Colorado Court Finds Agreements Between Employers and Employees Govern Payment of Accrued Vacation Upon Termination

Colorado employers recently received important clarification regarding their obligation to pay out accrued vacation time upon an employee’s termination. In Nieto v. Clark’s Market, ___ P.3d ___ , 2019 WL 2621236 (Colo. App. 2019), the Colorado Court of Appeals stated that the Colorado Wage Claim Act (CWCA) does not create a substantive right to payment for accrued but unused vacation time. Rather, the Court noted that a written agreement between an employer and an employee governs whether such a payment will be made, and further indicated that agreement can be a policy contained in an employee handbook.

The Nieto decision provides Colorado employers with improved guidance on how to handle payment of accrued vacation time to departing employees under the terms of the CWCA. The law provides that “[v]acation pay earned in accordance with the terms of any agreement” constitutes “wages” or “compensation,” and further states that an employer must provide “all vacation pay earned and determinable in accordance with the terms of any agreement between the employer and the employee.” C.R.S. § 8-4-101(14)(a)(III). The Colorado Department of Labor and Employment has not previously interpreted the CWCA consistent with Nieto’s holdings, and has instead contended in administrative proceedings that vacation time awarded at the start of each calendar year constitutes earned wages that must be paid out upon termination of employment.

In Nieto, the Court addressed an accrued vacation time policy contained in an employee handbook which provided that an employee who voluntarily resigned was entitled to payment of accrued, unused vacation time if he or she provided at least two weeks’ notice. If the employee was involuntarily discharged or failed to provide two weeks’ notice before resigning, he or she would forfeit “all earned vacation benefits.” Carmen Nieto was discharged, and therefore, under the foregoing forfeiture policy, Clark’s Market refused to pay out her accrued, unused vacation time. Nieto sued Clark’s Market, arguing that her vacation was earned and determinable under the CWCA, and that her former employer’s forfeiture policy was an illegal waiver of her right to payment.

The Court rejected Nieto’s arguments, noting: “Nothing in the CWCA creates a substantive right to payment for accrued but unused vacation time.” Instead, the Court stated: “[T]he employee’s substantive right to compensation and the conditions that must be satisfied to earn such compensation remain matters of negotiation and bargaining, and are determined by the parties’ employment agreement, rather than by statute.” In Nieto’s case, the Court held “that agreement unequivocally says that the vacation pay she seeks wasn’t vested given the circumstances under which she left the Market’s employ.”

In light of the Nieto decision, Colorado employers may want to review their current written policies regarding accrued vacation time. If employers want to impose conditions for payout of accrued vacation time at the time of termination, they should do so clearly and unambiguously.