Leave Encashment Dilemma: Should It Be Based on Basic Wage or Gross Salary?

Dear Sir, Recently, I have joined a manufacturing unit in Maharashtra which is in the commissioning stage. I have been tasked by Management to prepare various policies related to employees for the plant.

Leave Encashment Policy Query

While preparing the policy related to leave encashment, I am facing some queries. It is a general practice to calculate leave encashment based on the basic wage, but my consultant has advised me to calculate it based on the gross salary. Here, I have a query regarding whether leave encashment should be based on the basic wage or the gross salary.

I have searched for any documentary evidence on this matter but have not been able to find any. There are different opinions on this particular query.

I need your sincere help to understand the actual provision for wage calculation for leave encashment (basic or gross). Please help!

Thank you.

There is no specific rule in the Factory Act regarding this. However, the usual practice is as follows:

At the time of yearly leave encashment, HR personnel consider the gross salary as the base.

During full and final settlements, they use the basic salary as the base.

Regards,
Shubhlash

Yes, there is no hard and fast rule under the Factories Act. However, most companies typically follow the practice that leave encashment is based on the basic salary at the time of encashment.

Thanks and regards,
Somvir Singh

I beg to differ with the above. The Factories Act specifically provides the manner in which leave with wages is required to be provided in Section 80. Accordingly, wages = Basic + DA + Cash value of any food concession provided by the employer.

Regards

Of course, there is a direct provision in law under which leave encashment should be calculated. There is a small difference in what Mravimtnl said above. Logically, leave encashment is nothing but surrendering or selling your leave days on which you should have worked. In other words, leave is earned by working a number of full days on duty. Extending the same analogy, you should have been on duty on these days as a normal working day but for this leave encashment and thus entitled to full wages (gross). Of course, there are some exclusions such as overtime (OT) and conveyance reimbursement, which are normally paid only for actual days worked or attended to duty. However, you are entitled to Provident Fund (PF) on the leave encashed.

Regards,
Kumar S.

Leave Encashment Options

Leave encashment should be on gross as the employee has worked for the leave he can avail. In fact, you can give the employee two options: encash your leave or transfer the same to the next calendar year with a maximum limit, which can be carried forward. However, these carry forward leaves will not be encashed.

As many have said, there is no strict rule. It depends on the company policy. Most companies consider the basic salary for leave encashment calculation.

Understanding Leave Encashment Calculation

Please note that the first and foremost consideration is how your Standing Order (or your company policy) defines the computation of leave encashment.

If it is based on the basic salary, then the following formula should be used to calculate leave encashment for a day:
= Basic salary for the month / 30 days

You can multiply this by the number of days of leave credit for each employee to arrive at the leave encashment payable.

Regards,
P.M. Das

Provision for Leave Encashment Calculation

There is a provision in the Factories Act of 1948 that defines the manner in which it shall be computed. Section 80 states that the daily average of a worker's total full-time earnings (gross) minus overtime and bonus, based on the number of days worked during the month immediately preceding the date of encashment, shall be used to calculate the quantum of leave encashment. Therefore, you need to include all components of the salary except overtime and bonus.

Regards,
B. Saikumar
HR & Labour Law Advisor
Mumbai

Mr. Sasikumar is right. The word 'inclusive of DA' in Section 80 does not mean that only DA should be considered. It means the gross salary should be taken, but in no way should DA be omitted. Another logic is that all components that are paid as wages for the days an employee is on EL, the same components shall be considered for surrender as well.

Regards,
Varghese Mathew

Leave wages are paid based on the gross salary. As per the Shop and Establishment Act, "Leave wages are wages as per the Payment of Wages Act - 1962 MPC 107." The employee shall be paid at a rate equal to the daily average of his or her total full-time earnings, exclusive of any overtime and bonus but inclusive of DA and cash equivalent advantage.

Leave Encashment and Applicable Acts

Factories Act is silent on leave encashment while a worker is in service. The Payment of Wages (POW) Act is not applicable to a person with wages above Rs. 18,000 in a wage period.

Regards,
Varghese Mathew
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