Forfeiture Provisions in Employee Paid Vacation Policies Deemed Illegal Under Colorado Law

By Dan Block

June 2021

“Use It or Lose It” or Other Forfeiture Provisions in Employee Paid Vacation Policies Deemed Illegal Under Colorado Law.  What about “Paid Time Off” Policies?

In a decision issued this month by the Colorado Supreme Court, the Court decided that forfeiture provisions in paid vacation policies are illegal under Colorado law.

“Use It or Lose It” or Other Forfeiture Provisions in Paid Vacation Policies 

In the case before the Court, Nieto v. Clark’s Market, the company’s policy in its employee handbook stated that paid vacation time “cannot be carried over from year to year,” and that if an employee voluntarily terminates his or her employment without giving the company at least two weeks prior written notice, or if the company terminates the employee’s employment, the employee will forfeit all earned vacation pay.  The company discharged Ms. Nieto and refused to pay her for vacation time she accrued but hadn’t used.

The Colorado Court of Appeals had decided that the policy was legal under Colorado law.  The Court noted that the Colorado Wage Claim Act (the “Act”) states that “the wages or compensation for labor or service earned, vested, determinable, and unpaid at the time of such discharge is due and payable immediately.”  The Court also referred to another section of the Act that states that “wages” or “compensation” means “Vacation pay earned in accordance with the terms of any agreement.”  The Court determined that whether particular compensation is earned, vested, and determinable, and therefore, due on termination, depends on the terms of the parties’ agreement.   Accordingly, the vacation policy of Clark’s Market doesn’t violate the Act, because her forfeiture of vacation pay was based on the parties’ agreement.

The Colorado Supreme Court disagreed.  The Supreme Court noted that the term “vested” did not appear in the Act regarding vacation pay.   The Act states that “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.”  Therefore, it didn’t matter whether the vacation pay was “vested.”  Once it had been earned it was determinable, and not subject to forfeiture.

However, it appears that the result would have been the same even if the word “vested” was in the Act regarding vacation pay.  The Supreme Court stated that “it is quite possible that ‘vested’ is essentially a synonym of ‘earned.’”  Additionally, the Supreme Court cited a different Colorado Court of Appeals case, Rohr v. Ted Neiters Motor Co., in which the Appeals Court stated that “Rohr’s bonus was earned and, therefore, became vested and determinable as of the date of termination, even though not due and payable for [multiple] months thereafter.” Therefore, a company couldn’t refuse to pay a bonus to an employee whose employment it terminated after the end of a year in which the bonus was earned based on the employee not being employed on the bonus payment date.   In other words, as of the date the bonus was earned, it was determinable, and vested—even though it wasn’t payable until a much later date.

Although the Act doesn’t require an employer to provide vacation pay, the Supreme Court stated that “if an employer chooses to provide vacation pay, any contract term that purports to forfeit it . . . is void” under the Act.  And, “when an employer chooses to provide such pay, it cannot be forfeited once earned by the employee.”

The result is that employer policies that don’t allow earned but unused paid vacation to be carried over from one year to the next or that limit the carry-over amount, or that state that the employee will forfeit earned and determinable unused paid vacation upon termination of employment in certain situations, are illegal under Colorado law.

Paid Time Off Policies

The question for many business owners and managers will be, what is the status of employee “paid time off” policies (whether named “paid time off,” “paid personal leave,” or having a similar name), under which the employee doesn’t earn separate paid vacation and paid sick leave—but instead, earns paid leave that can be used for vacation, the employee’s illness, or any other reason?

Unfortunately, the Supreme Court didn’t address those policies.

Although some attorneys with employment law expertise might disagree with this assessment, it seems that the determination should be the same for “paid time off” (whether named as such or as “paid personal leave” or a similar name) as for “paid vacation.”  That is, “use it or lose it” or other forfeiture provisions in paid time off policies are also illegal under Colorado law.

In most, if not all, employer policies paid vacation can be used for vacation—or for the illness of the employee or for any other reason.  Likewise, in most, if not all, employer policies paid time off can be used for vacation, for the illness of the employee, or for any other reason.  Therefore, paid vacation is included in paid time off.

In the Supreme Court’s decision in the Nieto case discussed above, it cited an earlier case of the Colorado Supreme Court in which the Court stated that the Act, “as a remedial statute, it must ‘be liberally construed to carry out its purpose.’”  And, as discussed above, the Supreme Court cited favorably the Rohr case decision that a bonus, once earned and determinable, couldn’t be subject to forfeiture based on the claim that because it wasn’t payable until a later date, it wasn’t vested.

It seems likely that the Supreme Court in a liberal interpretation of the Act would decide that an employer cannot avoid the obligation to pay earned and determinable vacation pay by including it in a policy named “paid time off” or “paid personal leave” or any with any name other than “paid vacation.”  In other words, merely changing the name of paid vacation shouldn’t be enough to allow it to be treated differently than “paid vacation.”

And, treating “paid time off” (by that name or a similar name) the same as “paid vacation” is the safer course of action at this time for an employer, rather than treating it differently.

Can Paid Vacation or Paid Time Off Still be Limited?

Business owners and managers might wonder whether the Supreme Court’s decision in the Nieto case discussed above means that they can no longer place limits on the amount of paid vacation or paid time off that can be earned by an employee.

It appears, however, that employers can still limit the amount of paid vacation or paid time off that can be earned by an employee.

One way to do so is to pay the employee the equivalent salary or wage amount of earned but unused paid vacation or paid time off at the end of each year.  In that situation, earned paid time isn’t forfeited.  However, for multiple reasons that alternative is likely not desirable for most employers.

An alternative I have recommended to employers is a maximum accrual policy.  Under the most common maximum accrual policy, the employee earns a specified number of hours of paid vacation or paid time off each month during a year, and can carryover time from one year to the next—but the employee can never earn more hours than the maximum accrual amount for the current year.  I can prepare a maximum accrual paid vacation or paid time off policy for employers.

______________________

Dan Block is a shareholder of Robinson Waters & O’Dorisio, P. C. in Denver, Colorado.  He specializes in employment law and other areas of business law.  You can contact him at 303-297-2600 or at dblock@rwolaw.com.

The information contained in this article is for informational purposes only, and it does not constitute legal advice for any specific situation.  The invitation to contact an attorney at Robinson Waters & O’Dorisio, P.C. is not intended as a solicitation in any jurisdiction in which that attorney is not licensed to practice law.

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