Struggling with Leave Encashment Policies in SMEs: How Can We Find a Fair Solution?

Dear Concerns, I am working as an HR Executive in an SME. We are currently facing some issues regarding the leave encashment of employees. Please allow me to give you a brief idea about our present practices.

Current Leave Practices

1. We provide 21 Paid Leaves (PL) to all permanent employees, and we follow the practice of settling leave encashment every two years.
2. No other Casual Leave (CL) or Medical Leave benefits are given to employees.
3. In the previous year, we used to encash leave payment based on the employee's Gross Salary. However, according to my knowledge, the rules state that leave encashment should be based on Basic Salary + Dearness Allowance (DA).
4. We are facing arguments from employees regarding processing leave encashment based on Basic Salary + DA as they have worked for the company on a full-day basis and have not taken any leaves on those days.
5. Also, as an SME, we are not able to afford leaves for some employees due to limited manpower.
6. We need to establish a very strong policy on this matter that results in a win/win situation.

Please advise on the correct approach in this case. Your valuable response is eagerly awaited.

Thank you.

Dear Viraj,

Please elaborate on your statement, "But as per my knowledge, rules say to encash leave based on Basic+DA." Which rule are you referring to? Can we have a rule for clarification?

Thank you.

Basic DA for leave encashment, as per my knowledge. As an HR professional, ensure you have the relevant rules and materials to clarify this concern for everyone.

Components to be considered for Leave Encashment:
Last drawn Monthly Gross Salary.
Refer to applicable Laws: Factories Act & Rules/Shops & Commercial Establishments Act & Rules.

Dear Vijay, it is not just Basic + DA which makes up the Leave Encashment Amount. It is more than that; it is the amount you generally earn in a day if you had worked. Let me explain how. This is governed by the Shops and Establishment Act. More or less, each Shops and Establishment Act says the same about it. Basically, the logic is the same. I am explaining here as per the provisions of the Delhi Shops and Establishment Act.

Leave Encashment as per the Delhi Shops and Establishment Act

As per Section 22 (2) of the Act:
(2) If an employee entitled to leave under clause (a) of sub-section (1) of this section is discharged by his employer before he has been allowed the leave, or if, having applied for and having been refused the leave, he quits his employment before he has been allowed the leave, the employer shall pay him full wages for the period of leave due to him.

As per the above definition, an employee is entitled to full wages for the period of leave due to him.

Definition of Wages

Now let us see what the Act says about the definition of wages. As per section 2 (30), “Wages” means wages as defined in section 2 of the Minimum Wages Act, 1948 (XI of 1948).

Minimum Wages Definition

Section 2 (h) states:
(h) "wages" means all remuneration, capable of being expressed in terms of money, which would, if the terms of the contract of employment, express or implied, were fulfilled, be payable to a person employed in respect of his employment or of work done in such employment, [and includes house rent allowance], but does not include:
(i) the value of:
(a) any house-accommodation, supply of light, water, medical attendance, or
(b) any other amenity or any service excluded by general or special order of the appropriate Government;
(ii) any contribution paid by the employer to any Pension Fund or Provident Fund or under any scheme of social insurance;
(iii) any travelling allowance or the value of any travelling concession;
(iv) any sum paid to the person employed to defray special expenses entailed on him by the nature of his employment; or
(v) any gratuity payable on discharge;

So as per the above definition, all remuneration expressed in terms of money will be paid to the employee for leave encashment, and this is the reason all statutory deductions are done from the leave encashment amount.

In layman's terms, the Leave Encashment amount for one day shall be equivalent to one day's salary of a Workman. Hope things are clear now.