Leave Encashment Dilemma: Should We Use Basic or Total Salary According to the Law?

For leave encashment amount, should we consider the basic or total salary (including allowances)? What does the law suggest?

Section 80 of the Factories Act

Section 80 of the Factories Act reads as follows:

80. Wages during leave period.—(1) For the leave allowed to him under [section 78 or section 79, as the case may be,] a worker shall be entitled to wages at a rate equal to the daily average of his total full-time earnings for the days on which he actually worked during the month immediately preceding his leave, exclusive of any overtime and bonus but inclusive of dearness allowance.

In my opinion, when considering full-time earnings (Gross wages) for the period of leave availed by him/her, the same logic can be applied for leave encashment (Gross wages).

Limitations on Leave Carry Forward

Having said that, Section 79 limits the carry forward of unavailed leave to the succeeding year subject to a maximum of thirty days in the case of an adult. This means that any earned leave accumulated beyond thirty days will lapse.

In such a case, if you consider Gross wages for Leave Without Pay (LWP) computation, you can follow the same for leave encashment. However, if your LWP computation is on Basic + DA alone, then in my opinion, you can restrict leave encashment payment to Basic + DA.

Regards,

MVK

Normally, the emoluments that the employer would have paid if the employee had taken leave should be the basis for the encashment of leave. This also means that exclusions such as allowances linked to attendance in workplaces, such as project/daily, night shift allowance, risk allowance, attendance bonus, incentives, overtime (OT), and uniform allowance, which are already included in a month's salary.

CCS (Leave) Rules, 1972

The CCS (Leave) Rules, 1972 applicable to Central Government employees provide that cash equivalent to earned leave (at the time of cessation of employment) is to be calculated based on the pay last drawn plus dearness allowance.