Understanding Paid Leave: How Do You Calculate Leave Encashment?

What is the calculation of paid leave?

Understanding Leave Encashment and Paid Leave Calculation

Your thread heading is about leave encashment, whereas your post content is about the calculation of paid leave. Paid leave means leave taken for which payment of salary is made. Obviously, it will be equal to the salary for the working day, or the paid leave will be considered as a day worked for payment.

Difference Between Paid Leave and Leave Encashment

At the same time, encashment is the surrender of leaves. When you surrender your leaves, you will get cash equivalent to the number of days leave surrendered. If you mean to know on which salary, whether only basic salary will be considered for encashment, or is it basic and dearness allowance which should qualify for encashment of leaves, or is it the gross salary that should qualify for encashment of leaves, will depend upon the salary structure.

Salary Components for Leave Encashment

Normally, only basic salary and dearness allowance will be considered for encashment of leaves. At the same time, if the total salary including allowances like HRA, etc., are considered for the deduction of salary for absence without leave, then the same should be considered for encashment of leaves also. Conversely, if the basic and DA only will qualify for the deduction of Loss of pay and allowances are compensatory allowances, i.e., paid to compensate costs like rent (HRA), education of children (Education allowance), travel (conveyance allowance), etc., then for encashment of leave also the Basic pay and DA shall be taken.

What factors should be considered in determining the salary components eligible for leave encashment?

In determining the salary components eligible for leave encashment, several factors should be taken into consideration. Firstly, it is important to review the company's policies and guidelines regarding leave encashment to ensure compliance with legal requirements and internal regulations. Additionally, the employee's employment contract or collective bargaining agreement may outline specific provisions related to leave encashment eligibility.

Another crucial factor to consider is the employee's length of service with the company. Often, eligibility for leave encashment is based on the number of years an employee has been with the organization. Furthermore, the type of leave being encashed, such as annual leave, sick leave, or other types of accrued leave, will also impact the salary components eligible for encashment.

Moreover, the applicable labor laws and regulations in the jurisdiction where the company operates should be carefully examined to determine the legal requirements for leave encashment. These laws may specify minimum entitlements for leave encashment and provide guidelines on calculation methods.

Overall, a comprehensive review of company policies, employment contracts, length of service, leave types, and legal requirements is essential in determining the salary components eligible for leave encashment.

When it comes to paid leaves to be encashed, you will calculate the days with the basic salary determined. For example, if someone's monthly salary is 25K with a basic of 12.5K, then you will calculate encashment of paid leaves with a 12.5K base.

Ms. Kalyani, this is the practice, i.e., to calculate the leave encashment on basic wages (and also DA if it is paid). But I am saying that nowhere under any Act is it stated that basic pay alone is your salary.

The Significance of Basic Salary in Leave Encashment

In the present situation, when we fix the Cost to Company first and then split it into small compartments and allocate the minimum of it under basic salary, what is the significance of taking only the basic salary for leave encashment? This is the issue with all such payments, like bonus, gratuity, PF, etc.

If you take leave, you are paid the whole salary. If you take loss of pay leave, your day's deduction is calculated on the whole salary and not on basic salary alone. Then why should we take basic only for encashment? It is true that present employers take only basic, but we should not allow that. We are HR, and we should convince them that salary means the total emolument and not simply basic salary.

I agree, encashment is permitted only at the time the employee leaves the company, as you said, at the time of full and final settlement.

Why do the laws restrict the surrender of leaves while in service?

Leaves are minimal in number, and no employee should be permitted to keep them so that they can encash them. However, at the same time, employees should be encouraged to avail of their leaves to maintain a work-life balance. If the leaves granted are over and above the mandatory amount as per the law, it will be considered an employee benefit, and the employer can have separate SOPs for encashment. The employer can specify that encashment will be based on basic salary alone.

Encashment of leaves as per the law

When it comes to the encashment of leaves as per the law, we should consider the wages as the base according to the law. My opinion is that the basic salary is just one component of the salary fixed by the employer, and it does not constitute the wages as per the contract of employment. In many cases, allowances like HRA and Conveyance are not compensatory allowances. Only compensatory allowances, such as those to cover certain costs like house rent, travel, meals, education, buying newspapers, and periodicals, are considered outside the scope of wages. Currently, these are part of the remuneration, and the total salary is subject to deduction when an employee takes unpaid leave.

Faulty compensation structuring

It is due to the faulty compensation structuring that these confusions arise. The industrial sense when the Factories Act or Shops Act was passed was different from the current industrial practice. In the past, wages would refer to basic salary and dearness allowance, where the latter was paid to account for the increasing cost of living, and the former represented the cost of labor. All other payments and contributions payable by the employer due to that employment, such as bonus, PF, ESI, gratuity, etc., were costs borne by the employer, and these were implied without the need to show them separately in the salary offer sheet. However, now it is not just the cost of labor but the total cost to the company. It includes the total cost of engaging an employee, statutory and other benefits, maximum incentives, or even the cost of awards or performance bonuses that may be earned by achieving certain goals, all of which are shown in the salary sheet. It is rarely referred to as a salary offer but as a CTC offer!