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Unused Vacation Not “Priceless” in Colorado

By Gillian McKean Bidgood

Time off is important to employee morale and productivity. However, because the Colorado Wage Act requires employers to pay for accrued but unused vacation time in an employee’s final paycheck, overly generous policies can be costly. Accrued unused vacation time is not “priceless,” and we offer three legal developments and reasons for Colorado employers to re-visit their vacation and time off policies now.

1. School Activities

In 2009, the Colorado legislature passed the Parental Involvement in K-12 Education Act. The legislation requires employers to provide employees with 18 hours of unpaid leave per academic year to attend certain school activities. Many employers made one of three revisions to policies in response:  provisions creating school activities leave; statements that the existing policy was sufficient to meet the statutory requirements; or increased vacation or time off allowances to provide additional time that could be used, among other things, for school activities. Because the statute included an automatic repeal provision, it ended relatively quietly on September 1, 2015. However, many employers did not revise the changes they made to their policies.

2. “Use-it-or-Lose-it”

To avoid paying out large amounts to employees at separation, many employers adopted “use-it-or-lose-it” policies. Plaintiffs’ attorneys have long taken the position that such policies violate the Wage Act by forfeiting vacation time that has been earned. In late 2015, the Department of Labor informally announced that it would target employers with “use-it-or-lose-it” policies for enforcement actions. A month later, the Department of Labor issued written guidance that seemed to temper that announcement.

The guidance starts with a broad statement that “use-it-or-lose-it” policies are permissible. However, the guidance later clarifies that such a policy violates the Wage Act if it deprives employees of earned vacation time and/or wages in lieu of that time. Since most “use-it-or-lose-it” policies provide no compensation for unused vacation time that is “lost,” the guidance signifies that the Department of Labor will consider such policies to be a violation of the Wage Act. Based on the language of the Wage Act, there is a significant risk that a court would agree.

3. Final Pay

Many Colorado employers have abandoned traditional sick and vacation time distinctions for paid time off that can be used for any reason. Because those policies do not distinguish between sick and vacation time, the entire paid time off allowance is considered vacation time that must be paid out in an employee’s final pay check. However, many people involved with payroll and developing policies do not realize the legal impact of such policies. 

Action Items for Employers

  • Review policies for references to the Parental Involvement in K-12 Education Act, which can now be removed.
  • Consider whether to end school activities leave policies or return time off allowances to the pre-legislation levels. 
  • Review “use-it-or-lose-it” policies with counsel and assess risks and alternatives.
  • Consider whether alternatives to lump-sum paid time off policies will better control payouts at separation.