Leave Encashment Confusion: Should We Pay for All Unused Days or Just 15?

Leave Policy Overview

We have a leave policy as follows: An employee should accrue 30 days of leave for eligibility for leave encashment. We provide a total annual leave of 27 days, which employees can avail of from January to December. On December 31st, we review the remaining leave balance. Employees with 15 days of unused leave will receive leave encashment, as they will have accrued 30 days of leave. For employees with unused leave less than 15 days (e.g., 12 or 10), leave encashment will be provided accordingly, but they should have 30 accruals.

Current Leave Usage and Concerns

However, some employees use only 4 or 5 days of leave throughout the year, leaving them with a leave balance of 22 or 23 unused days as of December 31st.

Clarification Needed on Leave Encashment

I would like clarification on whether we should only pay encashment for 15 days as per our leave policy, or if there is any statutory rule stating that we should pay for all unused leave days (22 or 23 days as in the example above). Currently, the excess leave beyond 15 days is lapsing, which is causing dissatisfaction among employees.

Please advise if there is a specific ruling regarding this matter.

Clarification on Leave Encashment Policy

Your leave policy states that an employee should have 30 days of leave as a credit balance in their leave account to be eligible for leave encashment. They are eligible to avail of leave encashment for any leaves exceeding 30 days. Is that correct?

The same policy can be applied to employees who have 22/23 days of leave as a credit balance.

Regarding the encashment of leave for employees, there are no statutory rules governing such encashment. This depends on the leave policy of the company, which varies from company to company.

Thank you for your response. The employee who has 30 leave days in reserve will be eligible for leave encashment of a maximum of 15 days, and if less than 15 days, the actual number of days. This is what our policy states. However, I have recently heard that whatever unused leave balance remains needs to be paid off as leave encashment with no leave lapse. In our case, the maximum accrual of leave is 30 days only. Therefore, I cannot add the unused leave above 15 days to the credit of the 30-day reserve leave. Please clarify.

Regards

What is preventing you from making payment to the eligible employees?

Are you from the HR department? If yes, please consider modifying your leave policy as follows:

"The employee who has 30 leave days in reserve will be eligible for leave encashment of a maximum of 15 days. If there are fewer than 15 days, the actual days will be considered. With effect from 00:00:00, it has been decided by the company's management that whatever the unused leave balance is, it will be paid off as leave encashment with no expiration of leave, even if unavailed leave exceeds 15 days and is over the 30-day reserve balance."

Please ensure proper formatting and punctuation for clarity.

You ought to have mentioned what type of industrial establishment your organization is. As far as I know, statutory surrender of unavailed leave is applicable to EL/PL only, and that too in the event of termination of employment only. Therefore, if you provide such a facility periodically in the midst of service, this is an extra institutional leave benefit fully governed by the conditions mentioned in your leave policy.

Types of Leave

Coming to the number of days of leave all put together in a year, it depends on the establishment-specific labor law applicable as well as the kinds of leave admissible under the leave rules/policy of the establishment. Anyway, leave can be classified broadly into two categories, namely lapsable leave, i.e., which gets lapsed if not availed at the end of the calendar year, and accruable leave, i.e., accruing based on the actual number of days worked in a year and carried forward to the succeeding years subject to a certain limit on the number of days that can be accumulated if not availed. If your leave policy provides for annual encashment of unavailed leave of all kinds, the basic idea is motivating full attendance to the extent possible without affecting the choice of employees to avail the leave when the necessity arises without detriment to the employees' work-life balance.

Therefore, the scheme seems fair to me. You need not bother about some individuals' resentment in this regard, for leave cannot be permitted to be bartered for money, undermining the lofty purpose of leave as a beneficial condition universally under the contract of employment.

Thank you so much, Mr. Radha Krishnan Nair and Mr. Umakanthan M. Sirs. The responses have given me clarity on what needs to be done with lapses of leaves. By the way, we are into stockbroking under the Shops & Establishments Act in Hyderabad, Telangana State. Thank you once again for your responses.

Regards, Krishna T. B. R.

Dear colleague,

Types of Leave Encashment

For better clarity, leave encashment is of two types: while still in service and after termination of employment. There is no law that requires you to give leave encashment while in service. That is solely voluntary, and you may frame a policy in this regard, like the one you have. Under your policy, 15 days of unavailed leave is encashable if 30 days of leave is accrued. Your query is about the eligibility and quantum of encashment if accrued leave is less than 30 days.

Policy Suggestions for Leave Encashment

Your leave policy should have covered this situation. To be fair, you may frame a policy to allow a maximum of 15 days of encashment of unavailed leave and leave the choice of the number of days to be encashed to the employee.

Leave Encashment on Termination

As regards the situation of leave encashment on termination, as per State Shop Acts, all unavailed Earned/Privilege leave is encashable without a ceiling. Please check your Shops Act for this.

Regards,
Vinayak Nagarkar
HR and Employee Relations Consultant

Leave Encashment Under the Shops and Establishment Act

As per the provisions of the Shops and Establishment Act, leave encashment is permissible provided an employee, during his course of employment, had applied for PL/EL, and the same is not sanctioned and endorsed in writing on rejection/not sanctioned. In such a case, the employee becomes eligible for leave encashment. The unsanctioned leaves due would not be lapsed. Also, if there is any provision for the maximum accumulation of permissible leaves.

Regards, Syed Arshad H Rizvi

Eligibility for Leave Under the Factories Act

According to the Factories Act, employees who work more than 240 days in a year are entitled to one day off for every twenty days worked. Each company can establish its own policy for workers and other employees.