The Great Vacation Forfeiture/Pay-out Debate - The Colorado Supreme Court Weighs In
The Supreme Court of Colorado has issued an important decision regarding vacation pay. We are fortunate to have the attorney who defended the employer in that case as the Legislative Director for Western Colorado Human Resources Association, Michael Santo. Michael has graciously agreed to share his insights on this case with us in the article below.
Thank you Michael!
- Colin A. Walker, Fairfield and Woods, P.C. & COSHRM Legislative Director
The Great Vacation Forfeiture/Pay-out Debate --
The Colorado Supreme Court Weighs In
By Michael C. Santo, Cofounder and Partner of Bechtel & Santo; Now Bechtel Santo & Severn | Western Colorado HRA Legislative Director
Looking back, there have been many “great debates” throughout our history. For example, who can forget the “Less Filling” versus “Tastes Great” debate. Or LeBron versus Jordan. Perhaps neither were as historically significant as other debates in this country’s history (see e.g., Lincoln v. Douglas debates; Kennedy / Nixon presidential debates), but that doesn’t lessen, at the time, their impact. Enter into the pantheon the great debate that has taken place in Colorado since 2004: Can Colorado employers require employees to forfeit the employee’s vacation pay (often referred to as a “use-it-or-lose-it” system) on a particular date (e.g., the end of the calendar year or upon the employee’s termination) or when the employee doesn’t meet certain conditions if that is spelled out in a written agreement.
This debate began in 2004 when Colorado’s legislature included “vacation pay” in the definition of “wages.” Specifically, the statute defined “wages” or “compensation” to include:
(III) Vacation pay earned in accordance with the terms of any agreement. If an employer provides paid vacation for an employee, the employer shall pay upon separation from employment all vacation pay earned and determinable in accordance with the terms of any agreement between the employer and the employee.
Many opined that this statutory provision permitted Colorado employers to develop an agreement that informed employees that they forfeited vacation pay if the employee did not use the vacation leave by a certain date or if the employee did not meet a particular condition (e.g., failed to provide the employer two weeks’ notice of the intent to resign). Others argued that if earned vacation pay was identified in the Colorado statute as needing to be treated like wages earned, then once the employee “earned” a “determinable” amount of vacation pay, the employer couldn’t take that amount away from the employee; much like an employer could not take away pay for hours worked once the employee worked the hours. And so, the great debate commenced.
Recently, this “great debate” spawned litigation in the case of Nieto v. Clark’s Market. In this case, Ms. Nieto brought a complaint against Clark’s Market alleging she was entitled to vacation pay upon her separation from Clark’s Market. In response, Clark’s Market argued that it did not have to pay Ms. Nieto for the accrued vacation time because its written vacation agreement contained the provision, “[i]f you are discharged for any reason or do not give proper notice, you will forfeit all earned vacation and pay benefits.” In this case, Clark’s Market terminated Ms. Nieto from employment, so, it claimed it didn’t owe her for her accrued vacation based on the language of the Agreement.
Further, Clark’s Market argued that Colorado law allows employers to enter into an agreement with their employees defining when vacation is earned and when vacation pay becomes “determinable”, meaning when all contingencies for receipt of vacation pay are satisfied. The District Court agreed with Clark’s Market and explained that Clark’s Market controlled when vacation time was payable and when it was not payable. So, it determined that Clark’s Market did not have to pay Ms. Nieto for her accrued vacation.
An appeal by Ms. Nieto to the Colorado Court of Appeals followed. In a thorough, published opinion, the Court of Appeals explained that wages and compensation must be paid in Colorado only when they are “earned, vested, and determinable.” The Court of Appeals emphasized that, “Nothing in the [Colorado Wage Act] creates a substantive right to payment for accrued but unused vacation time.” So, under the ruling from the Court of Appeals, employers had the ability to set out when vacation time is earned, when it becomes vested, and when it becomes determinable and, thus, payable to employees. Importantly, the Court noted that an agreement like Clark’s Market’s vacation agreement is not a waiver of an employee’s right to receive vacation pay, but rather a statement of eligibility conditions for receipt of vacation pay. According to the Court of Appeals, since Ms. Nieto did not satisfy the conditions in the agreement to make vacation time payable, Clark’s Market was not required to pay her for her earned vacation leave.
Ms. Nieto appealed to the Colorado Supreme Court. In that appeal, the Supreme Court determined that, although the Colorado Wage Act does not entitle an employee to vacation pay, if an employer chooses to provide vacation pay, such vacation pay is no less protected than other wages or compensation and, thus, cannot be forfeited once earned. In short, the Court ruled that when an employee “earns” a “determined” amount of vacation leave, the employer cannot take away that amount of earned and determined vacation.
The Supreme Court also determined that while the Court of Appeals’ decision focused on Ms. Nieto’s failure to “vest” her vacation pay because she failed to meet a condition identified in the agreement, such “vesting” is not required by Colorado statute. Finally, the Court determined that to the extent that Clark’s Market had an agreement with Ms. Nieto that didn’t comply with the statute, that agreement was void because employers and employees cannot enter into an agreement that is contrary to statute. Similarly, an employee can’t lawfully agree to take less than minimum wage.
So, where does this decision leave Colorado employers? In short, under the Supreme Court’s decision, Colorado employers should not require an employee to forfeit, lose, etc. vacation pay once the employee earns it through a written agreement. And while the Court in Nieto did not specifically address “use-it-or-lose-it” vacation agreements during employment, there’s certainly a strong argument that the Court’s ruling would apply to make such agreements impermissible.
One thing not addressed in the Nieto decision, because, of course, it wasn’t an issue in the case, is whether employers can require an employee to forfeit other paid leaves that are not vacation leave. For example, Colorado’s recently enacted mandate for employers to provide sick leave to employees under the Healthy Families & Workplaces Act specifically identifies that it does not require Colorado employers to pay out such leave upon termination. But what about an agreement that combines vacation and sick leave, often referred to as “Paid Time Off Leave (a.k.a. PTO)”? The Supreme Court’s decision does not address this issue, and the Colorado Department of Labor has not issued any guidance on combined paid leave agreements; choosing to only address vacation leave agreements.
Further, the Supreme Court’s decision didn’t address the issue regarding paid leave that isn’t necessarily earned. For example, what are employers to do with a vacation agreement that provides unlimited vacation or that identifies that while an employee may use vacation, vacation is never earned? So, perhaps another great debate is about to commence. In the interim, our recommendation is that Colorado employers steer clear of vacation agreements that require an employee to forfeit earned vacation and, instead, establish agreements that cap the vacation earned at a specific amount.
