Leave part of Salary - Can we pay Leave amount to Employees in his salary in place of Leave? Is it legal?

Dear All,

Please share your valuable input on my query.

Can we pay leave amount to employees in their salary in place of leave? Is it legal? If yes, then is it part of gross or CTC?

Leave is not part of the salary; it is an employee benefit. Within the limits prescribed by law, it is a statutory right, whereas any leave beyond what is mandated by law is considered an additional employee benefit. The law requires that leave should be taken, and therefore, encashment of leave is not allowed during an employee's service. Consequently, it is not permissible to compensate the leave amount by having the employee work without taking any leave. Such action would be viewed as compensating the employee for not utilizing their entitled leave. While this may not raise concerns when uncontested, if an employee disputes that leave was denied but compensated through encashment, it could lead to legal non-compliance.

Any leave entitlement exceeding the statutory minimum can be included in the Cost to Company (CTC) calculation. However, it is not permissible to include statutory leaves as part of the CTC.

Madhu San,

We are paying our contractual employees the leave amount on a monthly basis along with their salary (included in the Gross amount) based on the number of days. This is as per the salary calculation.

Is this legally correct or not?

Thank you.

What do you mean by contractual employees? Are they employees on a fixed-term contract? Normally, their unavailed leave shall be encashed when their period is over, and the contract is terminated. This is permissible. However, the issue arises when a contract stipulates that no leave should be taken, but the amount of leave (encashment) will be given as compensation for not availing the leaves. Legally, this is not maintainable.

As an individual, I am not in favor of Pay in lieu of Leave.

Leave is prescribed in law with the idea that employees will be away from work on certain days.

Hi Sushil,

Leave encashment is a monetary emolument received by the employee in lieu of the leaves entitled to him but not availed by him/her. It is neither a part of the CTC nor does it come under gross pay. It can be considered as a part of termination benefits. You cannot pay leave amount to employees in lieu of leave.

Please note that there are annual leave entitlements like 12 Casual Leave, 15 Privilege or earned leave, and 5 sick leave, totaling 30 days in a year. Only the Privilege or earned leave is encashed, and not the other leaves. Additionally, it is important to mention that other leaves are not carried forward except for Privilege leave.

Given these facts, how did you come to a conclusion that you can pay leave amount in lieu of leave, which is not universally accepted.