How Can We Cut Leave Encashment Costs Without Hurting Employees?

Dear Seniors, We are an IT company following a leave policy where there are 12 CL, 2 OL, and 15 PL (after completion of 1 year). The management has identified that we are spending a significant amount on leave encashments when an employee resigns. They have asked me for ways to reduce the cost of leave encashment without causing any injustice to the employee segment.

Need Your Help and Suggestions

I would appreciate your help and suggestions on this matter.

Regards,
Ruchi Shah

CL is not encashed. Only PL (Earned leaves) are encashed. They are encashed based on Basic + DA only. So, the best way to reduce the burden of the encashment amount is in the next increment; don't increase the basic amount by much; instead, increase more in allowances like special allowances, etc. By doing this, if the basic amount is kept lower, the burden on the company will be less.

This is the idea, but of course, it depends on your company's policy.

Regards,
Rajeev Dixit

Is it correct to increase the number of CL and reduce PL or earned leave to avoid the burden of encashment?

If I am not wrong, you cannot simply increase CL and reduce PL to reduce the burden. For every 20 days, one PL is applicable.

Regards,
Rajeev Dixit

Casual or sick leaves are not encashable. You can restrict the encashment of paid leaves by limiting the number of leaves transferred to the next year to a certain amount suitable for your company's encashment policy. The remaining leaves should be taken by the employee in that particular year, or they will be considered lapsed.

Regards,
AK Mathur

Understanding Labor Welfare Legislation and Leave Policies

The labor welfare legislations, such as the Shops & Estt Act and the Factories Act, prescribe certain leave entitlements for every minimum number of working days, apart from the weekly off. Thus, every employer must grant a minimum leave as PL or annual leave and provide encashment thereof. Of course, the company can decide on further liberalization through some agreement with the employees or their unions. Therefore, you may engage in any cost-cutting measures within the provisions of the law.

Regards

There is a limitation on the minimum number of leaves such as CL/SL/EL/Public Holidays/RH, etc., according to the state rules under the relevant act, but there is no limitation on providing more than the minimum.

Encashment of Leaves

Regarding the encashment of leaves, Earned/Paid leaves are generally considered. Different combinations are considered as follows:

- Put Earned leaves under two heads as Encashable and Non-encashable heads.
- Encashment can be considered during the service period or only on leaving the company.
- Put a limit on the encashment of minimum or maximum leaves, as desired by the company.

Some companies also consider 120 days of sick leave as encashable only at the time of superannuation. The idea of encashment is to retain the employee with the organization for a longer duration or till superannuation. Encashment of leaves is a minor benefit when considering employee and talent retention. Only a few companies understand the importance of this if their employees feel responsible towards the company and do not take leave unnecessarily.

Regards,
AK Mathur

IT companies are under the Shops and Establishment Act, so please study the act before deciding on the leave policy.