CO Caselaw Update: Payout of Unused Vacation

Under the Colorado Wage Claim Act (“CWCA”), private sector employees are entitled to timely payment of wages that are “earned, vested, determinable, and unpaid at the time of discharge.” The CWCA’s definition of “wages” includes vacation pay which is earned in accordance with terms of an employment agreement. Lower state courts have disagreed as to whether the CWCA requires employers to compensate an employee for his or her earned—but unused—vacation pay upon separation, even when an employment agreement provides otherwise. On June 14, 2021, the Colorado Supreme Court resolved this issue with its ruling in Nieto v. Clark’s Market. 

Nieto sued her former employer, Clark’s Market (“CMI”), for refusing to compensate her in violation of the CWCA after she was fired and CMI refused to pay her for roughly 136 hours of earned and unused paid vacation time. CMI insisted that its refusal to pay was authorized by its employee handbook policy, which provided that an employee’s unused vacation pay was forfeit upon involuntary separation, and Nieto argued that the company’s ‘use it or lose it’ policy was void under Section 14(a)(III) of the CWCA. The trial court sided with CMI, holding that the CWCA permits employers and employees to enter into agreements governing an employee’s vacation pay, and therefore, that the forfeiture clause in CMI’s vacation policy was valid. On appeal, the Colorado Court of Appeals affirmed, reasoning that Nieto’s right to vacation pay was not vested independent of her employment agreement with CMI.  

The Colorado Supreme Court sided with Nieto and reversed the lower court’s ruling. The Court disagreed with the appeals court’s finding that an employee’s vacation pay must be “vested” to be covered by the CWCA and held that employees are entitled to pay for earned and determinable vacation time upon separation. The Court explained that while the CWCA does not create an automatic right to receive vacation pay, it does not permit forfeiture of such pay when it has been earned. Permitting employers to enforce the forfeiture of earned vacation time circumvents the CWCA’s purpose – to ensure the payment of employees’ earned wages, including earned vacation pay, by definition. The law provides that agreements purporting to waive or modify an employee’s rights under the CWCA are void. The Court also found it persuasive that the Colorado Department of Labor and Employment (CDLE) had enforced the CWCA accordingly, determining on several occasions that employees are as entitled to earned vacation pay as they are to earned hourly wages.  

Neito is a landmark case for Colorado employees and employers—the Colorado Supreme Court’s holding decisively voids ‘use it or lose it’ vacation policies like the one implemented by CMI. Colorado employers should review and revise their employment agreements and policies governing employee vacation time to ensure compliance with the Court’s ruling and the CWCA. 

Kuiper Law Firm, PLLC understands the importance of maintaining company policies and procedures which comply with applicable state and federal law and will continue to monitor developing caselaw and legislation impacting employers. If you have any questions about the information in this article, or how it applies to your business, do not hesitate to contact us.