Leave Encashment Dilemma: Should Only Basic and DA Be Considered for Departing Employees?

Hi,

I wanted some clarification regarding Leave Encashment. Earned Leave encashment is the prerogative of any management. The leave rule states that EL can be accumulated up to 30 days, and the excess will lapse if not utilized. There is no rule stating that the excess leave has to be encashed by the management. However, in the case of people leaving the company for any reason, the Factories Act is very clear that the leave at the employee's credit is to be paid. For convenience, most managements break down salaries into Basic, DA, HRA, Conveyance, etc. Some managements argue that the legislation has not specifically defined the components of leave encashment in case of employees leaving the services, and therefore, they will only consider Basic and DA for payment. They also claim that the other components are not wages, so only Basic and DA will be accounted for. What is your opinion on this? Is this the right practice? Is there legislation supporting this or otherwise? I would be grateful if our learned members shed light on this issue.

-Srinaren

Dear,

In this case, management takes advantage of the law because the law is not clear for the payment of encashment. Some companies pay it based on the basic salary, while others pay it in full.

Thank you.

J. S. Malik

Though the Factories Act does not clearly state the salary for the purpose of encashment, many similar Acts, such as the Payment of Bonus Act, Payment of Gratuity Act, Industrial Disputes Act, etc., have provided a definition of wages to include only basic wages and dearness allowances. Therefore, for leave encashment, the basic salary plus the dearness allowance at the time of encashment shall be considered. It is correct that all other allowances are part of employee benefits and not salary.

In establishments with Standing Orders, this matter will be clarified clearly. Otherwise, it is advisable to define salary to avoid any confusion during leave encashment, payment of salary in lieu of notice (from both sides), calculation of retrenchment wages, or gratuity.

Regards, Madhu.T.K