The Colorado Supreme Court determined that—although state law does not create an automatic right to vacation pay—if an employer chooses to provide vacation pay, it cannot be forfeited once earned. Any employment agreement provision allowing for the forfeiture of earned vacation pay is not valid [Nieto v. Clark’s Market, No. 19SC553 (Colo., 6-14-21)].
The court decision voided the employer policy at issue in the court case, which dictated that unused, accrued vacation pay would be forfeited if the employee was fired or quit without providing at least two weeks’ notice.
Colorado Law and Rules on Vacation Pay
The Colorado Wage Act provides that—if an employer chooses to provide paid vacation—all “earned and determinable” vacation must be paid upon separation from employment “in accordance with the terms of any agreement between the employer and the employee.” According to the court, although this means the employer has some discretion for establishing the terms under which vacation must be paid out on termination, forfeiture is not an allowable option. The act covers most private employers in the state, but most public employers—including state and local government agencies and school districts—are exempt.
The forfeiture of earned vacation pay has been explicitly prohibited by the Colorado Wage Protection Act Rules since August 20, 2019. Employment agreements can dictate: (1) whether there is any vacation pay at all; (2) the amount of vacation pay per year or other period; (3) whether vacation pay accrues all at once, or proportionally each week, month, or other period; and (4) whether there is an accrual cap of one year’s worth (or more) of vacation pay.
Cap on Vacation Pay Accrual Is Permissible
Employers may have use-it-or-lose-it policies that disallow carryover after employees accrue a year of vacation pay, but that do not forfeit any of that year’s worth, according to the rules. For example, an agreement for 10 vacation days per year: (a) may provide that employees can accrue more than 10 days, by allowing carryover of accrued vacation from year to year; (b) may provide that employees cannot accrue more than 10 days, by disallowing carryover of unused vacation from year to year; but (c) may not provide that after an employee accrues 10 days, that amount diminishes below 10 days for any reason.
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Mavanee Anderson, Esq., is Editor of PayState Update and Payroll Information Resources for the APA.