Employers Must Pay Out Unused Vacation Time

Eric Neeper
By: Eric Neeper
PublishedJun 28, 2021
3 minute read

Unused vacation time must be paid out to an employee when they leave a Colorado company. That’s what the Colorado Supreme Court recently ruled in the Nieto v. Clark’s Market case.

The state supreme court was tasked with deciding whether so-called “use-it-or-lose-it” vacation policies are allowed under the Colorado Wage Claim Act (CWCA).

Earned Unused Vacation Time Must be Paid Out

The Colorado Supreme Court said Coloradans have a right to be paid for unused vacation time they earn from their employer.

Vacation pay is not a right under the Colorado Wage Claim Act, but the state’s high court ruled that when an employer chooses to offer it, it cannot be given up by an employee later.

That means those use-it-or-lose-it policies – or vacation pay forfeiture clauses – are unenforceable.

This article explores the Colorado Supreme Court’s ruling in Nieto v. Clark’s Market and what it means for your business. Continue reading to find out how the state’s highest court reached its decision.

Background on Nieto v. Clark’s Market

Carmen Nieto was a longtime employee of Clark’s Market. When the company fired her after eight-and-a-half years of employment, Clark’s declined to pay out Nieto’s accrued but unused vacation time. Nieto claims she had about $2,200 worth of unused vacation pay at the time of her dismissal.

Clark’s Market cited its policy that when an employee is fired or quits without proper notice the employee forfeits “all earned vacation pay benefits”:

“In the event you voluntarily leave Clark’s Market and give at least two (2) weeks written notice, you will receive vacation benefits earned as of your last anniversary date but not taken by the date of separation. . . . If you are discharged for any reason or do not give proper notice, you will forfeit all earned vacation pay benefits.” Clark’s Market policy

Nieto Sues Clark’s Market

Nieto fought back, asserting the company’s policy violated the Colorado Wage Claim Act.

As Neito’s case worked its way through the state’s courts, a division of the appeals court concluded that because Neito was fired, her unused vacation time, despite being earned, had not “vested” under Clark’s policy.

“Nieto’s right to compensation for accrued but unused vacation pay depends on the parties’ employment agreement. And that agreement unequivocally says that the vacation pay she seeks wasn’t vested given the circumstances under which she left [CMI]’s employ.” Colorado Court of Appeals, No. 18CA1154, 2019 COA 98, ¶ 17

The appeals court division concluded that the Colorado Wage Claim Act:

“creates [no] substantive right to payment for accrued but unused vacation time” and “merely ‘establishes minimal requirements concerning when and how agreed compensation must be paid.’” Colorado Court of Appeals quoting Barnes v. Van Schaack Mortg., 787 P.2d 207,210

Nieto v. Clark’s Market Goes to State Supreme Court

Nieto appealed her case to the Colorado Supreme Court. The state’s highest court set out to resolve “whether section 8-4-101(14)(a)(III) of the Colorado Wage Claim Act allows an employment agreement to forfeit an employee’s accrued but unused vacation pay upon separation of employment.”

Colorado Supreme Court: The Word Vested is Irrelevant

The Colorado Supreme Court also took up the word vested, which was the appeals court division’s sticking point for its decision. As previously noted, the appeals court ruled that Nieto was not entitled to her accrued vacation pay because it was not vested under Clark’s employment policy.

In 2003, the state legislature amended the wage act to include that vacation pay is to be paid upon the employee’s separation:

“‘Wages’ or ‘compensation’ means: … Vacation pay earned in accordance with the terms of any agreement. 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 state supreme court concluded that the Colorado Wage Claim Act subsection (14)(a)(III) “requires only that vacation pay be earned and determinable upon separation,” noting that Nieto met both of those conditions when she was terminated from her job.

The high court said “‘vested’ is essentially a synonym of ‘earned,’ adding that it does not believe the vested even applies to the wage act:

“The legislature omitted the term ‘vested’ in subsection (14)(a)(III), instead including only “earned and determinable. … “we presume that its omission from certain provisions was intentional.”

Vacation Forfeiture Clauses are Unenforceable

Clark’s Market argued that the forfeiture clause in its employee policy was valid. The business claimed that the Colorado Wage Claim Act only regulated when vacation pay should be paid out and only if it conformed with the employer-employee agreement.

The Colorado Supreme Court disagreed. The high court called Clark’s interpretation of the law “narrow” and contradictory to the CWCA’s purpose, which is to “protect employees from exploitation, fraud[,] and oppression.”

The state’s high court concluded that Coloradans do not have an automatic right to vacation pay under the Colorado Wage Claim Act. However, employees do have a right to the vacation pay they earn from their employer, and once it is earned it cannot be forfeited.

Talk to a Lawyer

Are you a business owner concerned about the state supreme court’s recent ruling on unused vacation time forfeiture clauses?

Schedule some time to talk to one of our attorneys about your employee policies. Call 303-688-0944 to begin your case assessment. Our attorneys can help you make sure your policies are on the legal up and up.

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