The Colorado Supreme Court issued its long-awaited decision in Nieto v. Clark’s Market, Inc., ruling that employers must pay employees for any earned but unused vacation upon termination of employment. This decision means that Colorado employers must pay employees for earned but unused vacation pay at the end of their employment.  Employers with Colorado employees must also update their policies that purport to  forfeit an employee’s earned vacation pay for any reason.

The court noted employers are not required to offer paid vacation time to their employees. However, once employees earn vacation (or “PTO”) it becomes “wages” under Colorado law, and  employers are obligated to pay departing employees for the vacation that they earned.  The court reasoned that employers should not be allowed to manipulate contractual language to avoid paying rightful wages to employees, as that contravenes the public policy underlying the Colorado Wage Claim Act.

Critically, this decision does not prohibit employers from limiting their payout liability upon termination of employment by setting caps on how much vacation time an employee can earn or accrue. Under prior decisions, Colorado employers may have written policies that cap employees at one year’s worth of vacation time and provide that employees cannot accrue any additional time above the cap.

In light of this decision, Colorado employers, including employers based in other states who have Colorado employees to whom this decision will apply, should review their employee handbooks and individual employment agreements and remove “use-it-or-lose-it” language. Additionally, Colorado employers should train their human resources personnel on this development, and ensure that all employee departures going forward will be in compliance. Employers who wish to limit their liability should look at their vacation accrual policies, including implementing caps on the amount of time that employees can accrue.