Pay up: Colorado Supreme Court clarifies vacation payout obligations

Colorado law has long been unsettled over whether employers must pay out accrued but unused vacation time at separation of employment when the employer’s vacation policy says it isn’t necessary to do so (e.g., because certain conditions, such as voluntary separation or the employee’s provision of two weeks’ notice, haven’t been satisfied). But no longer.

On June 14, 2021, the Colorado Supreme Court addressed the issue head-on and held “all earned and determinable vacation pay must be paid upon separation and that any agreement purporting to forfeit earned vacation is void.” Going forward, the court’s decision appears to invalidate “use-it-or-lose-it” vacation policies in the state.

Facts and background

Clark’s Market declined to pay employee Carmen Nieto’s accrued but unused vacation time at separation of employment because she had been discharged. The employer’s vacation policy stated: “If you are discharged for any reason or do not give proper notice, you will forfeit all earned vacation pay benefits.”

Clark’s Market argued the terms of its vacation policy controlled whether accrued but unused vacation time must be paid out at separation. Nieto, on the other hand, pointed to the Colorado Wage Claim Act (CWCA) as indicating vacation time that is earned and determinable must always be paid out at separation, regardless of what the employer’s vacation policy says.

At issue in Nieto’s case (and a similar matter decided by the Colorado Court of Appeals in 2020) was how to interpret the CWCA. In pertinent part, the Act defines “wages” or “compensation” to include: