Accrued but Unused Vacation Pay Must Be Paid Out Upon Termination of Employment in Colorado

On June 14, 2021, the Colorado Supreme Court held that although the Colorado Wage Claim Act (CWCA) does not require employers to provide employees with vacation pay, if employers choose to provide vacation pay, all accrued but unused vacation pay must be paid to employees upon termination of employment.

This is the second step Colorado has recently taken to make Colorado vacation policies more employee-friendly. In December 2019, the Colorado Department of Labor (CDOL) issued a rule (now 7 CCR 1103-7 2.17) which clarified that once accrued, or in the CDOL’s terms “earned and determinable in accordance with the terms” of a vacation policy, vacation may not be forfeited for any reason. The rule clarified that employers have the discretion to decide whether to have a vacation policy. Should an employer choose to have a vacation policy, then it can decide how much vacation can be accrued, over what period of time, and whether vacation time is capped. Vacation is considered capped if there is a point at which employees can no longer earn vacation until they use accumulated time.

This week, the Colorado Supreme Court in Carmen Nieto v. Clark’s Market, Inc. concluded that “although the CWCA does not entitle an employee to vacation pay, when an employer chooses to provide it, such pay is no less protected than other wages or compensation and, thus, cannot be forfeited once earned.”

Colorado law defines “wages” to include:

Vacation pay earned in accordance with the terms of any agreement. 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. C.R.S. § 8-4-101 (14)(a)(III) (emphasis added).

In the Nieto case, Clark’s Market had a policy that provided employees forfeited the payout of accrued vacation if they were terminated or did not provide sufficient notice of resignation. The Nieto court specifically held that the CWCA nullifies any effort to circumvent its requirements by contract; thus, no agreement (or policy) can be entered into to waive or modify an employee’s right to payment of accrued vacation upon the employee’s termination.

In light of the Colorado Supreme Court’s decision stating that any term of an agreement that purports to forfeit earned vacation pay is void, employers should review their policies and amend any provision that results in an employee forfeiting accrued but unused vacation time during or after employment.