[Dridzt]

It doesn't (Fatality).

The relevant code snippet is this

local function colour(name)
	if (instance == "raid" and output1 ~= "SELF") or (instance == "party" and output2 ~= "SELF") then
		return strip(name)
	elseif not UnitIsFriend("player", name) then
		return format("|cffff0000%s|r", strip(name))
	end
	local _, class = UnitClass(name)
	local c = _G["RAID_CLASS_COLORS"][class]
	return format("|cff%02x%02x%02x%s|r", c.r*255, c.g*255, c.b*255, strip(name))
end

As you can see it only returns a colored name when the output is not raid or party, ie when it outputs to the local chatframe.