Colorado Court of Appeals Approves “Use or Lose It” Policy Regarding Vacation Pay

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By: Don Samuels and Mary Kapsak

In an unpublished opinion, the Colorado Court of Appeals recently held that a departing employee's right to vacation pay at separation is dependent on the company's policies.  Nieto v. Clark’s Market, Inc., 2019 COA 98.

In this case, the employer had a policy stating than an employee was not entitled to payment for unused vacation time if the employer discharged her or if she voluntarily quit without giving two weeks' notice. 

The employee quit without giving the requisite two weeks' notice and the employer did not pay her for unused vacation pay.  Thereafter, the employee filed suit. 

In its decision, the Court rejected the employee’s claim that her vacation pay was "earned and determinable," and, thus, owed to her on discharge pursuant to the Colorado Wage Claim Act (“CWCA”). Therefore, the employer did not owe her for that vacation time. 

The Court observed: 

Nothing in the CWCA creates a substantive right to payment for accrued but unused vacation time.  Rather, "the 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."

The Court concluded by writing: 

In sum, reading Sections 8-4-101(14)(a)(III), 109(a), and 121 together, we hold that the [employer’s] unused vacation policy doesn't violate the CWCA.  [The employee’s] right to compensation for approved but unused vacation pay depends on the party's employment agreement.  And that agreement unequivocally says that the vacation pay she seeks wasn't vested given the circumstances under which she left the [employer’s] employ."

The Nieto case is certainly good news for employers.  Even if not binding precedent, its rationale can be used to support a “use it or lose it” policy.  However, it may be prudent to still rely on a "cap on accrual" policy as a way of controlling an employer's liability to a separating employee for vacation pay.  Employers with questions regarding vacation payout policies and other employment policies would do well to consult with able counsel.