Colorado Employers Can No Longer Maintain “Use-It-Or-Lose-It” Vacation Policies

Posted by: Karen Booher on July 13th, 2021

On June 14, 2021, the Colorado Supreme Court issued an impactful decision on vacation pay, ruling that an employer must pay an employee’s earned but unused vacation pay upon separation from employment. With this, any prior agreement or company policy that forfeits an employee’s rights to this vacation pay is void.

The decision had been long-awaited by Colorado businesses and the labor-law community and brought needed clarity to how vacation policies are addressed under the Colorado Wage Claim Act (CWCA).

Important Clarification – Employers Are Not Required to Offer Vacation Pay

The CWCA does not entitle an employee to vacation pay; however, when an employer chooses to provide it, such pay is protected as any other wages or compensation and cannot be forfeited once earned. This applies in all circumstances, including when an employee is terminated for cause or quits without giving notice.

Nieto v. Clark’s Market

The Court’s decision in Nieto v. Clark’s Market stated that an Aspen-based grocery chain’s “use it or lose it” vacation policy was not in compliance with state wage laws.

In this case, Carmen Nieto worked for Clark’s Market for 8.5 years until her March 2017 termination. The company policy at time provided that vacation time was earned during the anniversary year prior to when it was used, and the amount earned based on length of employment. The vacation policy further stated that employees forfeited all earned vacation pay benefits if their employment was terminated.

Nieto had accumulated 136 hours of unused paid vacation, worth a total of $2,244. She sued Clark’s Market under the CWCA, seeking recovery of that amount.

The lower courts dismissed Nieto’s claim finding that her vacation pay had not vested under company policy, and therefore, could be forfeited based on the policy language. The lower courts also ruled that “an employee’s right to compensation for accrued but unused vacation pay depends on the parties’ employment agreement.”

The Colorado Supreme Court rejected this analysis. They found that vacation pay did not have to be vested in order to be “earned and determinable” and thus is not subject to forfeiture under the CWCA. The Court further concluded that the CWCA applies to all vacation pay that, upon separation, is owed as return for work done or services rendered by an employee. Since Nieto’s vacation pay was accrued prior to termination, so was for work she had already performed, the Court concluded that the vacation pay was “earned”. Also, because the policy provided the amount of vacation pay, it was likewise “determinable”.

Guidance For Colorado Employers

Employers should be reviewing their handbooks and policies and making necessary changes to ensure that any earned and determinable vacation pay is not forfeited either at year-end or at termination. Any such “use-it-or-lose-it” language in a company’s written policies is now considered void based on this recent Colorado Supreme Court’s decision.

Important Distinction:  In 2020, Colorado enacted the Healthy Families and Workplaces Act, requiring most employers to provide paid sick leave effective Jan. 1, 2021. Under this Act, paid sick leave does NOT need to be paid out at termination.

This article does not represent legal advice. Colorado employers should seek the advice of legal counsel in connection with any questions surrounding employee compensation and pay matters.

---

Sources:

1. ASA Staffing Today, 6/17/2021. “Colorado Supreme Court Says Employers Can’t Maintain “Use-it-or-Lose-it” Vacation Pay Policies“, by Kristin White at Fisher Phillips, June 15, 2021.
2. Denver Post, 6/16/2021. “Colorado Supreme Court voids grocer’s vacation policy”, by Rick Carroll, The Aspen Times.