Are Severance Payments Wages Under Colorado Law?

The Colorado Court of appeals confirmed that severance payments are not “wages” under Colorado law. In Sommers v. MarketPlace Realty, LLC, decided Dec. 24th, Jonathan Sommers was hired as Chief Financial Officer under a compensation plan that included a critical provision: if terminated without cause, he would receive six months of salary as “severance compensation.” When his employer fired him without paying this amount, Sommers sued under the Colorado Wage Claim Act (CWCA), arguing the promised severance was unpaid wages. The trial court disagreed and granted summary judgment to the employer. The Court of Appeals affirmed, clarifying an important distinction in Colorado employment law.

The Colorado Wage Claim Act

The CWCA allows employees to sue employers for unpaid wages. The statute defines “wages” and “compensation” broadly as amounts for labor or services performed by employees, but only when such amounts are “earned, vested, and determinable.” This seems straightforward enough—if you earned it and it’s determinable, it’s wages, right? Not so fast. The statute contains a critical exception: “‘Wages’ or ‘compensation’ does not include severance pay.” See C.R.S. § 8-4-101(14)(b)(2024)

What Makes “Severance Pay” Different?

Sommers tried several arguments to distinguish his “severance compensation” from statutory “severance pay.” He argued that most severance payments are meant to cushion unemployment, while his provision was intended as a delayed signing bonus and job security. The court wasn’t persuaded. Drawing on precedent from Colorado and other jurisdictions, the court explained that severance pay serves multiple purposes beyond unemployment compensation. It can compensate employees for the possibility of lower salary and benefits, reward service, or induce employees to accept employment in the first place. The court cited its own 2022 decision recognizing that severance can act as “an inducement to procure an employee’s services and represented a form of deferred compensation.”

What truly distinguishes severance pay is not its purpose, but its trigger: termination. The court adopted a straightforward definition used in prior Colorado cases: severance pay is “payment by an employer to its employee beyond the employee’s wages upon termination of the employment relationship.”

The Earned, Vested, and Determinable Argument

Sommers made another attempt, arguing that his severance compensation met the CWCA’s definition of wages because it was “earned, vested, and determinable.” After all, the statute says amounts meeting these criteria “shall be payable to the employee.” However the court dispatched this argument quickly. Even if severance pay is earned, vested, and determinable, the statute expressly excludes it from the definition of wages. The exclusion in section 8-4-101(14)(b) trumps the inclusion language in section 8-4-101(14)(a)(I). As the court explained, the statute makes clear that severance pay “does not qualify as wages under the CWCA,” regardless of whether it meets other criteria.

A Cautionary Tale from Legislative History

Interestingly, Colorado law didn’t always exclude severance from the definition of wages. In 2003, a Colorado Court of Appeals division ruled in Fang v. Showa Entetsu Co. that severance pay constituted wages under the then-current version of the statute. The legislature responded by amending the law to explicitly exclude severance pay—an implicit acknowledgment that severance could have been considered wages under the prior version. This legislative fix means employees cannot use the CWCA to recover promised severance payments, no matter how the agreement characterizes them.

Form Over Substance?

Sommers argued that calling the payment “severance compensation” in a section titled “Acknowledgement and Acceptance of Salary” should matter. The court rejected this formalistic argument. The provision’s location in the agreement and the specific terminology used don’t exempt it from the statutory definition of severance pay or transform it into wages. What mattered was the substance: the payment was contingent on termination and payable after employment ended. That made it severance pay under the plain meaning of the statute.

Practical Implications for Colorado Employers and Employees

The Sommers decision has significant implications for Colorado employees and employers. Colorado employees cannot pursue CWCA claims to recover unpaid severance, which means they lose access to the statute’s attorney fee provisions and other remedies specific to wage claims. Instead, they must rely on ordinary breach of contract claims. For employers, the decision provides clarity: properly structured severance payments—those contingent on termination—fall outside the CWCA’s reach, even when styled as salary continuation or characterized with other labels.

Key Takeaway

Under Colorado law, if a payment depends on termination of employment and is payable after that termination, it’s severance pay—and severance pay is not wages under the CWCA. The purpose behind the payment, whether it’s earned or vested, and how the parties label it don’t change this fundamental classification. Critically, employees with unpaid severance claims aren’t left without recourse, but they must pursue remedies outside the CWCA framework. The statute’s plain language and legislative history make clear that severance pay occupies its own category, distinct from the wages Colorado’s wage claim law was designed to protect.