Traditional 'use-it-or-lose-it' vacation policies barred in Colorado—at least for now

Under a recent regulation interpreting the Colorado Wage Claim Act (CWCA), Colorado employers are now barred from having policies that permit accrued vacation time to be forfeited if not used within a particular time frame. Instead, under the new regulation, they must compensate employees for all accrued but unused vacation at the time of separation and are otherwise prohibited from having policies requiring the forfeiture of accrued but unused vacation time.

CWCA's 'use-it-or-lose-it' conundrum

The legality of use-it-or-lose-it vacation policies under the CWCA has long been a subject of debate. Section 8-4-101(14) of the Act defines "wages" and "compensation"—which must be paid out at separation of employment—to include "vacation pay earned in accordance with the terms of any agreement." The section further provides that 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 language has caused widespread confusion. The Colorado Department of Labor and Employment (CDLE), which administers the CWCA, recently acknowledged vacation pay issues account for almost 25 percent of the thousands of complaints the agency receives each year.