Almost one year has passed since the Colorado Supreme Court declared that employers must pay accrued but unused vacation time upon separation of employment. Colorado employers should consider the current landscape of employer policies concerning vacation pay and paid time off (PTO) in light of recent Colorado Department of Labor and Employment (CDLE) guidance.

Nieto refresher

The case of Nieto v. Clark’s Market, Inc. presented the Colorado Supreme Court with a prime dispute to decide whether Colorado employers may implement policies that could, under certain conditions, prohibit payment of earned but unused vacation time when an employee is separated from employment. The issue rested on the court’s interpretation of the Colorado Wage Act (CWA).

On one hand, the CWA’s definition of “wages” includes in relevant part “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.” On the other hand, the CWA provides that any agreement “purporting to waive or to modify” employee rights under the Act is void.

The Colorado Supreme Court conducted a thorough analysis of the CWA and ultimately concluded that, although the Act doesn’t create an automatic right to vacation pay, when an employer chooses to provide such pay, it cannot be forfeited once earned by the employee. This settled the debate on whether Colorado employers could implement policies to prevent payment of earned but unused vacation time at the separation of employment.

Aftermath

Although the Colorado Supreme Court had ruled in favor of employees, questions lingered about the scope and extent of the court’s decision. For example, does the prohibition on vacation forfeiture apply to more general PTO? Does the court’s decision apply to employer policies that front-load vacation or PTO rather than provide it on an accrual basis?

Cognizant of the CDLE’s position before and during the course of the Nieto litigation, many employers (and their counsel) revised handbooks and policies to remove any form of “use-it-or-lose-it” policies. Six months after the decision, the CDLE issued Interpretive Notice & Formal Opinion (INFO) #14 in January 2022 (and updated March 4) to clarify its position post-Nieto.

INFO #14 first clarifies that unused vacation pay must be paid when an employee separates from employment, whether the separation is voluntarily or involuntarily, with or without notice or cause. To be clear, you are still entitled to place caps on how much paid leave employees can accrue.

INFO #14 also states the CDLE’s position that “vacation pay” includes any type of paid leave that is usable for any purpose the employee chooses, at their discretion (as opposed to paid leave usable for qualifying events such as health needs). As expected, the CDLE will treat PTO or “personal leave” as wages that cannot be forfeited. The broad definition also includes, according to the CDLE, floating holidays.

INFO #14 further provides examples of when employer policies will and won’t be considered compliant with the CWA. For example, the CDLE noted that “unlimited PTO” policies won’t be subject to any payout, unless the policy is “unlimited” in name only. If you purport to provide employees with unlimited PTO but only permit 120 hours of PTO per year, then departing employees must be paid any unused portion of their 120-hour allotment.

Another example in INFO #14, in conjunction with the wage protection rules, the CDLE won’t distinguish between personal paid leave that is front-loaded or provided on an accrual basis. As such, you may not escape the prohibition on forfeiting personal paid leave by front-loading the leave at the start of the benefit year.

Bottom line

While the vast majority of states still defer to an employer’s handbook or policy with respect to payment of paid leave upon separation of employment, Colorado continues its trajectory of increased state regulation.

If you offer paid leave that employees may use at their discretion, it cannot be diminished, forfeited, or otherwise lost unless used by the employee or paid out. Colorado employers should carefully review your handbooks and policies, written and in practice, to ensure you are compliant.