Earlier this year, the Colorado Supreme Court provided an answer to the long-standing question of whether “use-it-or-lose-it” vacation policies are permissible under the Colorado Wage Claim Act (“CWCA”). In the case of Nieto v. Clark’s Market, the Colorado Supreme Court held that an employer may not require an employee to forfeit vacation pay upon the termination of the employment relationship, and any agreement purporting to do so is void.
The Nieto case now offers excellent guidance to employers not only in Colorado, but nationally on the importance of managing and dispersing employee unused vacation pay. Employers in Colorado will need to revisit their paid time off and vacation policies, while employers nationwide should certainly keep an eye out for any similar judicial action in their jurisdiction.
The Nieto case centers on Carmen Nieto, who was employed as a grocery store worker for over eight years with Clark’s Market. Clark’s Market had a policy in its employee handbook that provided employees forfeit their accrued vacation time upon the termination of the employment relationship.
Upon separation from Clark’s Market, Ms. Nieto claimed that she was owed compensation for vacation time she never utilized during her employment. Clark’s Market disputed her claim, relying on the provision in their employee handbook which read, “If you are discharged for any reason, or do not give proper notice, you will forfeit all earned vacation pay benefits.”
As a result, Ms. Nieto took her claim to court. However, both the trial court and the Colorado Court of Appeals ruled in favor of the employer, holding that forfeiture was permissible where vacation pay had not vested under company policy. Specifically, the lower courts granted Clark’s Market’s motion to dismiss based on CWCA provisions allowing employers to enter into agreements with employees regarding vacation pay. The appellate court affirmed the dismissal and found that given the nature of Ms. Nieto’s separation from the business, her vacation time had not “vested” under the terms of the employee handbook that both parties had previously agreed upon.
Ultimately, the Colorado Supreme Court disagreed with the trial court and the Colorado Court of Appeals, relying on principles of statutory interpretation, the underlying purpose of the CWCA, and the CWCA’s legislative history. In particular, the Colorado Supreme Court focused on the term “earned” in its decision. It reasoned that although businesses do have the right to decide whether employees are given vacation pay, it may not be denied to that employee once it is earned. It also determined that the terms “earned” and “vested” are one and the same. Citing the intended purpose and public policy underpinnings of the CWCA, the court found that using a separate vesting requirement for earned vacation pay would be contrary to the intent of the law, which is to provide protection to employees.
As a result, the Colorado Supreme Court of Colorado overturned the dismissal and held that Ms. Nieto was entitled to receive payment for her unused, earned vacation time. The Supreme Court also ruled that any term of an agreement that purports to forfeit earned vacation pay is void. As such, Ms. Nieto was entitled to collect payment for 136 hours’ worth of vacation time, totaling $2,244.
Vacation Pay is Voluntary
Much like many other states, in Colorado, employers are not required to provide vacation pay – the CWCA does not create an automatic right to vacation pay or require an employer to provide it. However, following this ruling, if an employer decides to offer vacation pay to employees, it cannot be forfeited once earned. Any employee handbook provision, or other document that removes this right from an employee is void and unenforceable. Going forward this may impact when, how and if employers continue to provide vacation pay for their employees in Colorado.