Navigating Leave Encashment in Contract Staffing: How Should It Impact CTC and Billing?

Hi, I belong to an HR outsourcing company. We have been offering contract staffing services to a large manufacturing company, and my question is related to leave encashment. As a part of the contract, our employees working in the organization are entitled to 21 leaves annually. Although we have not bifurcated the leaves into PL/CL/SL, our employees can avail themselves of leave on a prorated basis, depending on the days worked. I need clarification on the following:

1. Since availing or not availing of the leave is entirely an employee's prerogative, I am a little confused about whether a provisional amount pertaining to leaves accumulated should be made in the monthly CTC or not, as the same has to be billed to the client.

2. Should the leave pay be calculated on Basic wages or Gross salary? Also, how should we bill the proportionate amount to the client?

Your contribution to the same will be highly appreciated.

Earned Leave and Leave Encashment

Earned Leave or PL is a benefit that you must provide to employees as mandated by law. Accumulated Earned Leave must be encashed when the employee leaves the organization.

Since encashment is a cost, it would ideally form part of the Cost to Company (CTC). However, since encashment is based on unutilized leave, there is some ambiguity on how to account for it in the CTC. Additionally, you would need to bill the client for the leave encashment paid.

There are two possible solutions from which you can choose:

1. In your contract with your client, provide for billing the client for Leave Encashment whenever it is paid.
2. Provide for Leave Encashment through LIC and bill the client for the premium paid to LIC for provisioning for Leave Encashment.

Regards,
Savio

Thank you for your valuable inputs. However, I am unclear about the relation between LIC and the leave encashment. I request you to please elaborate on the same.

Regards,
Dheeraj

Insurance Cover for Leave Encashment

LIC has an insurance cover to underwrite your leave encashment. You will have to send them the employee data, and they will do an actuarial valuation of your leave encashment liability and provide you a cover for a premium. This acts as a benefit in two ways:

1. It reduces your immediate liability. You pay smaller amounts every year compared to the amounts you would pay out as leave encashment.
2. The actuarial valuation of leave encashment can be transferred to your book of accounts as a cost.

They also have a similar policy for Gratuity.

Regards,
Savio

As you provide 21 days of leave with pay per annum, you can include the 21 days' amount in the CTC, regardless of whether the employee is availing the leave or accumulating it.

Leave Encashment Payment

For leave encashment, the payment should be based on the gross salary, not just the basic salary, as we pay the full salary when the employee avails leave.

Regards,
D. Gurumurthy
LL.HR & IR Consultant

Understanding Leave Encashment and Its Impact on Company Expenses

Leave encashment is an incentive for not availing of leave and contributing vital man-hours to the growth of the company. It is a privilege granted to the employee by law. Therefore, it is always an expense, whether the employee avails of it or not. If the employee takes leave, it results in a loss of productivity for the company, but the company still pays for it, leading to double expenses. However, if the employee does not take leave, they contribute to the man-hours and receive the encashment, resulting in a single expense for the company. In effect, the company benefits when an employee does not take leave but opts for encashment.

Leave Encashment Details by State

What is the exact number (e.g., CL - 2 / EL - 2) that is encashable in a year, state-wise?

1. Andhra Pradesh (AP)
2. Uttar Pradesh (UP)
3. Haryana
4. Punjab
5. Karnataka
6. Maharashtra
7. West Bengal

I beg to differ: while I was working with HCL, a 6 billion group, we used to follow COPC norms, and we had an attendance allowance (10% of monthly pay) which helped us in minimizing "unscheduled leaves." Kindly note that as per COPC/MBNQA, only unscheduled leaves affect the bottom line (not coming late or leaving early).

At Zamil Group, a 4.5 billion company, we used to allow sick leaves strictly on hospital advice (manipulation reduced). We were the forerunners in implementing "no attendance marking."

Encashment of leaves is not encouraged in any leading company worldwide because it drives medical costs.