A recent decision from the Colorado Court of Appeals clarifies that employers can limit the payment of accrued but unused vacation time at separation from employment and that forfeiture is not a violation of the Colorado Wage Claim Act (CWCA).

In Nieto v. Clark’s Market, Inc., the Colorado Court of Appeals, Division Four, held that a terminated employee was not entitled to compensation for her accrued but unused vacation time, where her employer’s policy limited payment to only those employees who voluntarily resigned with two weeks’ notice. The employee filed suit, claiming that she was owed a payout of her accrued but unused vacation time under the CWCA, because her alleged entitlements were earned and determinable.

The court dismissed her claim, holding that the CWCA does not create a substantive right to payment of accrued but unused vacation time. Rather, it is the agreement between the employer and employee that controls when such payment is owed.  The court further held that agreements limiting an employee’s right to compensation for accrued but unused vacation time do not violate the CWCA’s anti-waiver provision.

The court’s decision clarifies confusing written guidance from the Colorado Department of Labor and Employment, which had stated that while employers could require employees to “use or lose” their vacation time, employers could not deprive them of “earned” vacation time. What constituted “earned” vacation time was a source of confusion for Colorado employers.

Based on the court’s holding, employers can write their policies to require employees to use or lose their accrued vacation time and also impose conditions for a payout at separation from employment. Employers should be cautious, as silent or ambiguous policies may be interpreted as permitting rollover of vacation time or requiring compensation for accrued but unused vacation time at time of separation.