On June 14, 2021, Colorado Supreme Court addressed employers “use it or lose it” vacation policies in the case of Nieto v. Clark’s Market, 2021CO48. In short, the Court considered whether under the Colorado Wage Claim Act (CWCA) an employer must pay an employees earned but unused vacation pay at separation. The Court found that when an employer chooses to provide vacation pay, it cannot be forfeited once earned. The Court stated that all earned and determinable vacation pay must be paid at separation and any agreement forfeiting earned vacation pay is void. The Court also noted the CWCA does not create an automatic right to vacation pay.
In a nutshell, this means employers must pay out accrued and unused vacation time at separation. The Court’s ruling can create, and likely created huge financial liabilities for employees that are offer vacation time and had a “use it or lose it” policy. It is clear employers will be looking for ways to minimize liability based on accruing vacation time. Regarding solutions for employers that are on the hook already, it seems employers have little choice but to pay the employee. Employers that currently have employees under a vacation system, being earned and determinable, have options to limit liability which include changing their vacation plans to limit accrual or capping the number of hours an employee can earn. Employers can also eliminate or limit vacation benefits for its employees.
Employers should be aware of the Court’s ruling considering this decision. They should review their vacation policies and remove any provisions that forfeit vacation time after its earned. Employers should also be cognizant of pre-separation policies that require vacation to be used within a specified time which is likely to fall under the Court’s decision in Nieto. Furthermore, employers should be aware of their paid time off (PTO) policies including sick leave and personal leave. While the Court’s did not address sick leave and personal leave in the Nieto decision, it is likely to be litigated in the future. Thus, employers should be proactive when considering potential consequences of future Court rulings surrounding these topics.