August 24, 2021 - Mercer
Colorado employers that provide vacation cannot include a forfeiture provision in the policy, the state supreme court has ruled. In Nieto v. Clark's Market, Inc., 2021 CO 48 (June 14, 2021), the court held that employers must pay all earned vacation pay on separation and any agreement permitting forfeiture of earned vacation pay is void. The ruling reverses an appellate court decision upholding use-it-or-lose-it policies.
The case arose from a terminated employee denied payout of her earned, accrued vacation. The employer relied on its policy, which stated that any employee discharged or voluntarily separated without two weeks’ written notice would not receive payout of unused, accrued vacation time.
The Colorado Wage Claims Act (CWCA) generally defines wages and compensation as “earned, vested, and determinable.” The law expressly includes “vacation pay” as a type of protected wage or compensation. However, the employer argued that the CWCA doesn’t apply in this case because the earned but unused vacation time never vested in light of the policy’s forfeiture provision. Both the trial court and the appeals court agreed, and found that the forfeiture was permissible.
After the appeals court issued its opinion in 2019, the Colorado Department of Labor and Employment (CDLE)’s Division of Labor Standards and Employment issued a rule (7 Colo. Code Regs. § 1103-7-2.17) contradicting the appellate court holding. The rule notes that language added to the wage law in 2003 requiring an employer to pay out unused vacation time on separation “in accordance with the terms of any agreement” did not allow forfeitures.
Reversing the appellate court, the high court held that the CWCA doesn’t create a right to vacation pay, but when an employer chooses to provide paid vacation, it is no less protected than other wages and compensation and does not have to be vested. Under the CWCA, employers must pay all earned and determinable vacation time on separation, and any agreement calling for forfeitures of earned vacation pay is void. The court also reviewed the CDLE rule on vacation forfeiture and found that the agency’s interpretation conforms with the statute’s purpose, language, structure, and legislative history.
In accordance with the CDLE regulation, forfeiture of earned vacation is impermissible, but employers’ vacation agreements with Colorado employees may contain the following provisions:
As a result, employers may have policies that cap employees’ vacation pay at a year’s worth of accruals or some other accrual limit, but cannot require forfeiture of any of the accruals earned.
State wage laws often fail to specify whether an employer must pay out unused, accrued vacation at termination or can implement a use-it-or-lose-it strategy. Instead, regulations, court rulings or both clarify this issue. In general, many states allow an employer to dictate the terms of its vacation policy, as long as it’s in writing and clearly communicated to employees. In addition, most states consider paid time off (PTO) that has no special designation to be vacation.
The chart below includes a sampling of states with relatively clear positions on vacation forfeiture. In some cases, the law requires payout at termination but allows a clearly stated use-it-or-lose it provision, as long as the policy gives employees a reasonable amount of time to use earned vacation before losing it (e.g., Illinois and Massachusetts). In other cases, earned vacation cannot be forfeited at any time (e.g., California, Colorado and Montana), but in other states, the issue remains unclear.
State
Payout due at termination?
Use-it-or-lose-it provision OK?
Citations
California
Yes
No
CA Lab. Code §§ 201(a) and 227.3; FAQs from regulators; Suastez v. Plastic Dress Up, 647 P. 2d 122 (1982)
Colorado
Yes
No
CO Wage Claims Act; Nieto v. Clark’s Market, Inc., 2021 CO 48 (June 14, 2021); 7 CO Code Regs. § 1103-7-2.17
Illinois
Yes
Yes
820 IL Comp. Stat. §§ 115/5, 300.520(e) and 300.520 (f)(3); and IL Lab. Dep’t FAQs
Iowa
Yes
Unclear
IA Code § 91A.4
Louisiana
Yes
Unclear
LA Rev. Stat. § 23:631(A) and (D); and Wyatt. Avoyelles Parish Sch. Bd., 831 So. 2d 906 (2002)
Massachusetts
Yes
Yes
Elec. Data Sys. Corp. v. Att’y Gen., 907 NE 2d 635 (2009); Att’y Gen. Advisory 99/1
Montana
Yes
No
Langager v. Crazy Creek Prods., 954 P. 2d 1169 (1998); Att’y Gen. Opinion No. 56, Vol. 23 (1949); MT Dep’t of Lab. & Indus. FAQs
Nebraska
Yes
Unclear
North Dakota
Yes, with limited exceptions
Yes
ND Cent. Code § 46-02-07-02(12); ND Lab. Dep’t FAQs
Rhode Island
Yes (after one year on job)
Unclear
RI Gen. Laws § 28-14-4(b)
States have different positions on whether vacation and PTO policies must provide for payout at termination or can include a use-it-or-lose-it provision. Some states require payout of unused, accrued vacation unless the employer’s written policy and consistent practice in administering that policy clearly indicate when forfeiture of accruals may occur. Businesses that want to curtail accruals in states that ban use-it-or-lose-it provisions may want to explore capping the amount of accruals. For example, a policy could limit accruals to 80 hours so employees hitting that limit can’t accrue additional time before using some.
The following approaches may guide employers’ vacation policy designs: