January 13, 2020

Unsettled “Use it or Lose It” Vacation Rules in Colorado

Under Colorado’s wage law, employers are not required to provide a vacation benefit.  To the extent an employer does establish a vacation policy, such terms must be set forth in an agreement between the employer and employee.  Under such policy, the law prohibits forfeiture of accrued but unused vacation, or a “use-it-or-lose it” provision, i.e., accrued unused vacation time is deemed to be wages and must be paid to an employee upon separation of employment.  

Several years ago, the Colorado wage law was amended to provide that calculation of such accrued unused vacation pay is deemed earned and determinable pursuant to the employer-employee agreement.  This provision was deemed ambiguous and left many matters undefined.  Litigation commenced; of particular note, in the matter of Nieto v. Clark’s Market, Inc., 2019 COA 98 (Colo. App. June 27, 2019), the Colorado Court of Appeals opined that the binding employer-employee agreement defines these parameters. 

Presumably in response to this decision, the Colorado Department of Labor and Employment adopted rules that took effect on December 19, 2019 to clarify how to determine accrued unused vacation in these agreements.  According to these rules, an employer-employee agreement could set forth provisions to specify:

  1. whether there is any vacation pay at all;
  2. the amount of vacation pay per year or other period;
  3. whether vacation pay accrues all at once, proportionally each week, month, or other period; and
  4. whether there is a cap of one year’s worth (or more) of vacation pay. Thus, employers may have policies that cap employees at a year’s worth of vacation pay, but that do not forfeit any of that year’s worth. 

For example, an agreement for ten paid vacation days per year: (a) may provide that employees can accrue more than ten days, by allowing carryover of vacation from year to year; (b) may cap employees at ten days; but (c) may not diminish an employee’s number of days (other than due to use by the employee)”.

The Colorado Supreme Court may, perhaps, review this matter.  This leaves the landscape of vacation pay quite unsettled in the state of Colorado.  Employers with employees in Colorado should work with their legal counsel to address how best to manage accrued vacation upon separation of employment.


The information contained in this article is provided as general guidance and may be affected by changes in law or regulation. This article is not intended to replace or substitute for accounting or other professional advice. Please consult a CBIZ professional. This information is provided as-is with no warranties of any kind. CBIZ shall not be liable for any damages whatsoever in connection with its use and assumes no obligation to inform the reader of any changes in laws or other factors that could affect the information contained herein.

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