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A Colorado appellate court recently upheld an employer’s policy requiring forfeiture of accrued, unused vacation at separation of employment, finding the policy did not violate the Colorado Wage Claim Act. This reverses most HR and Employment Law persons interpretation of the Colorado Court of Appeals and the Colorado Department of Labor and Employment’s written guidance from 2015, which advised that so-called “use-it-or-lose-it” vacation policies are permissible, but that they cannot operate to deprive employees of earned vacation time.  Since that 2015 ruling, all employers in Colorado were likely advised to abandon any “use it or lose it” vacation policy in favor of one that pays out any accrued vacation balance upon separation of employment, for any reason. Colorado employers now have sound legal authority supporting policies requiring forfeiture of accrued vacation at separation and for use-it-or-lose-it vacation policies.

In Nieto v. Clark’s Market, Inc., the Colorado Court of Appeals affirmed the dismissal of an employee’s claim for vacation pay against her former employer.  The company’s policy provided that employees are entitled to payment of accrued, unused vacation time if they voluntarily resign with two weeks’ notice, but if the employee is terminated or resigns with less than two weeks’ notice, the employee “forfeits all earned vacation pay benefits.” The company in this case terminated the employee’s employment (i.e., she did not voluntarily resign) and did not pay out her accrued vacation based on its policy. 

The court rejected the former employee’s argument that her vacation pay was earned, and the court found that the company’s policy did not violate the Wage Claim Act’s anti-waiver section, which prohibits any agreement that purports to waive an employee’s rights under the statute.

Based on this decision, Colorado employers may implement and enforce “use it or lose it” vacation policies that provide for forfeiture of unused vacation at termination or condition payout of vacation on the employee’s meeting certain conditions, such as resigning voluntarily with appropriate notice. However, such policies are still not advisable from the perspective of what the majority of employees expect, what most employers offer, and keeping in mind that a former employee is still able to post reviews on Glassdoor to include things like time off and compensation. If a business does want to change their policy to use it or lose it, they should instead consider adopting policies that “cap” time.

Consider also that absent a statement that vacation will not be paid at separation, the employer’s policy could be interpreted to require payment.  Colorado employers should review their policies to ensure they affirmatively state how unused vacation will be handled at termination, and ensure actual practice is consistent with those policies.  

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