Struggling with Leave Encashment: How to Handle Privilege Leave in Final Settlements?

I am in a dilemma, unable to solve it. Can it be possible with your valuable guidance?

Delhi Shops & Establishment Act

Link: Office Of The Labour Commissioner

22. Leave

(1A) (i) Privilege leave to which an employee is entitled under clause (a) of sub-section (1) or under any such law, contract, custom or usage, award, settlement, or agreement as is referred to in section 3, or any part of such leave, if not availed of by such employee, shall be added to the privilege leave in respect of any succeeding period to which he is so entitled. However, the total period of such privilege leave which may be accumulated by such employee shall not at any one time exceed three times the period of privilege leave to which he is entitled after every twelve months of employment under that clause or under such law, contract, custom or usage, award, settlement, or agreement.

This means that privilege leave, if not availed, can be accumulated up to 3 years.

However, I noticed that in many companies, privilege leave is encashed at the end of the year if not availed by the employees. This process is not mentioned anywhere in the Shops and Establishment Act. Then how can companies frame such a policy?

Second Problem

We don't have a leave policy presently. But in the terms and conditions of employees, we mentioned that they would be given 20 privilege leaves per year. The company previously used to encash leaves at the end of the year. Later, we verbally asked employees to avail all privilege leaves by the end of the year, and privilege leaves won't be encashed.

Now, one employee has resigned, having more than 100 privilege leaves in his account. How can I calculate his privilege leaves for encashment in such a condition? Please help.

Thank you.

When the company has communicated the need to avail the Privilege Leaves (PLs), and if not, they would not be encashed, there is no question of encashing the 100 PLs as part of the Full and Final (F&F) settlement. It is also suggested that the leave policy be framed and documented. This will leave no room for ambiguity.

You can also introduce the carrying forward of leaves. For example, if an employee is left with some balance of PL at the end of the calendar year, you can give an option to carry forward and accumulate up to, say, 20, 30, or 40 days. If the balance exceeds the limit, it will lapse. Hope this information is useful.

Thank you very much. You are the only person who has taken the initiative to help me with this. I would like to tell you that earlier, I had raised this query in my other posts, but never got any reply.

Solution to the Problem

Now let me share the solution I have figured out to solve this problem:

For the last 3 years, starting from the date the employee left the company, attendance should be recorded. Based on the attendance record, the accumulation of Paid Leave (PL) and entitlement for PL encashment should be decided year by year. Three years are being considered here because, as per the Shops and Establishment Act, PLs can be accumulated for up to 3 years.

For these 3 years, the entitlements for PL encashment should be summed up, and payments should be made.

It is important to note that if any employee's leaves exceed 34 days (20 PL + 7 CL + 7 SL), the extra leaves should be adjusted in the Full and Final Settlement (F&F) if not done earlier in the respective month.

Calculations of PL, CL, and SL should be done on a pro-rata basis for the last working year. If the availed leaves exceed the total pro-rata leaves calculated (PL + CL + SL), the extra leaves should be adjusted in the F&F if not done earlier in the respective month.

If the leaves are less than 30 PLs in any year (i.e., PL credited - availed leaves), the remaining leaves should be considered for encashment.

This is the approach I have decided to take to handle the situation. Please advise if there is a better way to handle the Full and Final Settlement of the resigned employee.

Seeking Further Advice

I would also like to seek further advice from you. Our Management verbally instructed to stop PL encashment, but employees continued to accumulate PLs. Now, they are asking to encash all PLs. In the absence of any written leave policy, how can I convince them from a legal point of view? Please suggest...

Thank you.

I assume an employee is entitled to 20 PL + 7 CL + 7 SL each year, right? CL cannot be encashed from a legal perspective, and the same applies to SL. By the way, if the employee was covered under ESI, then they will not be entitled to SL. Only PL can be encashed at the time of F&F, subject to having a written policy on the same. PL encashment is calculated based on Basic + DA.

Addressing your last point, if the policy regarding non-encashment of PLs was not documented and circulated to your staff, then it would be difficult to reiterate the management's stand. It is very crucial to document all policy/process-related information.

Hope the above information is useful.

Regards

Yes, you are right. I accept what you quoted. I also discussed with familiar people regarding availing of PLs by the end of the year and not allowing any encashment for this. There is no point in saying it is improper. If the company is not willing to allow for encashment, employees should avail of PLs.

Furthermore, I would like to add that the above-mentioned method explained by me is okay but not 100% right. The proper solution for this is as follows:

Calculation for PL Encashment

Assume an employee joined on 29th April '96 and left on 31st Jan '12, and the annual PL is 30. The calculation for PL encashment will be as follows:

- Date of Joining: 29/04/96
- One-year Completion: 28/04/97

- Jan '98: 17.5 PLs credited on a pro-rata basis for the period of April '96 to Dec '96.
- Jan '99: 30 PLs for the period of Jan '97 to Dec '97.
- Jan 2000: 30 PLs for the period of Jan '98 to Dec '98.
- Jan '01: 30 PLs for the period of Jan '99 to Dec '99.
- Jan '02: 30 PLs for the period of Jan 2000 to Dec 2000.
- Jan '03: 30 PLs for the period of Jan '01 to Dec '01.
- Jan '04: 30 PLs for the period of Jan '02 to Dec '02.
- Jan '05: 30 PLs for the period of Jan '03 to Dec '03.
- Jan '06: 30 PLs for the period of Jan '04 to Dec '04.
- Jan '07: 30 PLs for the period of Jan '05 to Dec '05.
- Jan '08: 30 PLs for the period of Jan '06 to Dec '06.
- Jan '09: 30 PLs for the period of Jan '07 to Dec '07, Leaves availed: 32.
- Jan '10: 30 PLs for the period of Jan '08 to Dec '08, Leaves availed: 33.
- Jan '11: 30 PLs for the period of Jan '09 to Dec '09, Leaves availed: 46.
- Jan '12: 30 PLs for the period of Jan '10 to Dec '10, Leaves availed: 0.
- Jan '13: 30 PLs for the period of Jan '11 to Dec '11.
- Jan '14: 2.5 PLs for the period of Jan '12 to Jan '12.

Since the employee last worked in Jan '12 and no leave was availed, 30 PLs "for the period of Jan '10-Dec '10," 30 PLs "for the period of Jan '11-Dec '11," and 2.5 PLs "for the period of Jan '12-Jan '12" will be considered for PL encashment. Total PLs: 62.5.