“Use It or Lose It” No More – Colorado Supreme Court Weighs in on Employee’s Rights to Compensation for Accrued Vacation Pay

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On June 14, 2021, the Colorado Supreme Court issued its highly anticipated decision in Nieto v. Clark’s Market, Inc., i which provided clarification to Colorado employers and employees on the concept of “use it or lose it” vacation pay. While perhaps viewed as a win for Colorado employees, the decision will likely serve as the backdrop for significant changes to how vacation pay is accrued, how it is paid out if unused, and whether employees are offered it at all.

Overview of Nieto v. Clark’s Market, Inc.

At issue in this case was the claim of a former grocery store worker Carmen Nieto who worked at Clark’s Market (“Clark’s”) for over eight years. Ms. Nieto claimed she was entitled to compensation for unused vacation time when she was terminated from Clark’s.ii

When she was terminated, Clark’s denied paying Ms. Nieto her unused vacation time based on a provision found in its employee handbook. The provision provided earned vacation benefits were forfeited by a terminated employee or an employee who quits but fails to provide Clark’s with two-weeks’ notice. The provision reads, in pertinent part, as follows, “If you are discharged for any reason or do not give proper notice, you will forfeit all earned vacation pay benefits.”iii The language “earned vacation pay” was critical to the Supreme Court’s analysis.iv

While the case found its way to Colorado’s highest court, it did so after Clark’s successfully moved to dismiss the case for failure to state a claim pursuant to C.R.C.P. 12(b)(5). The dismissal was then upheld by a Colorado Court of Appeals. The decision to dismiss and the affirmation of the same was grounded in the ability of employers under the CWCA to enter into agreements with employees regarding vacation pay. The appellate court drew a distinction between earned and vested vacation pay, finding Ms. Nieto’s vacation had not vested given the circumstances of her departure.v

The Colorado Supreme Court disagreed with the lower courts and looked closely at the word “earned” in the CWCA. The high court concluded while an employer has the right to decide if and when an employee is entitled to vacation pay, it cannot be forfeited if it is earned and must therefore be paid. The court went on to reason a separate vesting requirement would be inconsistent with the intent of the CWCA.vi

As such, Ms. Nieto’s claim for 136 hours of unused paid vacation valued at $2,244.00 was sent back down for adjudication. Employers are faced with revisiting their policies and employee handbooks to square themselves with this decisional authority.vii

What does Nieto Mean for Employers?

An important takeaway from this decision is the Court’s unwillingness to push the bounds of the issue at the heart of the case. In other words, the Court did not weigh in on whether employers should offer paid vacation time to their employees and did not address limits on how much vacation time can be earned or accrued. For Colorado employers, the court’s decision means they cannot have policies or agreements result in an employee’s forfeiture of earned vacation pay. In reaching what is a fairly straightforward decision on its face, the Court chose to navigate away from persuasive decisional authority and state agency interpretation and to instead rely upon its interpretation of the intent of the CWCA to ensure workers receive the compensation they earn.

Employers should be reviewing the paid vacation provisions of their employment agreements and employee handbooks applicable to their Colorado employees. If vacation pay is part of an employee’s compensation package, employers should be abundantly clear about how such time is earned and ensure departing employees, regardless of the circumstances of the departure, are immediately paid for unused vacation time. The phrase “use it or lose it” is a thing of the past in Colorado when it comes to vacation pay.

i 2021 CO 48, 488 P.3d 1140.

ii Id.

iii Id. at 1141.

iv Id.

v Id.

vi Id.

vii Id.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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