Aug. 31, 2021 • by Jeffrey Pote

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On June 14th, the Colorado Supreme Court issued an opinion in Nieto v. Clark’s Market Inc.FN1 Employers would be wise to consider this opinion when developing or revisiting their vacation and similar policies.In Nieto, the Court held that an employer’s policy (as set forth in its employee handbook) that required the forfeiture of earned and determinable vacation pay upon termination of employment was void under the Colorado Wage Claim Act (“CWCA”).FN2 This decision has potentially far-reaching implications for Colorado employment law.

Following the decision in Nieto, it is no longer unsettled under Colorado law whether, upon termination, an employee is entitled to compensation for accrued but unused vacation pay. As the Colorado Supreme Court noted in reaching its conclusion “although the CWCA does not entitle an employee to vacation pay, when an employer chooses to provide it, such pay is no less protected than other wages or compensation and, thus, cannot be forfeited once earned.”FN3 As a result, a policy or agreement, like the one in the employee handbook of Clark’s Market Inc., that purports to require the forfeiture of vacation pay upon termination is void under Colorado law.

Facts and History:

The specific policy set forth in the handbook of Clark’s Market Inc. was to provide payment for accrued but unused vacation time only when an employee voluntarily terminates their employment by providing two (2) week written notice. In other circumstances where the employee does not provide proper notice or if they are discharged for any reason by Clark’s Market Inc. then, per the terms of the handbook, the employee would “forfeit all earned vacation pay benefits.”FN4

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In the Nieto case, Clark’s Market Inc. had previously prevailed in the lower courts – both the district court and the Court of Appeals. The Court of Appeals division concluded that, since Nieto was fired by Clark’s Market Inc., “her vacation pay – despite being earned – had not vested under” her employer’s policy.FN5

The Colorado Supreme Court reasoned that, if earned vacation pay could be forfeited, then, by analogy, employers could “manipulate similar contractual language to avoid paying rightful wages to employees by conveniently terminating them shortly before their payday."

Essentially, the Court of Appeals' position was that, since the CWCA does not require any employer to provide vacation pay, employers were effectively free to create whatever vacation-pay arrangements they want through their policies and agreements with their employees. Since Clark’s Market Inc.’s employee handbook provided for forfeiture of unused vacation pay unless the employee provided proper notice when they leave their employment, the Court of Appeals found that this was the bargain struck between Nieto and Clark’s Market Inc. and upheld the terms of the agreement.FN6

Overview and Analysis:

On appeal, the Colorado Supreme Court found that the Court of Appeals misinterpreted subsection 8-4-101(14)(a)(III) of the CWCA. In particular, the Supreme Court concluded that the division improperly read into this subsection a "vesting" requirement that was not explicitly included within the language of the statute.FN7 In rejecting this separate vesting requirement, the Supreme Court found that vacation pay only has to be earned and determinable in order for the employee to be entitled to this compensation.

Not only did the Colorado Supreme Court find that there was no separate vesting requirement, it also found that, since vacation pay qualifies as “wages and compensation” under the CWCA, its forfeiture was contrary to the public policies behind the CWCA.FN8 Based on the inclusion of vacation pay as wages and compensation under the CWCA, the Colorado Supreme Court reasoned that, if earned vacation pay could be forfeited, then, by analogy, employers could “manipulate similar contractual language to avoid paying rightful wages to employees by conveniently terminating them shortly before their payday.”FN9 But preventing this sort of wage theft is “precisely the kind of exploitation, fraud, and oppression of workers the CWCA was intended to prevent.”FN10 As a result, if vacation pay was subject to vesting as Clark’s Market Inc. argued, then this earned and determinable compensation could effectively be stolen through manipulation of employment agreements and policies.

Instead of permitting the forfeiture of earned compensation by agreement, the Colorado Supreme Court in Nieto held that “any agreement . . . by any employee purporting to waive or to modify such employee's rights in violation of” their rights under the CWCA is void.FN11 (Note: much like employment rights under the Fair Labor Standards Act, rights under the CWCA are non-waivable so an employee cannot simply agree to, for example, work for less than minimum wage.)

The Court summarized its opinion as: “Consequently, when an employer chooses to provide vacation pay to its employees, an employee is entitled to receive all that is earned but still unpaid upon separation from employment, and any agreement purporting to forfeit earned vacation pay is void.”FN12

Remaining Questions:

Although the Colorado Supreme Courts holding applied to the forfeiture of earned and determinable vacation pay at the time of termination, it is clear from the reasoning that a similar conclusion would be very likely with respect to “use it or lose it” vacation (or PTO) policies. Indeed, in many places, the Colorado Supreme Court dropped any reference to “at the time of termination” and simply reasoned that under the CWCA an employer could not require the forfeiture of earned and determinable vacation pay. This would seem to make a “use it or lose it” vacation policy similarly void under Colorado law. As a result, in light of Nieto, an employer with a vacation or PTO policy may want to consider having a cap on earned vacation time or PTO as opposed to requring its forfeiture whether annually or otherwise.

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There is also a lingering question of what Nieto will mean for employers with unlimited vacation (or PTO) policies. Here the reasoning of the Colorado Supreme Court is less on point. The CWCA refers to vacation pay that is both earned and determinable. The definitions of ‘determinable’ mentioned by the Supreme Court in the opinion were similar and both essentially came down to something that is “capable of being determined, definitely ascertained, or decided upon.” However, the amount of vacation pay that is owed under an unlimited vacation policy is not “capable of being determined” or “definitively ascertained.” As a result, it is at least arguable that there is nothing owed to an employee at termination where the employer had an unlimited vacation (or PTO) policy. That said, employers should expect to see future challenges to these unlimited and similar plans in the wake of Nieto. Until then it may generally be prudent to tread carefully.

This article only touches the surface when it comes to the employee benefits and vacation or PTO policies that may be right for your business. If you have questions or would like to discuss anything discussed here, please Reach out, Today!

This article provides only general information and is not intended to be a substitute for legal advice.

Click Here to Toggle End Notes: it did not also have to be beyond the possibility of forfeiture, which is how the division understood “vesting” in this context.

FN1: Nieto v. Clark's Market Inc., No. 19SC553, 2021 CO 48 (June 14, 2021).

FN2: Id. at ¶ 3.

FN3: Id. at ¶ 3.

FN4: Id. at ¶ 5.

FN5: Id. at ¶ 7-8. See Nieto v. Clark's Market, Inc., 2019 COA 98, ¶ 17, __P.3d __ (“Nieto's right to compensation for accrued but unused vacation pay depends on the parties' employment agreement. And that agreement unequivocally says that the vacation pay she seeks wasn't vested given the circumstances under which she left [CMI]'s employ.") (emphasis added and internal quotations omitted).

FN6: In reaching its conclusion the Court of Appeals reasoned that the CWCA creates no substantive right to payment for accrued but unused vacation time and merely establishes minimal requirements concerning when and how agreed compensation must be paid.” Nieto v. Clark's Market, Inc., 2019 COA 98, ¶ 11, __P.3d _ (quoting Barnes v. Van Schaack Mortg., 787 P.2d 207, 210 (Colo.App. 1990) (internal quotations and brackets omitted).

FN7: The Court of the Appeals, in this context, understood "vesting" to mean that the benefit was beyond the possibility of forfeiture. But since Clark's Market Inc's employee handbook provided that earned vacation pay could still be terminated -- for example, if an employee failed to provide proper notice -- then the pay was not beyond the possibility of forfeiture and, as a result, had not vested.

FN8: Nieto v. Clark's Market Inc. at ¶ 15 ("Before 2003, the CWCA did not specifically reference vacation pay as a form of wages or compensation. Instead, it referred only generally to 'wages' and 'compensation.' § 8-4-101(9), C.R.S. (2002). In Hartman v. Freedman, 591 P.2d 1318, 1321 (Colo. 1979), we held that vacation pay, when offered by an employer as 'compensation for . . . work,' was protected under the statute. In 2003, the legislature made extensive changes to the CWCA. Among other changes, the amendments added a separate subsection defining '[b]onuses or commissions' as compensation, § 8-4-101(14)(a)(II), C.R.S. (2020), and subsection (14)(a)(III), codifying Hartman by explicitly requiring employers to pay vacation pay upon separation from employment: 'Wages' or 'compensation' means: (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. Ch. 286, sec. 1, § 8-4-101(8)(a)(III), 2003 Colo. Sess. Laws 1850, 1852 (currently codified at § 8- 4-101(14)(a)(III))").

FN9: Nieto v. Clark's Market Inc. at ¶ 28 (quoting Hallmon v. Advance Auto Parts, Inc., 921 F.Supp.2d 1110, 1120 (D. Colo. 2013); see § 8-4-101(14)(a)(II) (defining, as wages or compensation, "[b]onuses or commissions earned for labor or services performed in accordance with . . . any agreement").

FN10: Id. (quoting Leonard v. McMorris, 63 P.3d 323, 328 (Colo. 2003)) (internal quotations and brackets omitted).

FN11: Id. at ¶ 25.

FN12: Id. at ¶ 10.

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