Earned Vacation Pay in Colorado Clarified by Colorado Supreme Court

In a legal decision Employers Council staff has been anxiously anticipating, on Monday, June 14, 2021, the Colorado Supreme Court in Nieto v. Clark’s Market, Supreme Court Case No. 19SC553, made clear that an employer must pay out any earned vacation on termination. There was an open question due to the language in the Colorado Wage Claim Act (CWCA) that defined wages or compensation and included:

[v]acation 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. [§ 8-4-101(14)(a)(III)]  Please note that the CWCA does not cover any political subdivision of Colorado state government.

The question was whether the agreement could include a forfeiture of vacation that was already earned. The employer denied Ms. Nieto, a long-time employee, payment of vacation on termination because Nieto did not meet the terms of the vacation agreement, which explained that when an employee is “discharged for any reason or do[es] not give proper notice . . . [the employee] will forfeit all earned vacation pay benefits.”  Nieto was discharged, and at the time of her termination, she had accumulated at least 136 hours of unused paid vacation, worth a total of $2,244.00.

The court, relying on the plain meaning of the term earned, ruled that once vacation pay is earned, it cannot be taken away, and it must be paid out. This makes a very clear demarcation for employers with employees in Colorado.

If an employee has not used vacation pay, there can be no loss of this already earned amount. The employer can refuse to grant more vacation pay but not refuse to pay out what has been earned. Employers Council has sample handbook language that states, “Employees are not eligible to earn any additional vacation once they have reached the maximum cap of ________. Employees will begin to earn vacation at their scheduled rate once their vacation falls below the maximum cap.” This appears to be lawful because the employee stops earning vacation when the cap is reached, and so no earnings are being taken away.

While neither the decision nor the statute addresses paid time off (PTO), employers who allow employees to earn PTO to take time away from work would seem to be allowing employees to earn vacation. As such, it cannot be taken away.

Sick leave is not included in pay in Colorado, while Colorado’s Healthy Families Workplaces Act (HFWA) requires up to 48 hours of paid sick leave a year. It might be wise to delineate a certain amount or percentage of paid time off as sick leave to meet HFWA requirements and not allow all paid time off to be earned and paid out at termination.

There are no statutes in New Mexico regarding vacation payout. However, vacation pay and other forms of pay for time that is not worked are included in the definition of “wages” in New Mexico’s Administrative Code if such pay is compensation for labor or service rendered pursuant to the employer’s written policy. In Arizona, the wage payment law defines wages broadly enough to include vacation pay. The law also says that wages include vacation pay when the employer has a policy or practice of making such payments. Arizona employers should establish a consistently applied policy or practice regarding whether vacation is paid to terminating employees. Utah law does not require employers to pay out accrued vacation leave. However, if paid vacation is provided under a company policy or contract, it will be considered wages. Therefore, upon layoff or termination, Utah employers should pay accrued vacation pay according to their company policy. Idaho law does not require paid vacation leave unless there is an agreement between the employer and employee to pay it. If there is any change in a policy that is in effect, the employee must be notified prior to the change. If paid vacation is provided, however, it may be considered wages. Finally, in Wyoming, the value of accrued vacation leave is excluded from the definition of wages if the employer has a written policy stating that accrued vacation is forfeited upon termination of employment and the employee has acknowledged the written policy in writing.

If you are an employer and are wondering how to calculate vacation leave in your state, call us. We can help.