In Nieto v. Clark’s Market, the Colorado Supreme Court addressed the issue of whether employers may implement vacation policy under which employees forfeit accrued, unused vacation pay upon the termination of employment. In a long-awaited decision, the Court held that an employer must pay earned and unused vacation upon termination from employment, even if the employer has adopted a policy that purports to cause a forfeiture of the employee’s right to receive such pay.
In Nieto, the employer’s vacation policy provided that employees would not be paid for their unused vacation if they were terminated or failed to provide sufficient advance notice of their resignation. Based upon the vacation policy, the employer refused to pay Nieto, a long-term employee, her accrued vacation upon her termination from employment. Nieto sued to recover her earned vacation (the value of which was $2,244.00), and lost before the District Court and Court of Appeals.
The Colorado Supreme Court accepted Neito’s appeal to consider the following question: “Whether section 8-4-101(14)(a)(III) of the [CWCA] allows an employment agreement to forfeit an employee’s accrued but unused vacation pay upon separation of employment.” In holding that the employer’s vacation policy violated the Wage Act, the Court reasoned:
Although the CWCA does not entitle an employee to vacation pay, when an employer chooses to provide it, such pay is no less protected than other wages or compensation and, thus, cannot be forfeited once earned. Accordingly, under the CWCA [Wage Act], all vacation pay that is earned and determinable must be paid at the end of the employment relationship … and any term of an agreement that purports to forfeit earned vacation pay is void[.]
According to the Nieto decision, any agreement or employer policy that causes a forfeiture of earned vacation time will be deemed void. Thus, when the employer terminates an employee with accrued vacation time, it must pay the employee such vacation time in the same way it is required to pay wages under the Wage Act.
The Nieto decision also aligned Colorado case law with regulations promulgated by the Colorado Department of Labor (“CDOL”). In December 2019, the Department of Labor issued a rule which provided that earned, accrued vacation pay could not be forfeited. While the specific language of any employer policy will drive the analysis, it is now clear that an employer may not adopt a policy that causes a forfeiture of earned vacation upon termination from employment. While not decided by the Supreme Court in Nieto, CDOL’s regulations state that employers may draft policies and agreements that do not allow for vacation accrual, that determine over what period vacation pay accrues and whether there is a cap above which vacation will not accrue. The CDOL regulations specifically state that an employee may not forfeit vacation that accrued over the course of a year (e.g., certain “use it or lose it” policies”).