On June 14, 2021, the Colorado Supreme Court issued its long-awaited decision in Nieto v. Clark’s Market, holding that company policies that provide for the forfeiture of earned vacation pay are unenforceable under Colorado law.  The Colorado Supreme Court reversed the lower court’s decision and aligned its conclusion with the Colorado Department of Labor’s current regulations.  It is now settled under Colorado law that earned vacation time cannot be forfeited.

The Colorado Wage Claim Act (CWCA) defines “wages” or “compensation” 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.¹

Whether or not the statute permits the “terms of any agreement”—i.e., vacation policy—to provide for forfeiture of earned vacation has been a hotly contested issue in Colorado, with conflicting court decisions on the subject.  The Colorado DOL waded into the debate in 2015, prohibiting forfeiture.

In settling the issue, the Colorado Supreme Court noted that Colorado employers are not required to provide employees paid vacation time, but employers that do provide paid vacation time must treat the vacation time as compensation under the CWCA.  Once the earned vacation is considered to be a CWCA wage, it cannot be forfeited.  “Accordingly, under the CWCA, all vacation pay that is earned and determinable must be paid at the end of the employment relationship . . . and any term of an agreement that purports to forfeit earned vacation pay is void.”  As a result, the employer’s policy that vacation would not be paid at separation to employees who were terminated or did not provide two weeks’ notice was unenforceable, and the employee was entitled to payment of accrued vacation time at separation.

While the Nieto case specifically addressed the payment of vacation at the end of the employment relationship, the reasoning would appear to apply equally to use-it-or-lose-it vacation policies, which apply during the employment relationship.  Such policies typically provide for the forfeiture of unused vacation time at the end of a year such that it cannot be used in the following year.  The Colorado DOL has already advised that use-it-or-lose it vacation policies cannot operate to deprive employees of earned vacation time.  However, accrual caps, where employees stop earning vacation time once they reach a maximum accrual amount—without forfeiting any previously earned vacation—are still permissible.

Although the law on vacation time is now clearer, neither Nieto nor the Colorado DOL regulations provide much clarity on how employers should treat paid time off, or PTO, under Colorado law.  PTO is typically a combination of vacation, sick, and personal time included in one bucket, and employees generally are not required to specify which type of time off they are using. Unlike vacation, pay for absences due to illness does not fall under Colorado’s definition of wages, and there is no obligation to pay out unused paid sick time under Colorado law.  Accordingly, it remains unsettled under Colorado law whether PTO policies that have use-it-or-lose-it provisions in the course of employment or that provide for forfeiture at termination are permissible.

Bottom Line for Employers

Colorado employers should review their vacation policies to ensure they do not provide for forfeiture of earned vacation. All accrued and unused vacation time should be paid out at termination, regardless of the reason for ending the employment relationship.  Additionally, employers should replace use-it-or-lose-it vacation policies with caps on the maximum amount of vacation that employees can accrue.  The Colorado DOL advises that the cap must be at least one year’s worth of accrual. Any such modifications should be made in consultation with legal counsel to ensure no earned vacation is forfeited in the transition.