Colorado Supreme Court Decides on Use-it or Lose-it Policies

Update Applicable to:
Colorado employers offering vacation/PTO policies.

What happened?
In a recent case, the Colorado Supreme court has ruled that “use-it or lose-it” policies as applied to vacation or Paid Time Off (PTO) plans are not compatible with the Colorado Wage Claim Act.

What are the details?
On Monday, June 14, 2021, the Colorado Supreme Court issued a long-awaited decision prohibiting so-called “use-it or lose-it” vacation policies. In Nieto v. Clark’s Market, 19SC553, the Supreme Court overturned both the trial court and the lower appellate court to hold that the Colorado Wage Claim Act (CWCA) prohibits the forfeiture of earned vacation pay at the end of employment, even when an employment agreement or policy provides that accrued vacation is not paid out upon separation.

The crux of this dispute is that the CWCA defines “wages” as amounts that are “earned, vested, and determinable.” However, the vacation payout provision within subsection 14(a)(III) only requires vacation pay to be “earned” and “determinable.” The omission of the term “vested” from the vacation payout provision had been the subject of multiple lower Court decisions that upheld employer use-it or lose-it policies. The Supreme Court disregarded the “vested” portion of the wages definition by reasoning that “vested” may be synonymous with “earned” and that the more specific payout provision trumps the general definition of wages. The Court also found that the CWCA general protections of wages and compensation apply to vacation pay and that the law’s remedial purpose would be contradicted if earned and unused vacation pay could be lost through a separate agreement.

An article covering the ruling may be found here.

What do employers need to do?
Employers offering vacation benefits will need to update their policies to reflect the new ruling. Employers who previously used a use-it or lose-it policy should remove these policies as soon as possible. Law firms, like Husch Blackwell LLP, recommend that employers either remove the policy’s language regarding “use-it or lose-it” or adapt the policy to instead cap accruals once employees hit max level.