If you offer paid vacation in Colorado, you must pay out unused PTO.
Colorado is quite adamant that PTO cannot be forfeited for any reason. Once employees get PTO, you can’t take it away.
As long as the PTO is “determinable” (some sort of formula that gives a specific amount), then it needs to be paid out if the employee leaves for any reason. So unlimited PTO doesn’t need to be paid out since there isn’t a specific amount to pay.
But you aren’t forced to provide PTO in Colorado. If you don’t offer PTO to employees, then there’s nothing to pay out. Do keep in mind that Colorado will count an informal PTO policy as PTO, even if it’s not documented.
Before we go any further, I’m not an attorney. I’m a small-business owner that has hired employees in Colorado. This is my best understanding of the rules but none of it is legal advice. Definitely speak to an employment attorney based in Colorado for legal advice.
The Colorado PTO Payout Laws in Detail
What Kind of PTO Policies Require PTO Payouts in Colorado?
In Colorado, paid time off and vacation pay refer to any paid leave that your employees can choose to use at any time. It doesn’t matter what you call it.
PTO payouts do not include paid leave that’s only given when a qualifying event. This includes company holidays, bereavement leave, jury duty, and similar policies.
Colorado requires all vacation must be paid out upon separation as long as it’s “determinable.” Colorado defines that as “able to be calculated. The calculation can be from a written document, verbal policy, or informal practice.”
If your PTO policy involves a formula to come up with a PTO amount, that needs to be paid out.
The obvious exception is unlimited PTO. Since unlimited doesn’t involve a set amount of PTO, there’s nothing to pay out when employees leave the company.The sneaky bit is that the policy can be informal too. It doesn’t necessarily have to be a written policy. So be very careful with any routine practices that your company adopts. You could be on the hook for paying out PTO even if you don’t realize it. And I strongly recommend you get a written PTO policy in place so there’s nothing open to interpretation.
What if an Employee’s Pay Rate Changes? How Does That Impact PTO Payouts?
The rule to remember is PTO can’t be taken away. So any PTO earned during a higher rate of pay still has to be paid out at that higher rate. PTO earned during the lower rate of pay can be paid out at the lower rate.
If an employee worked half the time at $20/hr and the other half at $10/hour, half of their earned PTO still needs to be paid out at $20/hr.
What Counts as Separation From Employment?
Basically, anything counts as separation. Here’s the quote that defines separation: “separate from employment, whether they are fired with or without cause, resign with or without notice, or separate for another reason.”
The only exception that might come up is a furlough. Employees aren’t technically separating during a furlough so you might not have to pay out unused PTO. But I’d definitely recommend that you get legal advice from an attorney that’s familiar with Colorado wage law.
When Do You Have to Pay Out the Unused PTO?
Unused PTO counts as earned wages. So it needs to get paid out at the same time as any other unpaid wages.
Colorado law states that if the employer initiates the separation, you must pay the final paycheck—including PTO—immediately. If the termination happens when your accounting department isn’t working, the payment needs to be made within 6 hours of the start of their next working day.
If the employee quits or resigns, the payment isn’t due until the following day.
There are some other nuances like if the accounting department is based in a different location than the work site. But the simple rule to remember is that when an employee leaves, pay them everything (including unused PTO) immediately.
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. The exact quote: “any agreement that forfeits earned compensation is void and unenforceable.” PTO counts as earned compensation.
Avoid Use-It-or-Lose-It PTO Policies in Colorado
Yes, many use-it-or-lose-it PTO policies are illegal in Colorado. You can’t avoid a PTO rollover and wipe vacation at the end of the year. Since PTO can’t be forfeited in Colorado, use-it-or-lose-it PTO policies are illegal.
So be very careful with lump-sum PTO policies and how PTO carries over from one period to the next.To avoid the issue entirely, I highly recommend using an accrual PTO system instead of lump-sum. Not only is it better in my opinion, it’ll keep you in the clear.
What Companies CAN Do With PTO in Colorado
Employers can decide:
- Whether or not to provide paid time off
- The rate that PTO accrues
- Limits on how much PTO can be accrued
- Limits on how much PTO can be used within a given period
- How the PTO will accrue over pay periods
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.
Key Resources for Colorado PTO Payout Laws
Colorado has taken down a lot of their resources and pages. But there are a few that I’ve found helpful:
- Colorado Wage Act § 8-4-101: This is the official regulation for wages. Since unused PTO is considered compensation, many of the normal wage rules apply to unpaid PTO.
- Interpretive Notice & Formal Opinion (“INFO”) #3E: Payment of Earned Vacation upon Separation of Employment: A very helpful PDF that breaks down PTO payout laws in plain english. Also has a bunch of great examples that clarify things for Colorado businesses. Trust this doc more than any random blog post (including mine) or an AI answer.
- List of Colorado Labour Statues: A bunch of the regulations are listed here.
Of course, always consult an employment attorney for any unique situations or if you have questions. Find an attorney based in Colorado and with a deep practice in employment law. This stuff changes all the time and you don’t want someone giving you their “best guess.”
