The Colorado Supreme Court recently settled a debate among employers and employees: Are employers required to pay accrued but unused vacation pay to employees upon separation, even if the employer’s policy contains a forfeiture clause? In Nieto v. Clark’s Market, the court answered “yes.” Although this decision only applies to employees who are bringing claims under the Colorado Wage Claim Act, it clears up a longstanding issue that has puzzled employers in the Centennial State for years.

By way of background, Colorado law has historically required employers to pay out accrued but unused vacation pay upon separation if an employer’s policy was silent on the issue. It remained unclear, however, whether employers could enter into agreements with employees to forfeit such pay in the form of forfeiture clauses in paid vacation policies.

This issue came to a head in Nieto, when an employee filed suit against her former employer to recoup accrued but unused vacation pay that she did not receive after being discharged. Before her discharge, the employee had accrued over $2,000 of paid vacation hours over eight years at the company. The employer argued that the employee forfeited her right to such pay because the company’s paid vacation policy included a clause that required employees to forfeit any accrued but unused vacation pay upon termination. The policy also required employees to forfeit any accrued but unused vacation pay if the employee did not provide two weeks’ notice before separating from the company. The employer argued that the language in its policy controlled the issue.

After years of litigation, the case ultimately made its way to the Colorado Supreme Court.

Ruling in favor of the employee, the court held that if an employer provides employees with paid vacation time, the employer must pay out accrued but unused vacation time upon separation of employment. The court rejected the employer’s argument and reasoned that a company policy does not dictate whether an employee is entitled to such pay at separation. The court further held that a forfeiture clause in a paid vacation policy is impermissible under Colorado law. In other words, this ruling likely means that “use-it-or-lose-it” vacation policies that apply during the employment relationship are invalid under Colorado law.

Despite the implications of this decision, it should be noted that Colorado employers may still cap the total number of paid vacation hours an employee may accrue. Colorado employers are also not required to provide paid vacation benefits to employees at all.

Employers should consult with counsel when crafting and enforcing a paid vacation policy to ensure that the policy complies with applicable state law. Employers that do business in Colorado should be especially mindful to ensure that the policy complies with the Colorado Supreme Court’s ruling in Nieto v. Clark’s Market.

Photo of Arslan Sheikh Arslan Sheikh

Arslan Sheikh is an associate in the firm’s Columbus office and practices in the Labor & Employment group. His practice includes a host of topics, including employment discrimination, wage and hour, and workplace safety. Arslan has experience counseling clients on compliance with local…

Arslan Sheikh is an associate in the firm’s Columbus office and practices in the Labor & Employment group. His practice includes a host of topics, including employment discrimination, wage and hour, and workplace safety. Arslan has experience counseling clients on compliance with local, state and federal laws.