The Colorado Supreme Court has cleared up a longstanding unresolved question about when employers need to pay out accrued but unused vacation time. The June 14 decision also appears to invalidate use-it-or-lose-it vacation policies in the state.
The decision in Nieto v. Clark’s Market centered on an employer’s refusal to pay out a discharged employee’s accrued but unused vacation time. The employer’s policy stated that employees discharged for any reason or those not giving proper notice of their separations would forfeit all earned vacation pay.
The former employee argued that the Colorado Wage Claim Act (CWCA) required the vacation time to be paid out. The CWCA states: “If an employer provides paid vacation for an employee, the employer shall pay upon separation from employment all vacation pay earned and determinable in accordance with the terms of any agreement between the employer and the employee.”
Employers have long argued the law’s reference to “any agreement between the employer and employee” shows that an employer’s policy controls whether accrued but unused vacation time must be paid out at separation.
Ultimately, the state supreme court ruled that although the CWCA doesn’t create an automatic right to vacation pay, when an employer chooses to provide such pay, it cannot be forfeited once earned by the employee.
Effect on Use-It-or-Lose-It Policies
The court’s decision in Nieto doesn’t extensively discuss use-it-or-lose-it policies, but the decision’s logic seems to apply to such policies. The holding that once an employer chooses to provide vacation pay there can be no contract term purporting to forfeit such pay would seem to apply to forfeitures under use-it-or-lose-it policies.
The Nieto decision also addressed rules from the Colorado Department of Labor and Employment’s Division of Labor Standards and Statistics. In 2019, the division issued rules codifying its position that vacation policies may never allow forfeiture of accrued vacation time.
The division’s rules permit employers to decide whether to provide vacation time, the amount of time provided, and how it accrues. The rules also permit vacation policies to place a cap on the accrual of vacation time—of one year’s worth (or more) of vacation—but instruct that such policies may never permit the forfeiture of any accrued vacation amounts.
The Nieto decision says the 2019 rules are “consistent with the statute’s purpose, language, structure, and legislative history.”
The decision may prompt more litigation on the issue. For example, if employers award vacation time prospectively rather than in return for past service, is the time actually “earned”? The court also didn’t address whether the decision applies to paid time off and the CWCA expressly discusses only vacation pay.
Even with some questions unanswered, employers should understand that use-it-or-lose-it vacation policies are unlikely to be defensible going forward. Therefore, they should revise their policies to ensure that once vacation time is accrued, it is never forfeited.
Since the court’s decision also broadly endorses the 2019 rules on vacation time payout, employers should carefully consider the rules to decide whether they can limit vacation payout liability by imposing a cap on vacation accruals. Capping vacation accruals isn’t the same as forfeiting accrued unused time, but it can limit employers’ ultimate payout liability.