Colorado wage law obligates employers to pay wages to discharged employees upon termination—including “vacation pay earned and determinable in accordance with the terms of any agreement between the employer and the employee.”

Until recently, many employers (along with lower Colorado courts) took this to mean that employers were only obligated to cash out vacation pay upon termination if their agreement required them to do so. In other words, employers believed they could maintain a use-it-or-lose-it vacation pay policy that required employees to use vacation pay for time off and risk losing unused PTO on termination.

Earlier this month, the Colorado Supreme Court invalidated this interpretation in a case called Nieto v. Clark’s Market, Inc. In it, the court held that “if an employer chooses to provide vacation pay, any contract term that purports to forfeit it . . . is void. . .” While the opinion leaves some questions unanswered, it is clear that upon termination, an employer must pay out all “earned and determinable” vacation pay when the employment relationship ends.  This presumably includes resignations and involuntary terminations. Given this, we are urging our Colorado clients to review their PTO policies and consider revising any provisions that purport to eliminate unused PTO upon termination or resignation.

It is unclear from the opinion whether it applies to annual PTO forfeiture that is not associated with a termination of employment (i.e. forfeiture of unused PTO on the employee’s work anniversary). But at least one reputable law firm has interpreted the opinion to apply both to terminations and year-end or anniversary scenarios. So, the safest bet may be to revise policies that have year-end forfeiture policies too.

Importantly, the opinion does not appear to impact paid sick leave, which does not need to paid out on termination. The opinion also acknowledges that employers are not obligated to provide vacation pay.  Regrettably, however, this opinion may have the unintended consequence of discouraging employers from offering paid vacation time to their workers in the first place.

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