Earned Leave Calculation Dilemma: Should It Be Based on Gross or Basic Salary?

I am working with a manufacturing company in Gurgaon. Until now, we have been calculating earned leave (EL) based on the gross salary. However, our directors are now instructing us to calculate EL based on the basic salary. Kindly assist me with this.

Regards,
Harry

Applicability of Earned Leave on Gross Salary

Earned Leave (EL) should be applicable to the gross salary. There is always reasoning and rationale behind any law. Suppose the employee is coming to the office; they should receive the complete salary, including all allowances such as HRA, Conveyance, Medical, etc. If they are on leave, then should they not receive HRA or other allowances? It should be based on the gross salary instead of the Basic.

It can be paid in any form, meaning it can be on basic and gross, but the taxability would be applicable on gross because, as per law, exemption can be given only on basic, not on gross.

Understanding Earned Leave (EL) Calculation

It is a matter of confusion. EL has been a long-time calculation in basic. Why? Here are the facts:

Basic Salary Calculation

Basic ≥ Minimum wages per day * Total number of days present. For example, if the minimum wage is 170, then the basic per month is 4420.

So, all other allowances that you give him are actually helping him to come to this company to work. For instance, HRA. In order for him to come and work in an organization, he needs to have shelter. Therefore, you pay him for his shelter. It is additional money you give him to come and work. Only basic wages are the salary that you give for the work done.

Leave and Allowances

If an employee is on leave, then he has not worked. Thus, you automatically cut his allowance too. So why pay him his house rent if he hasn't come for work? I hope I was not arrogant towards the employee's side.

Regards,
Yashwanth R
HR Associate
SKY Technologies

The calculation of leave encashment is always based on the basic salary because other components support the basic salary. Therefore, there is no need to include payment for other supportive components.

I agree with Mr. Yashwanth.

Regards,
Chill HR

[Facebook link: https://www.facebook.com/HRGang]

Let's assume that I am on leave for four days and apply for EL for these 4 days of leave. Here, I will get the entire four days off, which I believe will be equal to my four days of gross salary (FULL SALARY), not basic. My point is when it comes to calculations, you are advising me to base it on Basic, but for the purpose of leave, I consider it as a full day's salary. This is what I am unable to understand.

What I suggested in my last post is the same as what the majority of organizations are following. During the working period, if one needs EL (earned leave), it means a full-day salary, not just the basic pay. However, leave encashment entirely depends on the company's policy.

Case 1: If the company policy states that the company will deduct/pay the notice period based on the basic salary, then the leave encashment must also be calculated based on the basic salary.

Case 2: If the notice period deduction/payment is based on the Gross Salary, then the leave encashment must be calculated on the Gross salary only.

The policy regarding leave encashment is completely dependent on the notice period, and this should be clearly defined at the beginning with the office policy, rather than being determined at the time of encashing leaves and trying to find a way out.

Chill HR!! 

https://www.facebook.com/HRGang

All leaves are always calculated based on Basic + DA, not on Gross Salary. Leave Encashment = (Basic + DA) / 30 x No. of Leaves. It includes SL, PL, & CL.

Regards,
Vani M
HR

There have been repeated posts on this subject. Detailed discussions have taken place in this forum on this topic. However, I am repeating certain points as it has come up for discussion once again:

1. When an employee is availing leave, whether it is earned leave, casual leave, or sick leave, their full salary is given. If an employee's basic salary is Rs 1000 and their other allowances are Rs 1000, then they receive the basic salary plus other allowances in full when they avail leave with pay.

2. When an employee receives encashment of leave, generally the basic salary plus DA are given. The argument here is that when an employee avails encashment, their HRA and other allowances are already included in the salary. The logical argument is that there is no need to pay the same amount twice.

Dear Vani,

I have the same doubt as Gurgaon HR. The thing is, only EL/PL is cashable at the end of the year. It is stated as Leave with Wages in the Factories Act, i.e., 1 day EL for every 20 days.

SL is always calculated in two ways (60 days once). If I'm wrong, please correct me. One for employees covered under ESIC and the rest. If covered under ESIC, the employee shall give a writ to the HR department. The HR shall coordinate with the ESIC official and get the payment done for the employee through the bank. If the employee is covered under the Medical allowance (i.e., above 15,000), then the company shall avail SL for the employee.

Hope I was right... Please correct me...

Regards,
[Email Removed For Privacy Reasons]

Leave encashment would be on gross salary. Please refer to the Factory Act - Leave module. It is clearly mentioned in the Factory Act that leave encashment is based on gross salary, including all allowances that are regularly paid every month.

Regards,

If the employee has taken leave, then it's not a problem. If the employee left with SL, it will be encashed at the end of the year.

Calculation of EL & SL

EL & SL are calculated on Basic + DA.

Regards,
Vani M

Earned Leave Calculation According to the Factory Act

Earned leave calculation must be based on the gross salary as per the Factory Act. The reason for paying on the basic salary is that only those factories that provide a leave policy better than what is mandated under the Factory Act are exempted from this rule. Under the Factory Act, they can pay on the basic salary.

It actually depends on individual companies, and very few companies calculate leave encashment based on gross salary to attract and retain employees. Regarding sick leave, it is encashed so that employees would not take sick leave unnecessarily.

Regards,
Vani M HR

Understanding Section 80 of the Factories Act

Section 80 of the Factories Act states that if a worker avails leave, he shall be paid for the days of leave at the average total earnings, excluding overtime (OT) and bonus, but including dearness allowance (DA) and the cash equivalent of concessional sale of food grains or other articles. In practice, when an employee is on Earned Leave (EL), full wages are paid. Section 80 is not intended for EL surrender. The concept of EL surrender was not present before the legislature in 1948. Leave surrender is not a legal right. Section 79 deals with payment in lieu of leave when the employee's service comes to an end, not regarding EL surrender while the employee is in service. Leave surrender and the payment for that depend on each company's policy and practice.

Regards,
[Name Removed For Privacy Reasons]
[Phone Number Removed For Privacy Reasons]

Dear Harry, The query has some bugs in it. Is it about the calculation of EL or the calculation of salary during EL? The answers would depend on the query. Presuming that you require clarification only on:

1) How to calculate leave salary for the EL one avails under the Factories Act/Rules, as you mention you are in a manufacturing company.

2) The wages for EL are not "Encashment of EL" or "Encashment on cessation of employment." So this discussion is not about that.

If so, let us see what the Factories Act/Rules say about it -

Wages during Leave Period: For the period of leave allowed to a worker according to rules, he shall be paid at a rate equal to the daily average of his total full-time earnings for the days on which he actually worked during the month immediately preceding his leave. The average rate is to be calculated, exclusive of any overtime and bonus, but inclusive of dearness allowance and the cash equivalent of the advantage accruing through the concessional sale to the worker of food-grains and other articles. The cash equivalent referred to above is to be computed according to the method used when calculating the extra wages payable for overtime work. (See. post) - Sec. 80

Also, go through similar discussions in these links:

- <link no longer exists - removed>
- https://www.citehr.com/73083-india-l...es-people.html

Regards,
Kumar S.

Earned Leave Calculation

Earned leaves, when consumed, are calculated on a gross salary basis. However, when encashing the balance of earned leaves, normally the basic salary plus dearness allowance (DA) is used as the base.

Thank you.

EL = Basic + DA/26 * Remaining days, as simple as this. But if an employee is on leave, you deduct the payment from gross, not only from basic, so pay them based on Gross. For you, the formula will be: EL = Gross/26 * remaining days. CL and SL should never be encashed.

Regards,
Vikas Sharma
Jodhpur

If your question pertains to "workman," the EL should be considered in the Basic + DA + allowances. In short, the amount he will get (wage for a day) if he avails that leave.

In the case of non-workmen (executives), the company can have its own policy on whether to pay on Basic only or on the total CTC, depending on the objective—whether you want employees to avail more leaves to help them maintain work-life balance or if you want them to put more days for the company and pay for it to motivate them.

Hope this helps you.

Regards,
Shailesh Parikh
[Phone Number Removed For Privacy Reasons]

EL is to be encashed on Basic only and not on gross. This is in line with the IT Act of 1961, wherein exemption is given only on encashment done on Basic.

Regards,
Dxion
Tata Trent, Pune

Kindly advise whether EL is calculated on the basis of the number of days in a year or 30 days.

Thanks & Regards,
C.M. Mohla

Earned Leave Calculation Based on Policy

It depends on your policy. If you are allowing strictly as per the FA Act, it's one day for every 20 worked days. If it is an establishment in Kerala, there are flat 12 EL for an employee who has worked in the previous year for 240 days. This can be accumulated to 24 days. In factories, this 240-day criteria is also applicable.

Regards,
Varghese Mathew
[Phone Number Removed For Privacy Reasons]

Dear Colleagues, I agree with our seniors that EL/PL Encashment is based on Basic+DA, whether working or ex-employee. In other words, EL/PL = Basic+DA / 26 * No. of Days.

Additionally, EL/PL availed/leave taken is calculated on Gross Salary, which means an employee working within a company has taken leave(s) for personal exigencies. This calculation is expressed as EL/PL = Gross Salary / 30 * No. of Days.

I hope I am not mistaken; however, if I am, I kindly request our seniors to correct me and share your knowledge with us.

Thank you.

Can anybody tell me from which time E.L. should be counted, from the date of appointment or from the date of confirmation?

Regards,
Adhip Sen_gupta

Again, a lot depends on company policy. It's better to calculate it from the date of joining but allow employees to avail it after confirmation.

Regards,
Varghese Mathew

Earned Leave Calculation

EL should always be counted from the date of appointment as per all statutory provisions, be it the Factories Act, Shops and Establishment Act, Mines Act, Plantations Act, etc.

It is amusing to see so many diverse viewpoints and one's own interpretation of the query! It is appalling to see so much confusion with a simple concept as Earned Leave, and I think it calls for an Act to have a Certifying Body for HR Managers.

Direction for Companies with Conflicting HR Opinions

In what direction should a company act if the concerned HRs give these kinds of contrary opinions? Imagine the situation if the matter was about Medicine & Surgery, Civil Engineering, or say, Finance? One can imagine the result.

I appreciate the correct inputs from Kumar S. and T. Sivasankaran.

Regards.

Dear Faruk,

Please review the following:

Factories Act, 1948 [sec - 80 (1)]

For the leave allowed to him under Section 78 or Section 79, as the case may be, a worker shall be entitled to wages at a rate equal to the daily average of his total full-time earnings for the days on which he actually worked during the month immediately preceding his leave, exclusive of any overtime and bonus but inclusive of dearness allowance and the cash equivalent of the advantage accruing through the concessional sale to the worker of food grains and other articles.

They never mentioned other allowances. It's that you pay the Basic + DA + Cash equivalent that you would have paid if he would have come to the company.

Please correct me if I'm wrong.

Regards,

Dear All,

As per the Act, whether it's the S&E or Factory's Act, it should be 36 days per annum, i.e., 12 days of EL, 12 days of SL, and 12 days of CL.

Sick Leave (SL) Policy

SL, which stands for Sick Leave, can be carried over to the next year (at the discretion of the management) as the employee may not be sick in the current year but could be next year. For this purpose, it is carried over to the next year and is not encashable.

Casual Leave (CL) and Earned Leave (EL) or Paid Leave (PL) Policy

For CL and EL or PL, it is encashable by the company. In some companies, LTA can be adjusted against their PL after submitting proof.

Leave Policy Calculation

According to the Act, the leave policy is based on the calculation of BASIC + DA OR VDA, not gross, as this affects the employer outflow. BASIC + DA OR VDA divided by 30 multiplied by the number of days available (basic will be the last salary drawn as per the policy of leave).

Any deviation, please inform me.

Regards,
Vijayalakshmi J
Payroll Management Consultant

As per the Factories Act, it is not 36 days. There is no provision for CL and SL in the Factories Act. Regarding EL encashment, Mr. Yeshwant is right.

Regards,
Varghese Mathew
[Phone Number Removed For Privacy Reasons]

Dear Sir,

My name is Ashish Rana. I am working in a Delhi-based company. I just want to know if our manpower is working as a contractor in a Haryana-based company (our customer), then is it necessary for us to pay the leave encashment to our staff as per the "Haryana Leave with Wages Rules" or should we pay the leave encashment as per the "Delhi Shops & Establishment Rules."

Please help.

Regards,
Ashish Rana

A number of HR personnel have stated that Earned Leave (EL) should be based on Basic Salary. I am unsure on what grounds they made this claim. Everyone should refer to the Factory Act as it provides clarity on all queries regarding this matter; read Chapter 5. EL payment should be calculated based on the total earnings of employees working full-time. (Note: Factories can be exempted from this provision if they offer better leave facilities to employees, subject to approval in the company's standing orders). Therefore, it is evident that EL should be based on the gross salary. I am also aware that many companies provide EL encashment based on the basic salary, which is entirely unlawful unless they have an approved leave policy in place.

Hello Vani,

Leave encashment does not include the SL and CLs. As per most of the Shops and Establishment acts, leave encashment is only on Earned leave. The calculation is on Basic generally and varies from company to company as a practice. Please refer to the appropriate legal positions before posting anything.

Please tell me how to calculate leave wages for full and final settlement accurately.

The calculation of earned leaves (also known as accrued leaves or annual leave) and whether it's based on gross salary or basic salary depends on company policy and local regulations. Here's a breakdown of each approach:

Earned Leaves Based on Gross Salary:

In this approach, earned leaves are calculated based on the employee's total gross salary, which includes all components such as basic salary, allowances, bonuses, and other benefits. Using gross salary for earned leave calculations may result in a higher accrual rate, as it takes into account all forms of compensation received by the employee. This method is often used by companies that want to provide employees with leave benefits that reflect their total compensation package.

Earned Leaves Based on Basic Salary:

Alternatively, earned leaves can be calculated based only on the employee's basic salary, excluding other components such as allowances and bonuses. Using basic salary for earned leave calculations may result in a lower accrual rate compared to using gross salary. This method is commonly used by companies as it provides a more stable and consistent basis for calculating leave entitlements, especially when other components of compensation may vary. It's essential for employers to clearly define their policy regarding earned leave calculations in their employment contracts or company handbook to avoid any confusion or disputes. Additionally, they should ensure compliance with local labor laws and regulations, which may specify requirements for earned leave entitlements and calculation methods.

Ultimately, whether earned leaves are based on gross salary or basic salary depends on various factors, including company practices, employee agreements, and legal requirements. Employers should carefully consider these factors when determining the most appropriate approach for their organization.