Struggling with Leave Encashment Policy? Seeking Legal Guidance for Fair Implementation

Dear Team Members,

In my company, there is a policy of leave encashment for 30 days a year. However, if any employee is absent for any day in a month except the weekly off and festival holiday, then the company deducts the salary for that day, and the same is compensated through leave encashment by giving only basic pay at the end of the year. Although the appointment letter clearly states that the employee will enjoy the annual leave as per company policy, as HR personnel, when I described the situation to my director that CTC computes with statutory benefits and at the time of encashment, we are giving only basic pay, he did not agree with me. Could you please provide any ACT or rule as per shops and establishment so that I may be able to implement the leave policy apart from CTC in my company?

CTC Computations

COMPUTATION | PERCENTAGE | P.M. | P.A.
Basic Per month | 10000 | 120000
HRA Per month | 1500 | 18000
Conv. Allow. Per month | 1500 | 18000
Total GROSS Per month | 13000 | 156000
LESS Employees
EPF 12% | 1200 | 14400
ESIC 0.75% | 98 | 1170
P. Tax AS PER SLAB | 110 | 1320
Employees Net Take Home | 11593 | 139110

Employer Contribution

Per month
PF % | 12.00 | 1200 | 14400
ESI % | 3.25 | 325 | 3900
BONUS % | 12.50% | 1250 | 15000
LEAVE ENCASHMENT | 8.33% | 833 | 9996
TOTAL | 3608 | 43296
CTC P.M. & P.A. | 16608 | 199296

Leave Policies and Legal Implications

First of all, not permitting an employee to take leave or deducting salary when they are on authorized leave is against the law. The law provides certain employee benefits, which are meant for employees to avail themselves of. Leave is one of these benefits. No Act has any provision regarding the encashment of leave during service, but all Acts state that unavailed leave shall be encashed at the time of discharge or when leaving the service. Therefore, the basic objective of granting leave has been defeated in your company.

Encashment of Leave and Salary Components

Secondly, at the time of encashment, the salary should include the total salary and not just the basic salary. Nowhere in the law is it stated that only basic wages will qualify for the encashment of leaves.

Legal Limits on Leave Entitlement

However, 30 days of leave a year is excessive and beyond what is provided under the law. The law governing leaves in a shop/commercial establishment is a state subject, so you must refer to your state Act to determine the total leaves permitted to an employee and which types of leave can be surrendered. No state law provides for 30 leaves in a year, nor does it allow all 30 leaves to be surrendered or encashed.