Closing a Company Unit: Should Leave Payments Be Based on Basic Pay or Gross Salary?

We are going to close a unit of our group companies. We have prepared all payment documents for gratuity and bonus, and now I need to pay the balance for leaves. Please advise if this leave payment should be calculated based on basic pay + DA only or on the gross salary.

Sub- Leave Payment

It is not clear from your query whether your company is a commercial establishment or a factory, or if you have your own leave policy. As far as the law on this aspect is concerned, if you are a commercial establishment, you need to follow the computation method prescribed under the Shops and Establishment Act of your State. If you are a factory within the meaning of the Factories Act, you have to follow the computation method stipulated under the Factories Act.

For example, Sec. 36 of the Bombay Shops and Establishments Act states that the employer shall pay to the employee who is discharged from service or quitting the service an amount at the rate equivalent to the daily average of his wages for the days on which he actually worked during the preceding three months, excluding overtime, for the period of leave un-availed by the employee.

For this purpose, wage is defined by Sec. 2(30) of the Bombay Shops Act. It adopted the same definition as that of Section 2(vi) of the Payment of Wages Act 1936.

As regards leave encashment under the Factories Act 1948, Sec. 80 of the Act states that the wages for the un-availed leave shall be computed at the rate equivalent to the daily average of the total full-time earnings for the days on which he actually worked during the calendar month preceding the date of cessation of service.

While arriving at wages for the calendar month preceding the date of cessation of service, Sec. 80 stipulates that dearness allowance and cash equivalent of the benefit of concessional sale of the food grains and articles made to the worker shall be included in the total full-time earnings, and overtime and bonus shall be excluded from it.

If you have your own leave policy and it did not prescribe any mode of computation on encashment of leave, you can take guidance from the definition of 'wages' under Sec. 2(rr) of the Industrial Disputes Act 1947. The definition excludes payments like bonus.

Regards,
B. Saikumar
HR & Labour Law Consultant
Chipinbiz Consultancy Pvt Ltd.
Mumbai

How are additional working days calculated? Is it based solely on the basic pay, or are some perks added to it?

Regards,
Jitender

EL/PL encashment would be done on Basic and DA. You can also make leave encashment on the gross salary of the employee under the discretion of your management.

With Regards,
Priyadarshini

Please refer to the below clause of the Factories Act, which states that leave encashment should be equal to the daily average of total full-time earnings, exclusive of overtime and bonus. How come we have to consider only Basic & DA?

Wages During Leave Period

"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."

Based on my understanding, your employee worked for 10 days in a month as a notice period and was absent for 20 days. If he/she did not work for 20 days, the employee will not be eligible to receive the salary and other perks for those 20 days.

Step 1: Calculate Salary for 10 Days

Calculate his/her salary for 10 days = 18120/30*10 = Rs. 6040.00

Step 2: Leave Encashment

If EL/PL Balance is 15 (calculate on Basic and DA, (Basic+DA/30*15) = 6010

Step 3: Calculate Outstanding Bonus

Calculate outstanding bonus, if any.

Step 4: Deduct Notice Period

Deduct the notice period from the total (Total Salary/30)*20 = 12080 (to be deducted in lieu of the notice period).

The total amount payable towards FFS will be Rs. (Total Salary payable for 10 days + Rs. 6010 (encashable amount) + Bonus) - 12080.

With Regards,
Priyadarshini