While many employees are taking time off over the summer, the Colorado Court of Appeals issued an employer-friendly ruling on vacation pay policies.

An employment agreement that says an employee forfeits their payout on unused vacation time when they’re fired, or when they quit without two weeks’ notice, doesn’t violate state wage law, the Colorado Court of Appeals ruled June 27. The division held that the Colorado Wage Claim Act doesn’t give employees the right to unused vacation time they accumulate during their employment, but rather that payout — and whether workers are entitled to it — is handled entirely by the employment agreement.

The decision in Clark’s Market v. Nieto gives HR and legal departments more assurance that they can place conditions on unused vacation pay under Colorado law, employment attorneys say.

The CWCA considers vacation time to be “wages” or “compensation” when it’s “earned” according to the terms of an employment agreement. The statute says that, when an employee leaves, their employer must pay out any “earned and determinable” vacation pay — also according to the terms of an agreement between the employer and employee. In the case before the Court of Appeals, a plaintiff tested how much leeway the statute gives these agreements in limiting vacation time payouts. 

Clark’s Market, a grocery chain on Colorado’s Western Slope, was sued by former employee Carmen Nieto after the company dismissed her. Nieto had accrued vacation time that was left unused at the time of her termination, but the company refused to pay it out. The company pointed to the vacation policy in its employee handbook, which said that an employee “forfeits all earned vacation pay benefits” when they quit without giving two weeks’ notice, or if, like in Nieto’s case, they are fired.

In district court, Nieto contended that Clark’s Market’s policy ran afoul of the CWCA because it denied her payment for wages she’d earned. But the district court tossed the case, saying the CWCA “clearly and unambiguously gives employers the right to enter into agreements with its employees regarding vacation pay.”

Nieto’s case would fare no better at the appellate court, which said she “misconstrued” the CWCA’s provisions on vacation pay. “Nothing in the CWCA creates a substantive right to payment for accrued but unused vacation time,” according to the opinion written by Judge Jerry Jones, which also said, “the CWCA looks to the parties’ agreement as the sole potential source of any substantive right to payment.”

Leah VanLandschoot, an employment litigator who argued for the employer in the Hernandez v. Ray Domenico Farms case the opinion cites, said she wasn’t surprised Nieto’s case was dismissed.

“The plain language of the [CWCA’s] definition of vacation pay specifically incorporates the employment agreement,” VanLandschoot said. Some employment attorneys, she added, might wrongly interpret the CWCA as having a bright-line rule entitling workers to unused vacation pay, but it’s “generally understood” that it doesn’t.

“I would say that this case just really solidifies what we as employment attorneys already knew and felt confident about,” she said.

Policies tend to vary among Colorado employers regarding if and when they pay out unused vacation time to a separating employee, said Sue Schaecher, of counsel at management-side employment and labor firm Fisher Phillips’ Denver office. Placing conditions on that payout isn’t uncommon, she added.

“I see employers taking an approach similar to Clark’s Market or even saying unused vacation is not payable on termination,” Schaecher said.

In recent years, however, Colorado employers have been uncertain how the Colorado Department of Labor and Employment interprets the CWCA on unused vacation time, Schaecher said. “I think there’s been some confusion about it, that it’s been less than clear whether [employers] can place conditions on unused vacation pay.”

State guidance had been especially foggy regarding “use-it-or-lose-it” policies, where employers set a date or impose conditions where employees forfeit unused vacation time they’ve accrued. In September 2015, the CDLE caused a stir among employers when it issued guidance saying that use-it-or-lose-it policies were unlawful. A month later, however, the department clarified in an FAQ that those policies were indeed lawful, but as long as they are spelled out in an agreement between the employer and employee. 

Schaecher said the Clark’s Market decision is “helpful” to employers who might be unsure about whether they can have certain vacation pay policies, at least from the courts’ perspective.P

VanLandschoot said that employers have sidestepped a lot of the statute’s vacation pay questions by lumping those hours in with PTO, which isn’t defined as vacation pay in the CWCA.

Colorado employers have “played” with the CWCA’s definition of “earned” in their agreements, and not just related to vacation pay, VanLandschoot said. 

Commission is payable under the CWCA, but an employer might have a policy that tweaks the timing of commission payouts;  for example, it could specify that a “sale” doesn’t occur until the company receives payment from the customer, and that’s when the employee’s commission is earned under the agreement, she said.

— Doug Chartier

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