Protection Act (WPA).

The feasibility of “use-it-or-lose-it” vacation policies under the WPA has been in question for several years, with the CDLE’s informal guidance often conflicting with court decisions and public statements by the agency. The most recent authority on this topic was a 2019 Colorado Court of Appeals decision, which upheld an employer’s paid vacation forfeiture policy. The CDLE has now formally rejected that holding, replacing it with this new rule. The CDLE also clarified that employers may have a policy capping vacation accrual, but may not diminish earned vacation pay other than through an employee’s actual use.

The amended WPA Rule 2.15 states:

“Vacation pay” … includes in the definition of “‘[w]ages’ or ‘compensation’”: “Vacation pay earned in accordance with the terms of any agreement. 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.”

The “earned and determinable in accordance with the terms” provision does not allow a forfeiture of any earned (accrued) vacation pay, but does allow agreements on matters such as: 1. whether there is any vacation pay at all; 2. the amount of vacation pay per year or other period; 3. whether vacation pay accrues all at once, proportionally each week, month, or other period; and 4. whether there is a cap of one year’s worth (or more) of vacation pay. Thus, employers may have policies that cap employees at a year’s worth of vacation pay, but that do not forfeit any of that year’s worth.

- 7 CCR 1103-7 (emphasis added)

Under the new rule, in order to manage these costs, employers may stop the future accrual of vacation pay benefits for employees who reach a maximum cap until they have tapped the benefit. But at termination, employers must pay out all accrued and unused vacation still in the bank.

Notably, this permanent rule only changes the definition of “vacation pay” and does not mention PTO or sick time. Therefore, in the absence of additional guidance, it is unclear whether this prohibition against forfeiture provisions applies to PTO policies. Potentially, employers who wish to encourage work/life balance without making substantial payouts upon termination of employment could implement more generalized PTO policies, rather than paid vacation policies, in the face of this new rule.

This rule goes into effect December 19, 2019. Therefore, Colorado employers with conditional vacation payout policies should immediately reevaluate compliance with the CDLE’s new rule.

Ballard Spahr’s Labor and Employment Group routinely assists employers in complying with state, federal, and local statutes and regulations, and helps clients with developing and implementing workplace policies.

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