Leave Encashment and ESI Deduction: Should Monthly Payments Be Included?

Respected seniors,

Please tell me whether leave encashment paid on a monthly basis is to be considered for ESI deduction or not.

Regards, Devesh

Considering the definition of wages under section 2(22) of the ESI Act, 1948, if leave encashment is paid monthly, it will be considered as wages; however, if it is paid annually, it will not be counted for deduction.

Sir, how many months' gap should be in leave encashment payment to exclude it from ESI deduction? For example, leave encashment of April. Please let me know in which month it should be paid to be excluded from ESI.

As per the court's decision, any payment that is made once every two months on a regular basis is considered a part of the salary. It is possible, therefore, that payments made once every quarter will not be a part of the salary for ESIC.

In reality, it is actually a question of fact. If the payment is being made on a regular basis, then it is not actually leave encashment but a part of the salary under a different disguise. Therefore, it will be a part of ESIC, and courts are likely to declare it as such.

Hi, sir, if Leave encashment of April and May is paid in June, then it will be excluded from ESI deduction. Is it correct? Your view, please.

Considerations for Leave Encashment and ESIC

The matter depends on the facts of the case and how the ESIC and courts will interpret it. If you are paying leave encashment every month or every second month, then it's considered a part of ESIC. If you are paying monthly but paying it late, it would still be included in ESIC. If you are paying once a quarter, then maybe the courts will not include it in ESIC. However, compulsory encashment of leave every month leads to a host of other violations, so it's best avoided. It's better to allow workers to take their leave as per rules, and any unused leave can be encashed at the end of the year.

Understanding Leave Encashment

As far as I understand, the term "leave encashment" refers to the payment of wages to an employee in lieu of earned leaves accrued over a specific period, such as at the end of a year, upon retirement, or when leaving a job. Generally, only earned leaves are permitted to be encashed by organizations. In the Central Government, accumulated earned leaves or half-pay leaves can be encashed at the time of retirement up to a certain limit, which also contributes to retiral benefits. Some Public Sector Undertakings (PSUs) also allow the encashment of leaves once in a block of 2 or 4 years when the employee avails Leave Travel Concession (LTC).

Accumulation and Encashment of Earned Leaves

The accumulation of such earned leaves may result from statutory provisions of the Factory Act, the Shop and Commercial Establishment Act (of the concerned State), or the service rules of the establishment. I believe that in all such enactments/rules, the encashment of leaves is permitted in a lump sum after the end of a specific period, like a year, as mentioned earlier. I have not encountered a situation where unavailed leaves accumulated every month can be encashed monthly. If this were the case, there would be no leave due when the employee actually needs leave in the future. Additionally, I am uncertain whether the practice of allowing leave encashment every month or quarter is permissible under labor laws as mentioned above.

I kindly request the initiator of this thread to provide more details on such leaves, including the period and nature of leaves to be encashed monthly or quarterly, for the comments of seniors and experts in this forum on ways to avoid payment of ESI contribution on such leave encashment wages.

Hi Experts,

Can you please suggest if incentives paid after three months will be excluded for ESI and PF deductions?

For example, if incentives for April, May, and June are paid in July, would they be excluded from ESI and PF deductions?

Regards,
Devesh Chauhan

PF and ESI have to be deducted on the incentives (depending on the working days).

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Thank you for using our services. It is essential to ensure all deductions, including PF and ESI, are accurately processed for the incentives based on the number of working days. If you have any further questions or need clarification, please feel free to reach out.

Hi Harsh,

This is a common practice followed by contractors. They deduct wages for all absent days and give additional pay of 1.5 days a month as leave encashment. The workers are happy because they get more take-home pay. According to me, this is illegal and can definitely put the company and the principal employer in trouble. However, this is rarely investigated by the authorities who are also happy that workers get paid more and are unlikely to protest.

PF is computed on basic and DA only. For ESIC, it's on gross wages. If incentives are paid quarterly, it is not a part of gross monthly wages and therefore will not be included. However, if incentives are steady at a standard rate (not variable) or if they are based on hours worked (overtime), then they would be included for ESIC.

Harsh,

Let us not deny the reality simply because the law says otherwise. If people obeyed the law, our forum would not even have been needed perhaps :)

In many cases, contractors are deducting salary for EVERY absence of workers. Instead, they are paying wages for 1.5 days extra per month to take care of "encashment of leave wages." That is not sanctioned leave. How the records are maintained is not going to change that. In fact, those records may be falsified, which only makes it worse.

Not necessary for deduction of ESI in Leave Encashment payment.

Not necessary for deduction of ESI & PF as these amounts are not included in the monthly salary.