Encashment of Earned Leave (EL) and Casual Leave (CL)
Normally, the EL is encashed annually and not monthly. Annual encashment or surrender of leaves is not considered part of the salary for the purpose of ESI or PF deduction. However, if leave surrender payments are made every month, they would be treated as an allowance for not taking any leave in that month. Consequently, this situation would attract ESI contributions, as any allowance paid to a covered employee within an interval of not more than two months is deemed part of wages subject to ESI contribution. You can exclude these payments from the PF qualifying salary, but not from ESI. On the other hand, if you choose to encash leave on a yearly basis, you can exclude it.
Legal and Ethical Considerations of Frequent Leave Encashment
Regarding the legal aspect of frequent leave encashment, it may be deemed unfair and lack legal support if an employee requests to accumulate leave for future use. The law generally does not support encashment of leaves during the service period, although employees are allowed to surrender unavailed leaves upon leaving the organization. Leaves are intended for the welfare of employees, and they should be granted when needed. Accumulation of leave is permissible within certain limits as specified under various Acts (such as the Factories Act, Plantation Labour Act, Mines Act, or Shops and Commercial Establishments Act), and employers are typically obliged to grant leave under normal circumstances. Any refusal of leave would contribute to the maximum allowable accumulation of leaves. Therefore, it is not permissible to provide cash equivalent for leave every month and require workers to work without taking any leave, as this could be interpreted as bonded labor. This ethical aspect holds more significance than the considerations for ESI or PF.