Questions Pertaining To Leave Encashment, Leave Policy & Leave Bifurcation

Hi All,

Leaves are calculated based on the "CALENDAR YEAR" and not the "FINANCIAL YEAR"!!

I wanted to get better clarity on this. How does it make a difference? Are we violating the law if the leave period is from April to March instead of January to December? What is the best practice to follow to comply with the law?

[Link: https://www.citehr.com/436842-leave-calculation-financial-year-calendar-year.html]

Leave encashment is based on "BASIC" and not "GROSS" salary!!

We encash the remaining leaves based on Gross Salary. This is because when an employee takes paid leave, we make statutory deductions on Basic/Gross, depending on the case. Therefore, if an employee does not take leave, they are eligible for the entire Gross Pay, not just Basic.

This raises another question: I have heard that PF/ESIC contributions should be made on the amount of encashed leaves. Is this true? Is this the reason leave encashment is considered based on Basic salary?

[Link: https://www.citehr.com/443750-leave-encashment.html]

Generally, there are three types of leaves: Privilege/Earned Leave (PL/EL), Casual Leave (CL), and Sick Leave (SL). Among these, only PL can be carried forward or encashed at the end of the year, while the other two lapse. What if a company does not have these distinctions and only has one type, say CL, which they do not carry forward and must encash at the year-end? Would this be a violation of the law?

[Link: https://www.citehr.com/434860-leave-encashment-towards-full-final-settlement.html]

I am looking forward to clarity from seniors on all the three issues raised.

1. Leave Calculation for Financial Year

Law provides for calculation for the Calendar Year. However, there is no violation of the law if leave is calculated for the Financial year. It is the spirit of the law one should see. As long as you do not reduce the number, taking the year from April to March is perfectly alright. I have implemented this in one organization where I worked, and inspectors do not question this.

2. Leave Encashment on Basic

It has been the practice to pay encashment on Basic and DA alone. In those days, allowances normally include HRA, Conveyance, Washing allowance, etc. If a person takes leave, he has to stay in the same house. I have signed settlements for encashment indicating that Conveyance allowance, washing allowance, and HRA will not be included purely on the logic that these facilities are work-related. However, some organizations do pay all allowances now without applying any logic. I suggest organizations can draw their own conclusions on this by applying some logic suited to them. I still hold the view that logically there is no need to pay allowances like HRA, Conveyance, etc.

The Madras High Court has given a judgment saying that PF should be paid on leave encashment.

3. Having One Form of Leave

The Factories Act provides for Earned leave, and the Shops Act provides for Earned Leave and Medical leave as well. Earned Leave in all legislation needs to be carried forward. One cannot merge all leave and make it lapse at the end of the year even if the number is more.

Dear All,

Can anyone guide me to learn about the paternity leave policy in Indian organizations? How many days are ideally allowed for the same?

Awaiting your valuable guidance.

Regards,
Ambreen Shaikh
HR Executive

Indian companies do not provide paternity leave. It is not mandated by law either. In fact, asking for such leave is likely to be viewed negatively in your career plan. Of course, if you have accumulated leave, you can use that in such a case, and no one will object.

Hi,

I fully agree with our member Mr. Sivasankaran. This is a perfect and complete clarification. Nothing more to add. However, we have a practice of encashing the full salary (including HRA & Conveyance) as leave encashment only at the time an employee retires from the services of our organization. Of course, this is a good gesture from our management to employees. We also can keep/carry forward 90 days of PL/EL to the credit.

Dear Hiral,

I am working in a central PSU (A LEADING PSU). We can accumulate P/L and S/L up to 120 days and 300 days respectively. I do not agree with what Saswata Banerjee says because we DO HAVE a Paternity leave of 15 days in our organization. The same was started some 10 years ago.

S.K. Limaye (MBA-HRM)

Dear Hiral,

One more thing. PL is credited for 30 days and CL for 10 days on 1st April every year. S/L is credited for 10 days on the 1st January every year!

Paternity leave is now being offered by most companies as a benefit, which is not mandatory. This leave normally ranges from 3-7 days for the individual.

Hello!

Thank you all for your remarks and comments.

While on the same lines, I would like to ask what if an employee has been on leave for a month due to an accident and has been advised bed rest, with ESIC being taken care of by the company. The employee is expected to be on leave for the next two months or so. In such a case, is he eligible for PL, CL, SL? It is important to note that the employee, in general, is eligible for 1.5 leave credits every month.

Advice is solicited.

Provisions in all legislative initiatives on leave specify the calculation of leave only on the 'WORKED DAYS' and not for the days the employee was not present. It could be leave on loss of pay, leave with pay, accident leave, earned leave. These legislative measures include leave with pay and accident leave for the purpose of calculating eligibility. For actual calculation, the days will not be included. The following are excluded:
1. Layoff days
2. Leave availed
3. Maternity Leave
4. Any authorized leave

T. Sivasankaran

Hello Mr. T. Sivasankaran,

Please excuse my ignorance. I was unable to understand this exactly. Could you please guide me again? Thank you!

I am also trying to make my post more understandable:

1. A one-year-old (confirmed) employee has been on leave from 27th November until today.
2. He had a 0.5-day leave balance.
3. On 1st January, we credited his salary and 1.5 days of leave for December.
4. He was not present for the entire month of December.

Hence, is he eligible for two payable days (salary for 2 days and the rest for 29 days Leave Without Pay)?

Dear Mr. Mehta,

1. The legal status of the employee has no relevance to the eligibility of leave. Whether confirmed or not, an employee is eligible for leave.

2. Legally earned leave is credited on 1st January under Factories Act, Shops Act, and Mines Act. You can have your practice of crediting on the first of your accounting year. However, the point is that earned leave is credited once a year and not every month.

3. The Shops Act provides for Casual leave. This is credited normally in advance. However, many companies credit this every month, and some even go to the extent of saying that the same will lapse if an employee does not avail it in that month. This condition is not legally correct. Organizations can give credit every month, and the same shall lapse only at the end of the year.

3. Leave is credited only for worked days and not for the LOP period. Assume an employee is on loss of pay leave for the entire year; then, he is not eligible for any wages, and no leave is credited to his account.

4. Assuming that you give credit every month, the employee concerned has 0.5 days leave as of 1st Dec 2012. He is on leave for Dec, and you will sanction only 0.5 days leave. He will get salary only for 0.5 days.

5. In December, he was on LOP. Even assuming he was on leave with pay, the law does not provide for earning leave for days not worked, whether LOP or with Pay. Hence, he does not earn any leave for December.

6. If the employee continues to be on leave in Jan, he does not get any pay, and he also does not earn any leave.

I hope I am making it clear.

Sivasankaran

Thank you so much for imparting your valued knowledge. It was great to know it from a legal as well as policy point of view.

Just to correct - Ms. Mehta & Not Mr. :)

Thanks!!

Hi Hirel,

The leave policy and the cycle that you apply to your company depend on whether your company falls under the Factories Act or Shop Act. Also, if it is an Indian or Multinational company - Service industry or Manufacturing. You have to consider these factors while defining the policy.

Regards,
Gia

Hi Gia,

Thanks for the suggestion. Our company falls under the Shop Act, so my question was whether it is acceptable to consider the financial year. Also, what if we only offer 18 CL (without any breakdown) per year, which we encash at the end of the year? Is that against the law?

I do not understand what difference it makes if it is an Indian company or MNC. We are discussing the legal situation in an Indian context. Any organization engaged in a particular country needs to follow the rules of the land.

T. Sivasankaran

The legal situation doesn't change irrespective of Indian or MNC, but the decision-making factors are generally influenced, for example, in IT/Non-IT companies. The employees are well aware of the policies of other similar-sized companies, and most of the time, every policy decision is questioned and debated, etc. Anyhow, I am coming back to the point in question...

There is no legal enforcement to abide by the calendar or financial year. You can adopt what suits your organization, and also, if an MNC, you may align with your global practice. Regarding encashing CLs, for your information, CL & SL cannot be encashed; only PL/EL can be encashed.

I also want to add some inputs for the initial query raised by you. If the employee has been covered under ESIC, then he will not be entitled to SL. ESIC settles the leave salary of the employee on submission of all relevant documents on the accident, treatment, etc.

Hope my inputs were useful.
- Gia

Please note that the calculation of earned leave by deducting days on leave or non-working days is not universally applicable. Some shop acts provide for the calculation of earned leave based on 365 days. It depends on the provisions of the shop act.

Hi Gia,

I am aware of the ESIC clause mentioned by you and also that CL/SL cannot be encashed. Basically, I was trying to point out the fact that according to the Shop Act, should it be okay if there are no bifurcations in leaves. T. Sivasankaran has nicely put across the point and explained the same thoroughly and clearly. There are some necessary changes required and hence I was trying to understand the concepts clearly.

Thank you for your time and coordination. Trust me, it genuinely helped.

Dear T. Sivasankaran, Gia & members,

Could you all please throw some light on the best practices we can follow regarding the allocation of 1.5 leaves per month? Management intends to provide only 18 leaves per annum, resulting in the absence of PL/CL/SL in the company. How should this be managed and executed?

Thank you.

I am not aware of the provisions of Shops Act in Gujarat. Combining all leave is possible as long as you provide better benefits. I will discuss with reference to Tamilnadu Shops Act. This will shed some light, and you can apply it to your state.

Tamilnadu Act provides for 12 days of earned leave, 12 days of casual leave, and 12 days of medical leave with pay. Earned leave is credited after one year, while medical and casual leave are credited in the same year. Earned leave can be accumulated up to 24 days, but casual and medical leave lapse at the end of the year.

In Tamilnadu, it is mandatory to provide 36 days of leave in a year. If covered under ESI, this can be reduced to 24 days, although the law does not specify this. In a factory, the maximum leave allowed is 15 days in a year.

One needs to examine the Shops Act in their state and draft a policy.

If Gujarat provides for 12 plus 12 as in Tamilnadu, excluding medical, then the minimum leave you need to provide will be 24 days in a year. It is mandatory to provide earned leave, which can be accumulated for at least two years.

I often come across many BPOs resorting to one day or 1.5-day leave per month, which lapses every month. They justify this by stating the need to deliver and cannot accept absenteeism. Not all State and Central Governments are implementing this vigorously. In the past, in manufacturing, temporary workers were engaged without granting them leave. This practice was common in the 50s and 60s. However, unions started demanding and government officials became strict. Even today, in manufacturing industries, this practice is generally followed.

In summary:

1. It is legally incorrect to provide leave lesser than what is mandated by law.
2. It is legally incorrect not to allow accumulation for at least two years.
3. Many organizations, especially in the BPO/IT sector (excluding big players), are practicing this despite legal requirements.
4. Since there is no strong unionization and the government is not currently enforcing these regulations, organizations take the risk.

As a lawyer, I would advise against it. As a practical HR consultant, I would suggest considering two days per month and allowing accumulation of 12 days for the next year. Indirectly, allowing accumulation can help in reducing the attrition rate.

T. Sivasankaran

Hi,

I think you should do some research on the leave policy applicable in a similarly sized organization within the same service line as yours. You can use it as a yardstick to formulate your own leave policy. Mr. Sivashankaran has already elaborated on every aspect from a legal perspective.

I work in an IT company in Maharashtra. Our employees are entitled to 12 PL/EL, 6 SL, and 6 CL. We follow the calendar year, and CL/SL lapses at the end of the year. The leaves are credited every month and not given in advance.

Hope the above information will be useful.

We are in Biotech and we also follow the same pattern. CL-6, ML-6, PL-1 per month and a maximum of 12 days PL they can accumulate for use in the next year. However, we have not yet decided on the Encashment of the PL. We have given employees the option to utilize it whenever they require, so that they can take a break after a busy schedule and relax.