A very nice question and therefore I will answer it in detail.
Earlier there was concept of daily rated and monthly rated employees. Workmen cadre used to be generally daily rated and clerical staff and management staff used to be monthly rated. Daily rated would mean wages are say Rs. 150.00 per day and no payment would be made for weekly offs. In a month generally there are 30 days and 4 weekly offs, so normally payment would be released only for 26 days if the workman was not absent on any day.For Leave Encashment basis was number of days multiplied by daily wage. Same was the situation for entitlement of Leaves. Leaves would be allowed only on days worked (as in case of Factories Act). So at the time of granting of leaves also intervening OFFS would not be counted as Leave.
Monthly rated in contrast would get salary (in case of daily rate word was wages) for full 30 days i.e. they were paid for weekly offs also. here as salary was paid for full 30 days, so for Leave encashment monthly salary would be divided by 30 to get one day's payment. Leaves here were granted on lump sum basis i.e. 30 days of leave per annum. There was no link with days worked (only thing was that person should not be absent). Total number of leaves were also more in this case.So at the time of grant of leave, intervening OFFS were treated as leaves.
There will be constant demand from the unions to convert everybody to monthly rate. So slowly slowly everybody became monthly rate. But how was it done? Companies simply multiplied daily wage by 26 and started calling it monthly wage or salary.But now for Leave encashment if formula was changed to 30 days basis then it would be a loss to the workmen. So Leave encashment formula remained unchanged i.e. monthly wage was divide by 26 to get daily rate.But the system of entitlement and grant of leaves remained same i.e. in such cases leaves are granted on the basis of days worked and intervening OFFS are not treated as Leave.
So two types of practices are there. In IT Industry there was never a daily rate system. Therefore, it will not be correct to adopt 26 day formula. Because in that situation if you encash 30 days leave, you will be paying more than one month salary. Similarly in IT Industry leaves are paid on lump sum basis and not on days worked basis. Therefore intervening OFFS should be treated as leaves. (but it is suggested only for EL/PL. In case of CL, practice was same always for both daily rate and monthly rate employees i.e. they gey a fixed amount of CL per annum irrespective of days worked and intervening OFFS are never counted as Leave.
People generally do not know the background, make assumptions and start giving opinion which is not correct because it confuses the new lot.
Very nice article explaining the computation of daily rate. However, what would be the most recommended or applied pro-rating formula for employees on a monthly salary? My company is adopting the annualized formula i.e (Monthly Pay x 12)/(52 wks x 40hrs). Naturally, this formula is favorable when an employee is receiving payment from the company but unfair when the employee has to pay the company back e.g. for Notice Period. Thanks.
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