Part 2: Avoiding Legal Issues in Crafting Paid Time Off Policies

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With the holidays around the corner, we’re discussing legal issues surrounding holiday and vacation pay. In a previous post, we outlined some of the major federal and state laws and explained how, for the most part, paid time off for employees is not mandated by law either federally or in Colorado. Because there are not very many laws that govern paid time off, you might think that employers have free rein over this aspect of the business. But legal snares await the unsuspecting business owner. While this article does not cover every situation that might entangle an employer, here are some things to look out for.

Tread Lightly with “Use-It-Or-Lose-It” Vacation Policies

As we discussed in a previous post, Colorado doesn’t require paid holidays or vacation. But if an employer decides to offer paid vacation, there are some rules that must be followed. Most importantly, if vacation time is earned by the employee pursuant to an employer’s policy, it is considered “wages.” This means it must be paid out to the employee when they quit or are let go. For some employers, that can mean a big payout to employees when they leave, and employers can’t withhold that even if they have to fire the employee for misconduct. A couple years back, the Colorado Department of Labor caused quite a stir when it suggested in some informal guidance that Colorado law prohibited so-called “use-it-or-lose it” vacation policies. The Department has since clarified that Colorado law does not outlaw these policies per se, but suggests that they need to be drafted with caution. Effectively, this means that employers cannot withhold a payout for earned vacation time, but can have a policy that vacation time does not roll over into the next year.

Because of Colorado law requiring payout of earned vacation time, it is important for employers to carefully draft or reevaluate their vacation policies, with counsel where appropriate, in order to avoid these issues.

“Flexible” Schedules and Comp Time

Employers sometimes try to come up with creative solution to give employees more time away from the office in a given workweek by implementing flexible schedules and “comp” time policies. Often it is set up like this: work extra this week, then have some extra “comp” time off next week. For some employees, such as salaried exempt employees not subject to overtime rules, this system might work well. For example, a salaried exempt employee could have a long holiday weekend, and then work extra the next week to make up for the time out of the office. But for non-exempt employees (those subject to FLSA’s overtime requirements), this system can present issues. A system that causes an employee to work more than 40 hours in a given week will result in overtime having to be paid. Employees covered under the Colorado Minimum Wage Order Number 33 must be paid time and a half for hours over 40 per week, or 12 hours per day. Time cannot be “borrowed” from the previous week in order to avoid paying overtime. So, for non-exempt employees, the schedule within the work week can be flexible, but that is it.

Docking Employee Pay for Taking Too Much Time Off

Another area that often trips up employers is how to handle employees who overuse paid time off. Can the employer “dock” the paycheck (i.e., reduce the paycheck for the time that was not spent working)? For hourly workers, the issue is easier—if the employee does not come to work, the employee does not get paid. But what about salaried workers? The answer depends on how much time is missed and whether the employee is exempt from FLSA or not; FLSA regulations on this point can be complex.¹ FLSA provides some guidance in this publication.

Non-exempt salaried employees (which means they are subject to FLSA’s minimum wage and overtime requirements) can usually have their pay “docked” without running afoul of FLSA, as long as they are still being paid for the hours they do work. Colorado law is similar in that you need only pay a non-exempt worker for the hours they are actually working. But docking a paycheck shouldn’t be a penalty.

Exempt employees are more complicated. Take the following examples:

• Situation 1: Your exempt salaried employee takes every other Friday off in a month for personal reasons, and ends up taking an extra three days over his allotted paid time off for the year.

• Situation 2: Your exempt employee routinely takes the last two hours of work off on Fridays, and over the course of a few months, has taken the equivalent of three extra days of what is essentially paid time off.

Per FLSA rules, you might be able to dock the employee’s pay in Situation 1, but probably not in Situation 2. If an exempt, salaried employee misses a full day of work for personal reasons, other than sickness or disability, deductions from pay may be made. But if that same category of employee works even a small portion of the day, you cannot dock the pay for missing a couple hours of work, even if that adds up over time. There are other rules that make these situations even more complex, so it is generally recommended that you seek counsel before taking action to ensure you understand all the issues in play.

It is important to get these rules right because failure to do so can jeopardize the employer’s ability to categorize employees as exempt. And that situation can create a big (and expensive) problem for employers.

Firing an Employee for Missing Too Much Work

Because of the dangers inherent in docking an employee’s pay for missing work, a better course of action may be to deal with the issue of taking too much time off of work as a performance/discipline matter. Employers have a great amount of leeway to discipline employees who don’t show up for work. Colorado is, by default, an at-will employment state, meaning that the employer can terminate an employee for any reason. This includes missing too much work. Subject to the caveat discussed below, disciplining and even firing an employee for missing too much work is legitimate. So what you can do is evaluate her performance either in terms of productivity or whether she meets her hours (such as billable hours for an attorney).

That being said, other issues may also arise when employees want to take unpaid leave, and ultimately, take too much. If the reason the employee is missing work is because of a disability-related issue, or religious observances, for example, further discussions might be required. There may be certain situations when a business is required to allow employees to take unpaid leave. It could be an accommodation for a disability or a religious belief. And, if a business is considering terminating an employee for requesting or taking too much time off, it is important to seek counsel to ensure the employer handles the situation appropriately.

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¹ 29 CFR § 541.602.