DOL Says “Use it or Lose it” Still Okay

A new year often brings new or revised employment policies to go along with newly enacted laws or just to provide a fresh start for employees. One question that continues to arise is whether employers can maintain enforceable “use it or lose it” vacation policies.

In August of 2014, the Illinois Department of Labor issued amendments to the Illinois Wage Payment and Collection Act regulation 300.520.  Most of the attention focused on the new requirement that employers keep time records for exempt employees. But, another amendment to the same regulation, issued at the same time, created confusion about the viability of “use it or lose it” vacation policies.

The regulation has long contained the following provisions:

e)   An employment contract or an employer's policy may require an employee to take vacation by a certain date or lose the vacation, provided that the employee is given a reasonable opportunity to take the vacation.  The employer must demonstrate that the employee had notice of the contract or policy provision.

f)       The Department recognizes policies under which:

1)  no vacation is earned during a limited period at the commencement of employment.  The employer must demonstrate that the policy is not a subterfuge to avoid payment of vacation actually earned by length of service and, in fact, no vacation is implicitly earned or accrued during that period.

2)   vacation is earned and accrues at an accelerating rate during the year. The policy is acceptable when the acceleration period and the changes in accrual rates are reasonable, and the policy is uniformly applied.

3)  the employer does not have separate arrangements for vacation and sick leave.  Under the policy, employees earn a certain amount of "paid time off" that they can use for any purpose, including vacation and sick leave.  Because employees have an absolute right to take this time off (unlike traditional sick leave in which using sick leave is contingent upon illness), the Department will treat "paid time off" as earned vacation days.

Those provisions remain in the current version of the regulation. Among the amendments, though, is the following new provision:

h)   An employer cannot effectuate a forfeiture of earned vacation by a written employment policy or practice of the employer.

 Although the Department of Labor’s website maintained the advice that “use it or lose it” policies were still valid, the agency had not addressed the apparent inconsistency within the regulation, forcing many employers to take the conservative route of paying their employees for unused vacation time on an annual basis, rather than wiping it from the books.

At last, the DOL has taken a public position which reconciles the provisions in the regulation, by offering the following advice:

8. Does Section 300.520(h) of the regulations prohibit a “use it or lose it” vacation policy?

No. An employer may utilize a “use it or lose it” vacation policy as long as it is in accordance with 56 Ill. Adm. Code 300.520(f) and as long as the employer gives the employee a reasonable opportunity to take the vacation and the employer can demonstrate that the employee had notice of the “use it or lose it” nature of the policy (300.520 (e)). However, an employer cannot change a vacation policy in which vacation time already earned is forfeited by an employee because 56 Ill. Adm. Code 300.520 (h) provides “An employer cannot effectuate a forfeiture of earned vacation by a written employment policy or practice of the employer.“

While this Q & A seems a bit confusing, it is clarified by the FAQ that follows:

10. If an employer has a calendar year “use it or lose” it accrued vacation policy and an employee fails to take all earned vacation by the end of the calendar year, is that time forfeited?

Yes, as long as the employer complied with Section 300.520(f) and 56 Ill. Adm. Code 300.520 (h) which provides that such a policy must give the employee a reasonable opportunity to take the vacation and the employer can demonstrate that the employee had notice of the “use it or lose it” nature of the policy, there is no violation of Section 300.520 (f) and (h) and vacation days not taken by the end of the calendar year are lost.

Doubts of employers about the continuing validity of “use it or lose it” vacation policies can be put to rest by the DOL’s statements, as long as employers give proper and demonstrable notice of the policy (in writing is best, of course, acknowledged by the employee even if part of a employee handbook) and employees have a reasonable opportunity to use their vacation time before they lose it.