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Employer’s “Use It Or Lose It” Vacation Pay Policy Upheld by Colorado Court of Appeals

The Colorado Court of Appeals recently held that an employer’s refusal to pay a terminated employee’s accrued but unused vacation time did not violate the Colorado Wage Claim Act (“CWCA”).FN1

The CWCA requires employers to immediately pay discharged employees’ “wages or compensation,” which includes “vacation pay earned and determinable in accordance with the terms of any agreement.” FN2 In Nieto v. Clark’s Market Inc., the employer’s vacation policy provided that an employee (1) is entitled to payment for accrued but unused vacation time if she voluntarily resigns and gives at least two weeks’ notice, but (2) forfeits all vacation pay benefits if the employee is discharged or resigns without providing two weeks’ notice. The employer discharged the employee and did not pay her accrued and unused vacation time. The employee sued for unpaid wages and the trial court dismissed the claim based on the policy.

The Colorado Court of Appeals upheld the dismissal, reasoning that nothing in the CWCA creates a substantive right to payment for accrued but unused vacation time, but rather, the employee’s right to compensation and the conditions that must be satisfied to earn such compensation “are determined by the parties’ employment agreement.” FN4  

Practical Takeaway

Employers in Colorado are not required to pay employees for their unused vacation time if there is an employment agreement unequivocally providing that vacation pay was not vested under the circumstances of that employee’s separation from employment. Employers with vacation policies should clearly state in writing if, and when, vacation time is earned and vests, and what conditions must be met before a separated employee is entitled to payment for unused vacation time.

Although Nieto is a welcome and common-sense decision that supports use of use-it-or-lose it vacation policies, this is an area of law that seems to be constantly in flux in Colorado, and employers are encouraged to consult with an employment attorney with questions on their policies.FN4

Footnotes:

FN1:   See Nieto v. Clark's Mkt., Inc., 2019 COA 98 (Colo. App. June 27, 2019) (applying Colorado Wage Claim Act, C.R.S. § 8-4-101, et seq.)

FN2:   See C.R.S. § 8-4-109(1)(a) (requiring payment of wages and compensation upon termination); C.R.S. § 8-4-101(14)(a)(III) (defining “wages” and “compensation”).

FN3:   Nieto, 2019 COA 98, at ¶ 2 n.1 (applying C.R.S. § 8-4-109(c)(2) (“Nothing in subsection (1) of this section shall . . . require the payment at the time employment is severed of compensation not yet fully earned under the compensation agreement between the employee and employer, whether written or oral”). The court assumed for purposes of the decision that the employer’s policy was an “agreement” and thus overruled the trial court’s dismissal of the case.

FN4:   The Colorado Department of Labor Division of Standards and Statistics is considering a rule change that would update the scope of “vacation pay” as set forth under the CWCA to include time off work not expressly designated as “vacation” but that functions as “vacation.” The Colorado Employer will report on this proposed rule change once further details are learned.