In a significant decision for employers, a Colorado appellate court recently upheld an employer’s policy requiring forfeiture of accrued, unused vacation at separation of employment, finding the policy did not violate the Colorado Wage Claim Act. 

The June 27, 2019 decision from the Colorado Court of Appeals clarifies ambiguity in the Colorado Department of Labor and Employment’s written guidance from 2015, which advised that so-called “use-it-or-lose-it” vacation policies are permissible, but that they cannot operate to deprive employees of earned vacation time.¹  Although many employers modified their policies based on the DOLE’s guidance to clarify that vacation pay was not “earned” until it was used, Colorado employers now have sound legal authority supporting policies requiring forfeiture of accrued vacation at separation and for use-it-or-lose-it vacation policies.

Background

In Nieto v. Clark’s Market, Inc.,² the Colorado Court of Appeals affirmed the dismissal of an employee’s claim for vacation pay against her former employer.  The company’s policy provided that employees are entitled to payment of accrued, unused vacation time if they voluntarily resign with two weeks’ notice, but if the employee is terminated or resigns with less than two weeks’ notice, the employee “forfeits all earned vacation pay benefits.”³  The company in this case terminated the employee’s employment (i.e., she did not voluntarily resign) and did not pay out her accrued vacation based on its policy. 

The Wage Claim Act 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.⁴

The court rejected the former employee’s argument that her vacation pay was earned and determinable under this section.  In addition, the court found that the company’s policy did not violate the Wage Claim Act’s anti-waiver section, which prohibits any agreement that purports to waive an employee’s rights under the statute.⁵

Rather, the court held that nothing in the Wage Claim Act creates a substantive right to payment for accrued but unused vacation time.  Instead, the parties’ agreement governs, and the Wage Claim Act establishes only minimal requirements for how agreed compensation must be paid.  Here, the company conditioned payout of vacation at separation on certain conditions, and it was undisputed that the employee did not meet them.  The employer’s policy did not violate the anti-waiver statute because the Wage Claim Act does not create any substantive right to payment of vacation independent of the parties’ agreement.

Bottom Line for Employers

Based on this decision, Colorado employers may implement and enforce vacation policies that provide for forfeiture of unused vacation at termination or condition payout of vacation on the employee’s meeting certain conditions, such as resigning voluntarily with appropriate notice.  In addition, this decision supports Colorado employers’ ability to adopt “use-it-or-lose-it” vacation policies that prohibit carryover of accrued vacation from one year to the next (or limit the amount of vacation that can be carried over from one year to the next). Now, an employer’s use-it-or-lose-it policy prohibiting any carryover of unused vacation from year-to-year would appear to be enforceable under the reasoning set forth by the Colorado Court of Appeals. 

However, if an employer’s policy is silent about whether unused vacation will be paid out upon separation from employment, not paying out accrued vacation to a separated employee continues to carry risk.  Absent a statement that vacation will not be paid at separation, the employer’s policy could be interpreted to require payment.  Colorado employers should review their policies to ensure they affirmatively state how unused vacation will be handled at termination, and ensure actual practice is consistent with those policies.