The Colorado Department of Labor and Employment (“CDLE”) recently issued several proposed rules, including new language defining “vacation pay” for purposes of Colorado’s wage laws. Colorado law has long defined “wages” and “compensation” as including “vacation pay earned in accordance with the terms of any agreement.” C.R.S. § 8-4-101(14)(a)(III).

Until recently, there has been significant debate regarding whether Colorado’s statute prohibits so-called “use-it-or-lose-it” vacation policies. On June 14, 2021, the Colorado Supreme Court settled the debate, issuing its highly anticipated decision in Nieto v. Clark’s Market, ruling that employers must pay out an employee’s earned but unused vacation pay upon separation of employment and any handbook provision or agreement to the contrary is not enforceable. 488 P.3d 1140 (Colo. 2021).

A lingering question for employers—both before and after the Nieto decision—has been whether leave accrued under a Paid Time Off (“PTO”) policy that can be used for both vacation and other types of leave, including sick leave, is included within Colorado’s use-it-or-lose-it prohibition. On September 30, 2021, the CDLE ostensibly answered the question regarding use-it-or-lose-it policies for PTO in a proposed rule. The proposed rule defines “vacation pay” as “pay for leave, regardless of its label, that is usable at the employee’s discretion (other than procedural requirements such as notice and approval of particular dates), rather than leave usable only upon occurrence of a qualifying event (for example, a medical need, caretaking requirement, bereavement, or holiday).” 7 C.C.R. 1103-7-2.17.1. The CDLE’s new definition of “vacation pay” removes any question that PTO, or a similar policy by any other name, that can be used for vacation, is included within the definition of vacation pay and cannot be forfeited. Employers should review their vacation policies to remove use-it-or-lose-it language as required under the Nieto decision. With respect to PTO policies, while the language in the proposed rule must undergo the rulemaking process—including public comment and a public hearing—and the final rule will not take effect until 2022, employers will also need to prepare to remove use-it-or-lose-it language because PTO policies are included within the CLDE’s new definition of “vacation pay.”

As an alternative to use-it-or-lose-it policies, and to limit the amount of PTO they potentially must pay out at separation, employers can consider implementing a cap on accrual. Under such a system, once an employee earns a certain number of vacation (or PTO) hours, the employee no longer accrues further vacation (or PTO) time until taking some of his or her previously accrued time. After using available accrued hours, the employee will once again accrue vacation (or PTO) hours. Under this type of policy, the amount of PTO ever accrued, and therefore potentially paid out at separation, is naturally limited.