Leave Encashment, Loss Of Pay And Notice Period Buyout - CiteHR
Saswatabanerjee
Partner - Risk Management
Pon1965
Construction
+1 Other

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Hello,
I am part of an IT firm under Shop and establishment act 1988. I have read many articles where Leave encashment is done on Basic Salary and LOP on gross salary.
But why do we calculate them according to basic and gross respectively? No one has yet stated reasons. So I would appreciate if someone could let me know the reason why we should go with basic and/or gross.
Also, should the notice period buyout be according to Basic or Gross pay ? and why ?
Request your advice on these.
Thank you.
LydGov
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Hi

It's a very interesting question.

At first I considered it unfair practice

But then I realised that it makes sense :

1. Let us assume that it is correct to give leave encashment on basic plus DA basis. The reason is that you are paid basic plus da for work and that other things are allowances related to work. (this does not hold very true today since things like education allowance are not in per day worked basis)

2. In case of leave without pay, you will lose the basic plus da, but then the allowances are also not payable because you did not work during that period. Since you did not work, why should you get paid for it ?

3. Another point is that for leave encashment, you are getting your main pay. The allowances have already been given to you in the month in which you worked. So even for monthly allowances like education allowance, you should not get more education allowance because you did not take leave. It is amount for education of your kids. They don't require more money because you didn't take leave.

I am sure you can make similar reasoning for every allowance (to be denied).

In the end, it's a matter of practice and negotiation in most cases. If union is strong, they will probably try to get the opposite rule passed :)
Leave encashment is a facility provided to the employees to have more liquidity when they are in need. It is reimbursed on basic only which is being followed in many establishments.
Whereas, LOP is a penalty for not turning up work or absent. How can you expect gross salary which comprises of other allowances, inter alia, basic salary, when you are not in duty.
Notice period buyout or notice pay deductions are usually done on basic in many establishments but it depends on the appointment conditions.
Pon
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