On June 14, 2021, the Colorado Supreme Court settled a long-standing debate over whether employer policies requiring employees to forfeit earned and determinable vacation pay upon separation run afoul of the Colorado Wage Claim Act (“CWCA”). In Nieto v. Clark’s Market, Inc., the Colorado Supreme Court held that when an employer chooses to adopt a vacation policy, the employer must pay a separating employee all earned and unused vacation time notwithstanding the existence of a policy or agreement that purports to require forfeiture of vacation benefits. 

Background

Under the CWCA, when an employee separates, wages or other compensation that are earned, vested, determinable, and unpaid at the time of discharge or separation are due and payable. The CWCA’s definition of wages includes vacation pay “earned in accordance with the terms of any agreement.” The relevant provision governing vacation pay states:

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).

The employer, Clark’s Market, published a handbook policy requiring employees to forfeit all earned vacation benefits upon discharge for any reason or upon an employee’s failure to give “proper notice.” Clark’s Market terminated Nieto in 2017 after more than eight years of employment. Relying on the terms of its policy, Clark’s Market did not compensate Nieto for her accrued and unused vacation time.

Clark’s Market successfully argued in the trial court and Colorado Court of Appeals that the terms of its policy should control employees’ entitlement to vacation pay upon separation because, even if Nieto had earned vacation, the vacation had not “vested” in accordance with the terms of its policy.  Conversely, the lower courts rejected Nieto’s argument that once vacation pay is earned and determinable, unused vacation must be paid at separation notwithstanding an employer’s policy to the contrary.

In reversing the Colorado Court of Appeals, the Colorado Supreme Court determined that the terms “vested” and “earned” appear to be interchangeable for purposes of determining whether accrued and unused vacation constitutes wages that must be paid upon termination. Further, the Colorado Supreme Court reasoned that the Colorado General Assembly’s omission of the term “vested” in the specific statutory provision governing vacation pay was intentional. As a result, because Nieto had earned vacation under the policy and the amount of vacation was determinable, the Colorado Supreme Court held that Nieto’s vacation time constituted wages due upon separation.

With respect to the vacation forfeiture clause in Clark’s Market’s handbook, the Colorado Supreme Court invalidated forfeiture clauses that purport to require employees to relinquish earned and determinable vacation pay. The Colorado Supreme Court reasoned that in light of the broad remedial purposes of the CWCA, which is designed to protect employees from “exploitation, fraud, and oppression,” allowing an employer to control by agreement whether earned and determinable vacation is payable upon separation would be contrary to the statute’s purpose. The Colorado Supreme Court held that when an employer chooses to provide vacation benefits, any contract or policy term that purports to forfeit such benefits is void under the CWCA. 

Finally, the Colorado Supreme Court found that the Colorado Department of Labor and Employment’s rules, promulgated in response to the lower courts’ decisions in the Nieto v. Clark’s Market case, were persuasive. The rules essentially invalidate “use-it-or-lose-it” vacation policies in Colorado. Nieto urged the Colorado Supreme Court to defer to the Colorado Department of Labor and Employment’s rules. However, the Colorado Supreme Court ultimately declined to hold that courts are required to defer to a reasonable agency interpretation of an ambiguous statute.

Practical Tips

The Colorado Supreme Court acknowledged that employers are not required to provide vacation benefits. However, companies electing to provide employees with vacation benefits must payout an employee’s earned and unused vacation upon separation. Additionally, because the Colorado Supreme Court essentially endorsed the Colorado Department of Labor and Employment’s rules prohibiting use-it-or-lose-it-policies, employers should familiarize themselves with these rules and make any necessary changes to policies to ensure that employees do not forfeit earned and determinable vacation during employment and upon termination.