Is Our Company's EL Encashment Calculation Legal During Full and Final Settlement?

Respected Seniors,

Our company calculates EL encashment at the time of Full and Final settlement.

Basic/30 x Balance EL

Is it right/legal?

Waiting for your valuable reply.

Regards

Ravinder Rawat

Dear Ravinder,

The formula you have mentioned is absolutely correct. There is no need to worry about that. Some companies pay Earned Leave (EL) based on the gross salary, but the formula you provided is accurate and compliant with the law.

Regards,
Vineet Saini

This is correct, but as others have said, some allowances should be added based on the company policy.

Dear,

Here are two types of questions:

1. How do we calculate working days?
2. When calculating gratuity based on 26 days, why is the leave encashment calculated on 30 days?

Legally, what is the correct method for calculating the number of days?

Thank you.

Dear Ravinder,

The formula is correct, but most companies follow Basic + DA / 26 (Number of working days).

Regards,
Sudharshan

The formula is absolutely right to calculate EL at the time of F&F: basic/30 * balance EL. Because most companies offer more than 15 EL to employees, if the formula were basic/26 * balance EL, companies would be restricted to providing only 15 EL per year.

Regards, Sudershan

The formula is correct. Our company also follows the same formula as we don't have anything like DA in our salary structure.

Hi,

The formula to calculate Earned Leave is Basic Salary divided by 26, i.e., payable days multiplied by total earned leave.

For example:
(5000 / 26) * 15 = 2884.6

Payush

The formula you mentioned is correct. The difference is that some companies consider the month as 26 days, while others consider it as 30 days.

-- Lav Nigam --

Dear,

As per the provisions of the Factories Act, the Encashment of earned leave is provided in Sec. 80. I am reproducing the same for your understanding.

80. Wages during leave period.- (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:

Provided that in the case of a worker who has not worked on any day during the calendar month immediately preceding his leave, 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 last calendar month preceding his leave, in which he actually worked, 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 workers of food grains and other articles.

(2) The cash equivalent of the advantage accruing through the concessional sale to the worker of food grains and other articles shall be computed as often as may be prescribed on the basis of the maximum quantity of food grains and other articles admissible to a standard family.

Explanation 1: 'Standard family' means a family consisting of a worker, his or her spouse, and two children below the age of fourteen years requiring in all three adult consumption units.

Explanation 2: 'Adult consumption unit' means the consumption unit of a male above the age of fourteen years and the consumption unit of a female above the age of fourteen years, and that of a child below the age of fourteen years shall be calculated at the rates of 0.8 and 0.6 respectively of one adult consumption unit.

(3) The State Government may make rules prescribing:

(a) the manner in which the cash equivalent of the advantage accruing through the concessional sale to a worker of food grains and other articles shall be computed; and

(b) the registers that shall be maintained in a factory for the purpose of securing compliance with the provisions of this section.

As per my understanding, "Total Full-Time Earning" means the amount the person earned while he is on duty, i.e., it includes all allowances as well.

Thus, the formula for encashment of unavailed leaves should be: Total Full-Time earnings (i.e., Basic Salary + D.A. + other allowances) / 30 * No. of unavailed leaves.

Regards

Only in the case of gratuity, the calculation is 26 days as per the Act, and for all other calculations, it is 30 days.

Dear Mr. Rawat,

As far as my knowledge goes, the calculation of EL or PL Encashment is: Basic / 26 * number of balanced EL or PL.

Regards,
Sanjay Sharma

Dear Sharma,

The act formula is correct. However, EL and Gratuity calculations will differ from company to company because some companies may manipulate salary calculations for 26 (working days) and 30 days (month days). Therefore, EL and Gratuity will be determined based on the salary calculations.

Regards,
Ramalingam.V

Hi,

Your formula is absolutely correct. We request you to refer to your company's leave policy; based on that, you can make the payment for leave encashment.

Regards,
Deepa P.

The calculation for gratuity is different, and for leave encashment is different. It is quite legal to give encashment on basic alone. If there is a DA component given in the salary, it should also be included. However, HRA, Conveyance allowance, etc., need not be included as "leave encashment" is only for the wages earned and not for the allowances given. Your company is well within its right, and you should accept the encashment given gracefully.

Dear Friend,

The calculation you have shown depends on the policy of the company. The HR manual of the company can resolve your doubts. However, in most companies, they use (Basic + DA)/30 * Balance EL. EL represents the earned leave for continuous work, i.e., 2.5 days per month of continuous service. In some companies, it is credited in advance for a quarter or six months as it is earned by the individual for their work/duty. Therefore, it forms part of basic and DA. Some companies pay matching PF contribution on EL encashment. However, this is not binding on the company to pay matching, as per the recent Hon'ble Supreme Court judgment.

Hi All,

Is it necessary to give leave encashment at the time of retirement/resignation, or can we give it at the year-end? What is the limit of Leave Encashment? In our company, we have a limit of 42 Leaves.

Regards,
Manasi

The formula is correct, but it must be paid ONLY ON GROSS. When an employee takes off on those days, the company pays the person based on Gross wages only. If that is correct, then is it also correct to pay an employee only Basic (which is roughly 40% of gross) and penalize the employee for ensuring that the company had smooth sailing, without the employee being absent or taking leave from work?

When the policy is silent about encashment, it does not imply that one could reduce the encashment and pay only on basic. Several companies are faltering on this, as there are no inspections carried out by authorities on this issue.

Leave encashment is required to be given only at the time of retirement or resignation. However, there are a few companies that offer annual leave encashment, which is favorable for employees and exceeds the statutory requirement. It is advisable to limit leave encashment to retirement or resignation to prevent increasing administrative issues.

Leave carry forward in Karnataka is 30 days, but this varies from state to state. If I am correct, 42 days would be sufficient.

K. Ramesh

The 26-day concept has come only based on gratuity calculation. Secondly, only the daily wage earners are required to be paid on a 26-day calculation, whereas for monthly salaries, it is a 30-day calculation.

If we are to go by working days, then the majority of the companies these days (except factories) work only 22 days. Then they have to resort to a 22-day calculation. Certainly, the employees are getting benefited, but for monthly wage earners, you could go by 30 days.

K. Ramesh

It is debatable whether Basic is divided by 30 or 31. To resolve this puzzle, the formula mentioned below is best:

One day Basic = ((Basic + DA) * 12) / 365

PL encashment = ((Basic + DA) * 12) / 365 * No. of days PL.

Dear Mr. Rawat,

The formula is absolutely right, but it depends on the company's internal policies. Sometimes, some companies use 26 days instead of 30 days. However, the actual count should be 30 days only.

Regards,
Deepak

Dear Neeraj K. Singh,

The discussion being held is with regard to wages for the leave period. The formula for calculating the wages for the leave period as well as the amount for unavailed leaves (Encashment) is the same, as it is provided in Sec. 80 of the Factories Act, which I have already reproduced in detail in my last post.

Regards

Dear,

As per the provisions of the Factories Act, the Encashment of earned leave is provided in Sec. 80. I am reproducing the same for your understanding.

80. Wages during leave period.- (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:

Provided that in the case of a worker who has not worked on any day during the calendar month immediately preceding his leave, 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 last calendar month preceding his leave, in which he actually worked, 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 workers of food grains and other articles.

(2) The cash equivalent of the advantage accruing through the concessional sale to the worker of food grains and other articles shall be computed as often as may be prescribed on the basis of the maximum quantity of food grains and other articles admissible to a standard family.

Explanation 1. - 'Standard family' means a family consisting of a worker, his or her spouse, and two children below the age of fourteen years requiring in all three adult consumption units.

Explanation 2. - 'Adult consumption unit' means the consumption unit of a male above the age of fourteen years, and the consumption unit of a female above the age of fourteen years and that of a child below the age of fourteen years shall be calculated at the rates of 0.8 and 0.6 respectively of one adult consumption unit.

(3) The State Government may make rules prescribing -

(a) the manner in which the cash equivalent of the advantage accruing through the concessional sale to a worker of food grains and other articles shall be computed; and

(b) the registers that shall be maintained in a factory for the purpose of securing compliance with the provisions of this section.

As per my understanding, "Total Full-Time Earning" means the amount the person earned while he is on duty, i.e., it included all allowances as well.

Thus, the formula for encashment of unavailed leaves should be: Total Full-Time earnings (i.e., Basic Salary + D.A. + other allowances) / 30 * No. of unavailed leaves.

Regards

The formula might be correct in most cases. However, as per CCS (Leave) Rules, the formula is: Basic + DA / 30 x Balanced E/L.

Rosanga

If we take a 12-month average, the employee might not get the right benefit if the employee's wages were revised just a few months prior to his/her resigning. Secondly, it must be only on gross wages and not only on Basic & DA.

Dear Ravinder,

The formula is correct, but most of the companies follow Basic + DA / 26 (Number of working days).