How Do Companies Handle Privilege Leave Accumulation and Encashment Policies?

Currently, the earned leave encashment in our organization is based on the last drawn basic. There has not been any ceiling on the accumulation so far. Some employees have accrued more than 180 days. We are planning to limit the accumulation to 70 days. Additionally, the management now believes that basing the encashment on the current basic strains the budget since the basic salary is revised every 3 years during salary revisions.

The management proposes the following changes to the leave encashment policy:

- The Privilege Leave (PL) balance at the end of the year, even if carried forward, should be eligible for encashment based on the prevailing basic at that time.
- When encashing leave at any point, the calculation should consider the basic salary and the carried forward balance year by year. For example, if there were 20 days of leave balance in 2005 and 20 days in 2006, and 30 days are being encashed in 2007, the calculation should be based on 20 days at the 2005 basic rate and 10 days at the 2006 basic rate, not the current (2007) basic rate.

I am interested in learning how other companies manage Privilege Leave accumulation and encashment. Could members shed some light on this topic? Specifically, I am looking for information on:

a) The maximum allowed PL accumulation
b) The basis for encashment

Your insights are appreciated.

Regards,

K Venkat

Hi Sabari,

I would suggest an even easier way: stop the practice of carrying forward leaves. If the employee doesn't avail of the leave, it will lapse at the end of the year.

There are two advantages to this approach:
1. The cost of leave encashment is saved.
2. Only about 5% of employees will be able to avail of the total quota; the remaining leaves will lapse.

As the leaves will lapse at the end of the year, employees will also be encouraged to consume their leaves, thereby fulfilling the purpose of the leave facility.

All seniors, please correct me if I am wrong.

Hi Venkat,

Regarding leave encashment, you will have to frame a policy for encashment. In short, sick leave cannot be carried forward to the next year and will lapse if an employee accumulates it during the year.

Regarding PL, follow the policy and draft it so that the accumulated leave for an employee does not exceed more than 30 days in a year. In other words, an employee should have a minimum of 30 days' leave to their credit. If an employee has more than the available credit, for example, 35 days, then only 5 days of encashment need to be given.

Therefore, considerably reduce the budget strains of the management. Establish a cutoff for leave through a policy and proceed accordingly.

Feel free to ask further doubts.

Regards,
R. Devarajan

Hi,

The purpose why a company allows accumulation of leaves for its employees is twofold: one is to meet emergency situations when a sudden large number of leaves are required to be taken, and the second is to have the option to encash leaves in emergencies for cash. Therefore, the suggestion that no encashment be allowed will not be in the best interest of the employees. Another problem that will arise if encashment is not allowed is that employees may start taking all their leaves, leading to increased absenteeism and causing the company's work to suffer.

The company's suggestion that leaves be encashed at the rate when the leaves were earned is also not entirely correct. Suppose some of my accumulated leaves were earned by me in 2001. By accumulating leaves until 2007, have I not lost interest for six years, resulting in a gain for the company? On one side, the company gains interest on the accumulated leaves, but on the other hand, it loses by encashing them at current rates. Additionally, encashing leaves at old rates will add to the workload of HR and accounting personnel.

Therefore, the alternative is as follows: First, do not allow 100% accumulation; make a change in the rule that a minimum of 10 or 15 leaves must be taken in a year, and only the balance shall be allowed to be carried forward as accumulated leaves. Second, limit the maximum accumulation allowed to 60 and state that beyond 60, the leaves will lapse.

K. K. Tyagi

Dear SV,

If we discuss The Factories Act 1948, wherein it is mentioned that leave can be accumulated for a maximum of 30 days, and in case of non-granting of leave, the limit of 30 days may be extended. Generally, acts are pro-labour. In other cases, the accumulation of leave may be a minimum of 30 days and a maximum that depends on the policy of the company.

We are accumulating Earned Leave (EL) for 60 days, Sick Leave (SL) for 30 days, and we give preference for encashment because for encashment, we have to pay at the current rate of basic, and if the member avails his leave, then he will be paid the full rate. As per social and natural justice, accumulation facilities should be available.

We can discuss the rest in the next session.

rrtpan

Thank you so much, Santosh, Devarajan, KKT, and rrtpan, for your suggestions and comments.

I am in line with KKT and rrtpan on the rationale behind the PL accumulation and encashment. I was able to convince the management about accumulation up to 70 days. The point for deliberation now lies only on the basis of payment. While I advocate for the current basic pay (not the current gross pay), my MD is of the view that it should be on the staggered basic pay relevant to the year in which particular days are being carried forward. As KKT rightly pointed out, the latter practice will be an add-on headache to account for and administer the process. I also find the suggestion of not allowing 100% carry forward but to draw a limit. Thank you for this input, KKT. Now...

I seek your help to know whether any legal guidelines exist on the rate of encashment.

With immense regards,
K Venkat

Dear Venkat,

First of all, let me thank you and rrtpan for adding to my knowledge or being instrumental in adding to my knowledge. Before interacting with you both, I was not aware of the Factories Act providing for the accumulation of leaves.

Coming back to your query, I have checked the Factories Act, and its Sections 78 to 80 provide that at the time of separation, the balance leaves including accumulated leaves are to be encashed at the current rate (and not on a staggered rate) of Basic Pay. However, it does not provide for encashment upon request.

KKT

Hi All,

Please help me in understanding the following:

1. For shops and establishments, how many mandatory casual/earned/medical leaves must an employer provide to employees?
2. Is there any mandatory requirement on earned leave accumulation?
3. Presently, we are not bifurcating leaves between earned/medical and casual. If we have to do so, in what proportion should we do it?

Rajesh

Hi,

In my company, we have 30 days of annual PL. A minimum of 15 days of PL must be availed during every subsequent financial year. PL not availed to that extent will automatically lapse. Hence, not more than 15 days can be accumulated in a year. Also, there is a ceiling of 100 days. In addition to this, PL accumulation beyond 30 days may be encashed by the employee in March or September. Many employees opt for this, so the problem of too many leaves to be encashed at the end of their term with us also decreases.

Your suggestion of encashing PL based on the basic from that year sounds good but can be a little tricky.

Hope this is of some help to you. :)

Hi Venkat,

A very nice and informative discussion is going on EL encashment and accumulation. Let me add here my organization's rules as well. I am working in a public sector undertaking where EL rules are as follows:

1) One can accumulate EL up to 300 days maximum.
2) One can encash EL three times (maximum) in a year but with a remaining balance in his/her account of 30 days EL.
3) The encashment rate is based on the current basic pay.
4) Encashment formula = (Basic Pay + DA) x No. of EL / 30

Bye,
RK Sinha
[Login to view]

Dear [Recipient],

If the person leaves the company in February, then the same formula will be applicable.

Regards,
Nirmal