June 22nd, 2021

How to Update Your Vacation Policy: Recent Ruling on the Colorado Wage Claim Act

The Colorado Supreme Court recently ruled on a case under the Colorado Wage Claim Act (CWCA) that clarifies Colorado businesses will have to pay out vacation pay when an employee leaves. Learn what’s involved in paying out vacation pay and what steps you can take to update your policy and ensure you’re compliant with the CWCA to avoid the liability and potential penalties associated with this ruling. 

Colorado Wage Claim Act & Vacation Pay 

The Colorado Wage Claim Act states that employees are entitled to “earned, vested, determinable, and unpaid [compensation] at the time of discharge.” Unpaid compensation under the CWCA includes vacation pay. Under federal and state law you are not required to provide paid vacation as a business owner — it is a voluntary benefit. But if you do, this creates an obligation you’ll want to prepare for.

Vacation pay, like other wages, cannot be forfeited once earned. In other words, vacation pay policies that take a “use it or lose it” approach aren’t an option. If your current employment agreement or vacation policy states something like this, it’s now void.

Vacation Pay & What’s Required for the CWCA

Vacation pay that’s offered as an employee benefit only applies to full or part-time employees — not independent contractors. Under the Colorado Wage Claim Act, when an employee is terminated, compensation for vacation pay is due with their final paycheck. When an employee ends the relationship, compensation is due and payable upon the next regular payday. If more time is required, give written notice. 

Payment can be made at a worksite, employer’s local office, or employee’s last known mailing address. If timely payment isn’t provided, employees can pursue legal action and employers will be liable for the unpaid compensation plus a penalty. 

Though the recent ruling dealt with vacation pay, the CWCA requires compensation for any labor, services, bonuses, or commissions to be paid out similarly. For the employee to receive their unpaid compensation they must have fulfilled all their requirements for the job or service. 

Steps to Update Your Vacation Policy 

  1. Review your current vacation pay benefits and policy. Evaluate whether vacation pay is a benefit you want to continue to provide. If you’re an employer who currently has a “use it or lose it” approach, you’ll need to create a new vacation policy. If you don’t currently offer vacation pay or choose to, there are no additional steps you’ll need to take.
  2. Consider setting a vacation “cap.” If you choose to provide vacation pay, setting a limit to the amount of vacation pay accrued limits your payout liability when an employee leaves or is terminated. Determine what cap in accrual makes the most sense based on the size of your business and employees.
  3. Update your employment agreement and employee handbook. Be clear in your language regarding vacation pay and make sure your employees have access to your vacation policy. 

More Help With Your Vacation Policy & CWCA

The conversation around vacation pay and the Colorado Wage Claim Act will continue to develop. Likely there will be updates around the terminology of “vacation pay” and how it is “earned.” We’ll continue to keep you informed as Colorado business laws evolve. 

If you offer your employees unique vacation benefits, such as unlimited vacation, we can offer more support in crafting your policy. To learn more about other Colorado laws and regulations and how to be compliant, check out our guide and learn how they impact your business and how to reduce your risk.

Download Our eGuide: New Employment Laws & Regulations for 2021

New employment laws and regulations in Colorado went into effect on January 1, 2021. Understand what the new laws mean for your business.

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