Colorado Supreme Court Rules on ‘Use It or Lose It’ Vacation Policies

Colorado Supreme Court
The Colorado Supreme Court on June 14 struck down a grocery store chain’s “use-it-or-lose-it” vacation policy in a decision that has been hailed as a victory for Colorado workers. / Colorado Supreme Court.

The Colorado Supreme Court on Monday concluded that employment agreements may not force employees to forfeit unused vacation pay when leaving a job, bringing much needed clarity regarding the legal status of “use-it-or-lose-it” vacation policies.

The unanimous decision in Nieto v. Clark’s Market overturned an employer-friendly ruling by the Colorado Court of Appeals that was seen as a green light for such policies following years of legal ambiguity and conflicting guidance from the Colorado Department of Labor and Employment.

The high court concluded that while employees are not entitled to vacation pay under the Colorado Wage Claim Act, such pay “is no less protected than other wages or compensation” if an employer chooses to provide it, and it cannot be forfeited once earned. “Accordingly, under the CWCA, all vacation pay that is earned and determinable must be paid at the end of the employment relationship,” states the opinion penned by Justice Melissa Hart.

“We believe the impact of the Court’s decision is clear — every Colorado worker who earns paid vacation must be compensated for all earned but unused vacation time when leaving a job,” said a statement from attorney Hunter Swain, who represented plaintiff Carmen Nieto in her appeal to the Supreme Court.

Nieto worked at Aspen-based grocery chain Clark’s Market for more than eight years until she was fired in March 2017. Upon termination, Nieto claimed she was entitled to pay for unused paid vacation worth a total of $2,244. However, the company denied Nieto the payout, pointing to a policy in its handbook that says employees “forfeit all earned vacation pay benefits” if they are dismissed for any reason or fail to give two weeks’ notice.

Nieto alleged the grocer’s forfeiture policy violated the CWCA, which says that when an employee is discharged, wages and compensation “earned, vested, determinable and unpaid at the time of such discharge” are due and payable immediately.

Under the CWCA, vacation pay is considered wages or compensation if “earned in accordance with the terms of any agreement” and if “earned and determinable in accordance with the terms of any agreement between the employer and the employee.” Clark’s Market argued that the plain language of the CWCA allows employers and employees to enter into agreements that determine when or if vacation time becomes “earned, vested or determinable.” Under its policy, Clark’s Market argued, Nieto’s vacation time didn’t vest or “become determinable” because she was terminated.

In June 2019, the Court of Appeals upheld a lower court’s decision siding with Clark’s Market. The court said in its opinion that Nieto’s right to vacation pay hinged on the employment agreement, which “unequivocally says the vacation pay she seeks wasn’t vested given the circumstances under which she left the Market’s employ.” 

But months after the Court of Appeals’ decision, the CDLE adopted new rules that conflicted with the intermediate court’s ruling. According to the 2019 rules, the law doesn’t allow forfeiture of earned vacation pay, but it does permit employment agreements that cap accrual of vacation pay as well as agreements that define how much vacation pay is allowed and how often it accrues. 

In Monday’s decision, the Supreme Court concluded that the legislative history shows the General Assembly did not intend for unused vacation pay to be forfeitable under the CWCA. The court also found that the CDLE’s interpretation of the statute and its 2019 rules are consistent with the CWCA.

“The Court’s decision is a victory for Ms. Nieto, Colorado workers, and working families. The Supreme Court’s opinion promotes the fundamental principle that employees must be paid wages that they earn,” attorney David Albrechta, who has represented Nieto since 2017, said in a news release.

The case was closely watched by employment law attorneys. In an amicus brief supporting Nieto, the Colorado Plaintiff Employment Lawyers Association estimated that “more than 2 million workers in Colorado have a stake in the outcome of the Court’s decision based on vacation pay alone.”

According to PELA, the court’s reasoning could also apply to other forms of compensation such as commissions and bonuses. David Lichtenstein, one of the authors of the PELA brief, said that if an employer fires an employee just before annual bonuses are paid, “the opinion seems to come down on the side of saying that bonus is earned … and the employer shouldn’t be able to engage in that kind of tactic.”

“The knee-jerk reaction by employers may be to say, ‘This is a really bad decision.’ But it does motivate them to do the right thing by employees,” Lichtenstein said.

Husch Blackwell partner Christopher Ottele called the decision “one of the most sweeping employment decisions” in Colorado in the past decade. Ottele filed an amicus brief in support of Clark’s Market on behalf of the Colorado Civil Justice League, Denver Metro Chamber of Commerce and National Federation of Independent Business.

Ottele said that while the amount of unpaid sick leave in the Nieto case was relatively small, many employers have trouble when long-term employees “stockpile” vacation days over the course of decades. The biggest problem for employers isn’t necessarily the cash payout, he said, but rather the liability that has to be carried on the balance sheets. “The CFOs are the ones who are coming to me and asking, ‘What do we do about this?’” Ottele said.

Ottele said he expects some employers, especially in low-wage industries, to stop offering paid vacation as a result of the Nieto decision. But a more likely response, he said, will be for employers to cap the amount of vacation time employees can accrue.

According to Sherman & Howard member Brooke Colaizzi, many employers already have caps in place. Because of the legal ambiguity around use-it-or-lose-it policies, many employers have played it safe by limiting how much vacation time can be accrued. Others have adopted unlimited vacation policies or granted vacation time as needed without a formal policy, Colaizzi said, in order to avoid making specific promises about the amount of vacation time provided.

Colaizzi said that the Supreme Court’s decision is consistent with the way many employer-side attorneys have been advising clients for years, and she wasn’t surprised the Court of Appeals’ decision was overturned. “This is the interpretation that, in my view, is consistent with the language of the statute and the position of the Colorado Department of Labor and Employment and how we’ve been interpreting the statute for quite a while,” she said.

The attorneys agreed that the court’s decision was a broad one, but there are some questions that remain unanswered. One is whether employers can avoid payouts if they call the time off “PTO” rather than “vacation.” “Right now, the [CDLE] is telling us that PTO policies are not subject to this payout,” Ottele said. “We’ll see how long that lasts.” Colaizzi said she interprets “vacation” as “anything that walks, talks and looks like vacation — including PTO.”

While the ruling was a win for workers, Lichtenstein said job applicants should be aware that the decision affirms that employers are not required to offer paid vacation to employees, and without a written policy in place, there’s no guarantee they will receive the benefit. “A lot of people walk into jobs thinking every job in the world has two weeks’ vacation,” he said. “Not true.”

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