All Colorado employers who offer paid vacation days must pay out unused PTO. This is because Colorado law puts paid vacation days under the umbrella of compensation and wages. For Colorado employers, this means that if an employee leaves the company, any unused PTO must be paid out.
As with all states, Colorado employers aren’t required to create and maintain a vacation policy at all. But companies without a good benefits package don’t attract loyal employees. That’s why most employers provide paid vacation days as part of a benefits package. And since there’s no federal PTO payout law, each U.S. state makes the rules on whether PTO counts as compensation.
Up until 2021, Colorado’s laws about whether PTO qualified as wages and compensation were fuzzy. That all changed with Nieto v. Clark’s Market, Inc., the 2021 court case that clarified Colorado’s PTO payout laws once and for all.
If you’re a Colorado-based employer or you have employees who work in Colorado, understanding Colorado’s PTO payout laws is key to the success of your business.
The Colorado PTO Payout Laws in Detail
Colorado companies that grant PTO must follow the PTO payout laws defined by the Colorado Department of Labor and Employment (CDLE). If you don’t know the ins and outs of these guidelines, we’ll cover them here.
First, let’s talk about what the terms paid time off and vacation pay mean in Colorado. They refer to any paid leave that your employees can choose to use at any time. Keep in mind that at any time includes leave that must be approved in advance.
PTO does not include paid leave that’s only given when a qualifying event—like a holiday or death in the family—takes place.
When Do I Have to Pay Unused PTO in Colorado?
All wages and compensation earned at the time of an employee’s separation from employment must be paid within hours or days of the separation. The exact time depends on the situation. And in Colorado, wages and compensation include unused PTO earned according to the agreement between your company and the employee.
So what does this look like in action?
Say you provide your employees with 10 days of PTO per fiscal year. An employee leaves your company in March or April without having taken any of that PTO. Let’s assume that under your employment, they were earning $35 an hour for 40 hours of weekly work. This equals $2,800 of PTO that you must pay the employee upon their separation from your employment.
What Counts as Separation From Employment?
Under Colorado law, separation from employment includes any type of separation except a bona fide furlough. A qualified furlough can be caused by:
- A partial or full shutdown of your company’s operations that is expected or planned to last no more than 30 days or
- A partial or full shutdown of your company’s operations as required by an emergency declaration by the federal or state government. In this case, the furlough must end when the emergency declaration does.
If a non-emergency furlough goes longer than 30 days, it no longer qualifies as a bona fide furlough. This means you must pay out the employee’s unused PTO and other final wages.
Colorado law states that if you terminate the employee, you must pay the final paycheck—including PTO—immediately. The only time this doesn’t apply is if your accounting department isn’t scheduled to work on the same day as the employee’s termination. Instead, you must pay the employee within six hours of the accounting department’s first day back at work.
For example, say you terminate the employee on a Friday but your accounting department only works Monday through Thursday. In this case, the PTO payout and final paycheck would be due six hours after the workday begins on the following Monday.
Colorado employers with off-site accounting departments have slightly more time. An offsite accounting department must send the final payment to either the work site, the employer’s local office, or the employee’s mailing address no later than 24 hours after the start of the next regular work day.
However, if your employee voluntarily decides to part ways with your company, you’ll pay their final wages on the next regular payday. This includes any unused PTO.
What if an Employee Agrees to Forfeit Their Earned PTO?
Employees cannot forfeit their earned PTO under Colorado law. Even if such an agreement is made in an employment contract, the agreement is legally void. This rule is meant to protect employees from losing PTO wages and compensation because it prevents employers from implementing use-it-or-lose-it PTO policies.
In other words, Colorado employers can’t force employees to use all of their earned PTO before a certain date or risk losing it altogether. Employers can choose:
- Whether or not to provide paid time off
- How much PTO an employee can get in a specific time period
- How much vacation time can be used or accrued in a single year
- How the PTO will accrue–over pay periods, months, or years, for example
This means that if your PTO policy gives employees 10 days of PTO each year, they can choose not to use them and instead get a payout if or when they leave your company. Going back to the scenario we outlined above, let’s say you have an employee who:
- Earns $35 an hour
- Works 40 hours per week
- Receives 10 PTO days per year
- Quits without having used PTO for five years in a row
Under Colorado law, you must pay this employee for all 50 days of unused PTO. You’ll owe them five years’ worth of PTO, or $14,000, once they leave your company.
The Court Case That Changed PTO Payouts in Colorado
PTO payout laws in Colorado weren’t always this well-defined. Before Nieto v. Clark’s Market, Inc., Colorado employers successfully argued that vacation pay had to be vested before it could be paid out if an employee left the company.
In legal terms, vested means having an unconditional, absolute right to something. It is the opposite of the term contingent, which means certain conditions must be met before an event—such as a PTO payout—can happen.
Prior to Nieto, employers created policies that prevented PTO from ever becoming vested. They wrote policies with loopholes that meant PTO did not have to be paid out upon separation of employment, which meant it never vested.
All of that changed with Nieto. In this landmark case, an employer discharged an employee and refused to pay the employee’s accrued PTO. The employer’s PTO policy stated that if an employee was terminated or did not give adequate notice before leaving the company, they lost their right to any accrued PTO.
The employee used the Colorado Wage Claim Act (CWCA) to argue that they were entitled to the PTO. At the time, the CWCA stated that vacation time must be paid out upon separation of employment…as long as it was earned, determinable, and vested. The employer argued that because the employee had been discharged, the PTO was not vested under the employer’s PTO policy.
The Colorado Court of Appeals agreed with the employer. The Colorado Department of Labor and Employment (CDLE) sided with the employee, however, pointing to a different CWCA provision that voided any employee agreement to waive their PTO rights. The CDLE outlined emergency rules that prevent these use-it-or-lose-it policies.
Nieto went to the Colorado Supreme Court to decide whether the CDLE’s rules were an appropriate interpretation of the CWCA.
The Supreme Court held that vested either meant the same thing as earned or did not apply to PTO under CWCA. The Court also turned down the idea that an employer could create a vacation policy that legally controls whether an employee could cash out unused PTO.
Ultimately, the Court asserted that Colorado employers are not required to provide vacation pay. It ruled that as soon as employers offer vacation pay to employees, that pay cannot be forfeited by either the employer or the employee.
Should I Provide PTO to My Employees?
Multiple studies have shown that PTO policies reap a host of benefits for employees and employers alike. Paid time off improves job satisfaction. The rest and relaxation employees enjoy during a paid break boosts their mental, physical, and emotional health. It also increases their productivity when they’re back on the job. And PTO reduces employee turnover, which helps employers limit costly hiring and onboarding processes.
We highly recommend including paid time off as part of your employee benefits package. The United States is the only developed country in the world that does not require employers to offer paid leave. In other words, it’s up to you to provide this essential benefit to your employees.
While PTO is common in the professional sector, it’s less common in industries like hospitality, service, and leisure. No matter which industry you’re in, you can help boost the health of your employees and your company by providing PTO. Read our guide to creating a PTO policy to get started.
Other Colorado PTO Laws
Once you decide to implement a PTO policy in Colorado, there are rules you must follow.
The first important thing to know is that a vacation or PTO policy can be put in place by written word or by custom and practice. So, say you’re a small business and you’ve never actually put a PTO policy down in writing. Instead, you’ve long told your employees they have 10 days of PTO per year that they can request at any time. Under Colorado law, this counts as an unwritten but legally binding PTO policy.
And if you have a policy like this—or a written one, for that matter—your employees must be informed about its existence.
Next, both you and your employees have to follow the policy unless it changes, in which case your employees would need to be made aware of the change. The best way to make sure you’re following Colorado PTO laws is to create a written PTO policy with the help of legal counsel. If you are an employer in another state but employ remote workers in Colorado, you’ll need to be prepared to follow Colorado’s PTO payout laws too.
Hiring a lawyer to help you will cost you extra money upfront, but it will likely save you money and time down the road. Failing to follow Colorado’s PTO laws can invite costly lawsuits from former employees.
Doing everything you can to provide your employees with a fair PTO policy that follows Colorado’s PTO payout laws can help you maintain a reputation as a fair, honest employer. And that’s never bad for business.