Can My Employer Refuse Leave Encashment If I Leave Before a Year? Seeking Legal Advice

Esteemed members of the group,

I need your expert advice from a legal standpoint. I left my job within a year and served the 90-day notice period. In the F&F statement, the company refused to encash the earned leaves citing the below reason. My only question to this esteemed forum is if the employer can refuse to encash earned leaves based on the below rationale. Please advise on the action to be taken to resolve the issue.

"Leave encashment is available only to employees who complete a minimum of one year with the organization."

It is true that earned leave (leave earned as a privilege by working in the organization for a certain number of days) will get accrued only after twelve months of service. Therefore, an employee who has left the service before 12 months or before getting their EL credited to their account cannot demand encashment as a right. At the same time, some state rules will say that pro rata credit shall be given to employees who leave the organization. However, the legal interpretation is that "once you complete one year/12 months and get credit of EL and serve the organization for a few months—not necessarily 12 months again—and then leave the company, the balance to your credit will be counted after considering the service after the first 12 months."

At the same time, if you have been granted EL in January, proportionately for the period of your service in the preceding year, then you can demand that EL to be encashed.

Hi Madhu Ji, A couple of pointers to add to bring some more insights to the table:

1. Earned Leaves (9 in total) from Sep-Dec '22 period were granted in Jan '23—hence these should be paid as per your note, is that correct?

2. Earned Leaves (24 in total) from Jan-Dec '23 period were accrued on January 1 itself—the employer HRIS portal showed that these leaves were actually accrued (under the head accrued) for an employee. Do you think the accrual itself provides the right to an employee to claim the encashment of the same?

Please suggest.

I have the screenshot of their HRIS portal to prove #2, i.e., 24 accrued leaves.

Can a company deny leave encashment?

On April 24, 2020, India's Supreme Court stated that employers could only deduct leave encashment when it is paid, not when it is due. This decision upheld the constitutionality of section 43B(f) of the Income Tax Act, 1961 (ITA).

It seems that your employer has stated that leave encashment is only available to employees who complete a minimum of one year with the organization. From a legal standpoint, the policy your employer has regarding leave encashment should be outlined in your employment contract, company policies, or the applicable labor laws of your jurisdiction. In many cases, companies have policies that specify when employees become eligible for leave encashment.

If the leaves are credited to you, then upon discharge from service, you can encash them. However, encashment becomes a right of an employee only when it is provided under the law.

Legal Entitlement for Leave Encashment

In your case, I doubt if it is more than what the law (Factories Act or Shops and Commercial Establishments Act) permits. As per the Factories Act, employees are entitled to one leave for every 20 days worked in the preceding year. If you had joined on September 22, there would be 120 days of which you should have physically worked for 100 days, entitling you to 5 earned leaves (EL) at the rate of one day for every 20 days worked.

Calculation of Earned Leaves

Additionally, if you have worked from January to August 2023, it would account for 200 physical working days, granting you 10 days of EL. If you had not utilized any EL, the maximum EL that you would have at the end of August would be 15 days. However, you mentioned that you have 9+24/24 (?). This implies that the company has been providing leaves over and above what an employee is entitled to as per the law. In that case, the provisions of the company's leave rules should be followed.

Madhu ji,

My employer was providing earned leaves as per the law only, meaning 2 leaves per month. Therefore, for Sept-Dec '22, I got 9 leaves.

From Jan-Dec '23, I had 24... if we prorate till mid-July, I earned around 13 leaves.

Therefore, even after considering the prorated period, I had 9 (2022) + 13 (2023) = 22 leaves eligible for encashment.

Do you advise me to initiate legal proceedings in this matter?

Leave Entitlement and Legal Compliance

As per the law, an employee could get two leaves per month. The maximum admissible leave per year shall be around 15 days. Therefore, the leave rules are not against the law but more favorable to the employees. As such, even if you take it legally, the maximum encashment would be for whatever I had posted just before this.

Remember that taking an employer to dispute redressal machinery and adjudication, etc., would be bad for your career.