Why Did My Company Switch EL Encashment from Gross to Basic Pay? Seeking Your Thoughts

Dear All, I know my query is old, as EL encashment should be done on Gross or Basic. When leave availed is being paid on gross, then why encashment on Basic?

Also, my organization is 38 years old. We used to pay on Gross, but since 2020 post-Covid period, it has been changed to Basic. Making these changes has reduced the CTC of employees, causing stress and demotivation. Is this step correct? Kindly share your viewpoints.

Regards, Mukesh Badal

Workman Category and Customary Practices

If you are in the 'workman' category as per the ID Act 1947, then there cannot be any unilateral withdrawal of any customary practice. If done so, it would be an 'illegal change' with consequential effects.

Impact of Pandemic on Organizational Benefits

If it is otherwise, many organizational privileges and benefits were substantially affected due to the pandemic. Even many state governments did not implement DA revision, which they had to implement otherwise. The organization has discontinued certain practices due to adverse circumstances and hopefully will restore them once the situation improves.

To feel stressed or demotivated over a marginal drop in CTC is a bit of an overreaction, if I may be permitted to say so.

Hello, Friend, as per the law, leave encashment is based on basic salary. The company is providing this right in a legal manner. If your company previously granted it based on gross salary for a certain period, then it was done in good faith. However, due to COVID, if the company has now switched to calculating it based on basic salary, it is something that needs to be accepted, and there is no need to feel demotivated.

Why is leave encashment calculated based on basic salary?

There is no mention of the term "gross" in any labor law. All calculations specified in the law are based on basic salary and DA (Dearness Allowance).

1. EPF Act
2. Leave Encashment
3. Bonus Payable
4. Gratuity Payable

I hope this clarifies the issue for you.

Mr. Ravi,

Please tell me under which act and which clause/section the encashment of leave salary is to be made at the basic rate. Your contention that Gross Wages is not mentioned in any act is incorrect.

Section 59 of the Factory Act

Section 59 specifies that payment of overtime must be made at the "Ordinary Rate of Wages," which is then defined in the section as gross wages. For the purposes of sub-section (1), "ordinary rate of wages" means the basic wages plus such allowances, including the cash equivalent of the advantage accruing through the concessional sale to workers of food grains and other articles, as the worker is entitled to at the time, but does not include a bonus and wages for overtime work.

I agree with Umakhanta-ji that the payment must be made at the gross rate excluding any allowance specifically given to defray the expenses connected with work. Any amount deducted as an allowance must be actually and really linked with the cost of doing the work and not just a restructuring of salary into allowances made to reduce statutory dues. Therefore, any amount paid to everyone and any amount that is paid when a person is absent or on leave will be included in the computation of the encashment value of leave wages.

Earned Leave Encashment Policy

Earned leave encashment is on Basic plus DA.

Col. Suresh Rathi

For staff not falling into the category of workmen, the salary breakdown is agreed upon at the time of appointment and may comprise a large number of components such as:

- Basic
- DA
- HRA
- Medical Allowance
- CEA
- Phone allowance
- Newspapers/periodical allowance
- Entertainment allowance
- Transport Allowance
- Etc.

All these allowances, except Basic and DA, are not considered for the calculation of Gratuity. If a person is encashing accumulated leave, other allowances which are for his everyday working should be omitted. If there is any statutory Act which states otherwise, it is not known to me.

It also differs from one organization to another. My post was based on tax applicability on leave encashment wherein it is mentioned that it is calculated on Basic plus DA.

"Salary for this purpose includes basic salary, dearness allowance, and commission based on a fixed percentage of turnover secured by the employee. The specified amount of Rs 3,00,000 is the aggregate amount allowed as exemption irrespective of the frequency of leave encashment received by the employee from various employers. If an employee has utilized Rs 2,00,000 already at the time of the first resignation, he is only entitled to use the balance of Rs 1,00,000 for the exemption computation next time. Hence, overall, the employee is allowed a total exemption of only Rs 3,00,000 with respect to leave encashed from all employers."

https://cleartax.in/s/leave-encashment-tax

I request members to offer comments.

Col. Suresh Rathi

Dear Members, I found this topic interesting, so I did a bit of research. There is no reference in the Factory Act regarding what wages are, except in Section 59, which states that 'normal rate of wages' is gross wages.

There are different definitions in various standing orders, many of which actually state it is full wages and not just basic and DA. However, where definitions are not explicitly given, we need to refer to the best possible act. This being a social security legislation, the courts would naturally take a liberal view.

The Subsistence Allowance Act

The Subsistence Allowance Act is one of the best references as it states how much you need to pay to a suspended employee. Obviously, what you pay to an employee on leave should be the same as what you pay to a suspended employee.

The Tamil Nadu Payment of Subsistence Allowance Act, 1981

The Tamil Nadu Payment of Subsistence Allowance Act, 1981, states in Section 2, (h) that “wages” shall have the same meaning as in clause (rr) of Section 2 of the Industrial Disputes Act, 1947 (Central Act XIV of 1947).

Industrial Disputes Act

The Industrial Disputes Act defines "wages" as all remuneration capable of being expressed in terms of money, which would, if the terms of employment, expressed or implied, were fulfilled, be payable to a workman in respect of his employment or of work done in such employment, and includes:

(i) such allowances (including dearness allowance) as the workman is for the time being entitled to;
(ii) the value of any house accommodation, or of supply of light, water, medical attendance, or other amenity or of any service or of any concessional supply of food grains or other articles;
(iii) any traveling concession;
(iv) any commission payable on the promotion of sales or business or both;

but does not include:

(a) any bonus;
(b) any contribution paid or payable by the employer to any pension fund or provident fund or for the benefit of the workman under any law for the time being in force;
(c) any gratuity payable on the termination of his service.

So, the leave wages can't be paid at basic only. At least, that is what I understand from the above.

Dear Colonel,

I am afraid that your reference to the payment of gratuity and the calculation of income tax on the sub-head of income received by way of leave encashment is not relevant to the calculation of salary payable in lieu of leave. Even otherwise, the income tax rule you quoted suggests the taxable component of leave salary only.

Application of Leave Encashment to Superior Cadre Employees

The application of leave encashment to superior cadre employees, i.e., other than workman cadre, is one of the conditions of employment based on the mutual consent of the employer and the employee concerned. Therefore, the contention that leave encashment should be on the sum of basic + D.A can be correct as it is only an extra benefit under the contract of service.

Periodical Surrender of EL for Cash Benefit

On the contrary, in the case of the periodical surrender of EL for cash benefit or on the termination of employment concerning employees covered by such a provision of any labor law, it should be equal to the actual leave salary payable if he would have gone on authorized EL. The logic, for example, is that of HRA for leave of absence.

In any case, the primary objective of leave encashment is to encourage full attendance of employees to work so that both the employer and the employees mutually benefit.

Thank you, Colonel, for your compliments. In fact, the credit should actually go to this wonderful forum citeHR, which gives us an opportunity to periodically enhance our knowledge through our interactions. Some questions may appear threadbare or trivial; however, such inquiries prompt us to delve deep into the underlying logic behind the provisions of the law involved, fostering our lateral thinking and enabling us to arrive at appropriate answers. Let us encourage questioners with our responses, regardless of any perceptual differences that may exist.

The inputs shared by Umakanthan Sir and Saswat Sir on "leave encashment should be payable on gross salary" are brilliant. In fact, companies are adopting formulas/HR tactics to reduce statutory liabilities such as PF, gratuity, bonus, etc. Often, leaves applied are not sanctioned citing urgent work, etc., and as a result, employees are deprived of enjoying quality leave and sacrificing personal priorities. This leads to leave accumulation exceeding the maximum limit. Encashment on basic salary is definitely not justified. It should be payable equivalent to the used leave salary only.