Understanding Earned Leave and Encashment: How Do the Rules Apply in Different Scenarios?

Dear All, Request for clarification on the following:

Eligibility for Earned Leave

1. As per the Factories Act, is the completion of 240 man-days compulsory to become eligible for earned leave?

2. Should the paid leave availed in the previous year be taken into account only for the purpose of completing 240 days, or should it also be used to calculate the quantum of leave for the present year?

3. Is an employee who has been working for more than 2 years eligible for leave if their total man-days fall below 240 days in the previous calendar year?

4. Is an employee who joined in the middle of the previous calendar year (say in October) eligible for leave in the succeeding calendar year?

Leave Encashment

5. Should leave encashment be made for an employee who has joined and worked only for 5 to 6 months and then resigns?

6. It is not mentioned either in the Factories Act or in any other Acts regarding the calculation of leave encashment. Some views suggest that for monthly-rated employees, the daily rate should be calculated by dividing the monthly rate by 30 days, while others suggest dividing by 26 days. Could someone highlight the correct and justifiable procedure?

Hi N. Mohan, answer to your queries are:

Factories Act and Earned Leave Eligibility

1. As per the Factories Act, is the completion of 240 man-days compulsory to become eligible for earned leave?
Yes, it is mandatory, but a company can extend leaves before the completion of 240 days if required as part of an employee-friendly policy.

2. Should the paid leave availed in the previous year be taken into account only for the purpose of 240 days completion or to calculate the quantum of leave for the present year?
Both. Paid leave should be considered for the purpose of 240 days as well as the quantum of leaves in the kitty for the present year.

3. Is an employee who has been working for more than 2 years eligible for leave if their total man-days fall short of 240 days in the previous calendar year?
As per the definition, 240 days of working in a year is compulsory. If not completed, it needs to be fulfilled in the second year, and then the leaves will be extended in the third year.

4. Is an employee who joined in the middle of the previous calendar year (say in October) eligible for leave in the succeeding calendar year?
No. It needs to be as per the definition.

5. Should leave encashment be made for an employee who has joined and worked only for 5 to 6 months and resigns?
Completion of 240 days in a year is required, and if not, it is not necessarily required to be encashed upon exit.

Calculation of Leave Encashment

6. It is not mentioned either in the Factories Act or in any other Acts regarding the calculation of leave encashment. Some views suggest that for monthly-rated employees, to arrive at the daily rate, the monthly rate should be divided by 30 days. Others suggest it should be divided by 26 days. Request someone to highlight the correct and justifiable procedure.
For a monthly-rated employee, it should always be divided by the maximum number of days in the month. While not mentioned anywhere, this is a widely accepted formula. If not followed, the EPF and ESI contributions would not match as per compliance required for using the denominator as the maximum number of days in the month.

Your raised queries reminded me of an experience I had in one of my previous organizations. The employer was very interested in how not to extend earned leaves and make deductions by applying the formula of 26 days division.

Understanding Leave Provisions Under the Act

Let's be clear, the leave provision under the Act is normative; you can't go below it. For example, if you consider eligibility based on 200 days or entitle 1 day of leave for every 15 days worked, it must comply with the Act.

Harpreet Walia has erred in the answer to question #4 and needs to check the provision.

Eligibility for Leave When Joining Mid-Year

To carry forward your example, if an employee joins in October, they will be eligible for leave if they work for 2/3 of the days from October to December. Suppose they complete 60 days out of 78 days; then they will be entitled to 60/20 = 3 days of leave. Why the ratio of 2/3? It is mentioned in the Act, and also 240/365 = 2/3.

Calculating Leave Wages

Dividing by 26 or 30 will depend on how you calculate the loss of pay leave or overtime wages. You should follow the same principle for the calculation of leave wages. There is no leave encashment as per the Act; only payment of leave wages before the employee proceeds on leave or at the time of separation of service. However, if you follow the practice of payment of leave wages, please do so based on gross wages to be legally correct.

Dear Mohan N, as per the Factories' Act, upon completion of 240 man-days, an employee becomes eligible for earned leave at the rate of 1 day per 20 working days. If an employee joins after the 1st day of the calendar year, they must complete 2/3 of the available man-days to be eligible for leave at the same rate. Each establishment may have its own leave rules, but they cannot provide less than the quantity sanctioned under the Act.

Each employee is provided with a leave book where earned and availed leave is recorded. Furthermore, establishments may allow the accumulation of earned leave or encashment if not availed, according to the employee's preference. An employee is not eligible for any leave if they fail to comply with the norms of 240 days or 2/3 of the available working days during each calendar year. The employee is entitled to leave encashment upon full and final settlement, provided they meet the above criteria. For daily-rated employees, calculations should be based on 26 days, or otherwise 30 days.

The chapter on leave with wages is normative. If you extend leave facilities that are more beneficial than those laid down, you will not contravene the Act. For example, if you wish to give 1 day leave for every 15 days worked, that is perfectly legal; this is a normative chapter.