Colorado employers may not require workers to forfeit their earned vacation pay upon termination, the state Supreme Court decided on Monday.
Although the Colorado Wage Claim Act does not itself grant vacation pay to employees, it is now clear that the law does protect the benefit for workers who do receive it.
“We believe the impact of the Court's decision is clear — every Colorado worker who earns paid vacation must be compensated for all unused vacation time when leaving a job. Simply put, employers no longer have the option to withhold earned vacation pay from their departing employees,” said Hunter A. Swain, the attorney for Carmen Nieto, who challenged her former employer’s refusal to pay out earned vacation time upon her termination.
For eight-and-a-half years, Nieto worked at Clark’s Market, Inc., a Colorado chain of grocery stores. At the time of her firing in March 2017, she had accumulated approximately 136 hours of unused paid vacation, worth more than $2,200.
Pursuant to the store’s policy, employees earned vacation time annually based on their length of employment, and could not carry it over into the following year. But most crucially, employees had to give two weeks’ notice prior to quitting if they wanted to receive a payout for the annual vacation time not yet taken.
“If you are discharged for any reason or do not give proper notice, you will forfeit all earned vacation pay benefits,” the policy stated.
Nieto sued Clark’s Market to recover payment of her unused vacation pay, but a Pitkin County District Court judge dismissed the case. In June 2019, the Court of Appeals agreed with the dismissal, saying the matter of payout upon termination was governed by company policy and not the Colorado Wage Claim Act.
“Nothing in the CWCA creates a substantive right to payment for accrued but unused vacation time,” wrote Judge Jerry N. Jones in the appellate court's opinion.
The wage law requires employers to pay their workers at regular intervals, deduct from wages only those amounts that are legally allowed, and pay out earned but unused compensation upon an employee’s separation. In 2003, the General Assembly added vacation time “earned in accordance with the terms of any agreement” as a type of compensation to be paid.
The question before the Supreme Court was whether the Colorado Wage Claim Act permits the type of policy Clark’s Market instituted requiring forfeiture of earned vacation pay. The justices decided it does not.
“In fact, though Nieto’s complaint did not allege a particular reason for her termination, she posits that [Clark’s Market] might have terminated her merely to effect a forfeiture of her unused vacation pay, given the large amount she had accrued,” wrote Justice Melissa Hart in the Court’s June 14 opinion. “That is precisely the kind of ‘exploitation, fraud[,] and oppression’ of workers the CWCA was intended to prevent.”
Hart also pointed to testimony before the legislature at the time of the 2003 changes, in which there was an understanding that employers could not require workers to forfeit their earned vacation pay.
"The important thing here is that Clark’s Market wasn’t saying that they wouldn’t ever pay vacation at all upon termination," Michael Santo, an attorney for the company, told Colorado Politics. "Instead, Clark’s Market had written their policy to say that if an employee quit, Clark’s Market would like the employee to provide two weeks notice so that Clark’s Market could plan accordingly."
He did not address how the mandatory forfeiture of vacation pay in the event of an employee's firing furthered the company's ability to plan.
Scott Moss, director of the Division of Labor Standards and Statistics at the Colorado Department of Labor and Employment, said the ruling aligned with the department’s own interpretation of the law as banning forfeiture policies. However, there is no indication of how many workers the Supreme Court’s decision covers.
“CDLE data confirms that claims of vacation pay denial are frequent: before this case, they were more than one-fifth of all appeals of CDLE wage rulings,” said Moss, whose division investigates and adjudicates roughly 6,000 wage complaints and inquiries each year.
During oral argument before the Supreme Court in November, attorneys for both sides grappled with what it meant to have vacation time that was “earned,” versus time that was “vested.” Swain, representing Nieto, argued there was no distinction between the two concepts.
“The Court needs to look at the moment in time as of the employee gets that vacation pay. And if they have the right to use it a minute before their separation or an hour or a day before the separation, that means the vacation pay has already been earned and vested and cannot be forfeited,” he explained.
Hart agreed that unlike other types of compensation, such as year-end bonuses or commissions, it was logical to think of vacation time as being earned and vested simultaneously.
“The employer can unilaterally, by firing a person, remove a significant amount of vacation pay that the employee had earned. That strikes me as problematic,” she said. “An employee who’s being terminated for any reason at all has no control over whether they have access to the vacation pay they have earned.”
Christopher L. Ottele, a partner at Husch Blackwell LLP who is a labor and employment attorney, believes the Court's decision "upends" the understanding of earned vacation time. Now, he said, it will be treated as a form of severance pay rather than a means of giving employees time off while working.
"With this decision, employers have choices to make. Some employers are likely to take away vacation benefits, others may impose caps on vacation accrual, and still others will not respond at all, comfortable paying out accrued vacation as a part of their agreement with their employees," said Ottele. He previously filed a legal brief supporting Clark's Market on behalf of the Colorado Civil Justice League, Denver Metro Chamber of Commerce and the National Federation of Independent Business.
The Supreme Court reinstated Nieto’s lawsuit, and it will now proceed at the district court level. The case is Nieto v. Clark’s Market, Inc.