Change is leave policy- earned leave

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A company having offices in Ahmedabad, Mumbai, and Bangalore intends to introduce a cap on its leave encashment policy. Earlier there was no cap.
Whether the company can lawfully impose a cap on leave encashment now and if so, to what extent such a cap can be structured without violating minimum statutory entitlements;

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Hi @Aiswarya1 ,

Company can lawfully impose a cap on leave encashment, even if previously there was no such cap. However, the implementation of such a cap must comply with applicable labour laws to ensure that statutory entitlements are not violated. Here’s how this can be structured:

Legal Validity of Imposing a Cap

Employers are permitted to amend their leave policies, including introducing caps on leave encashment, provided they continue to meet or exceed minimum statutory requirements. The key statutory regulations to consider in this context are:

1. Factories Act, 1948

For establishments covered under the Factories Act:

  • Section 79 requires that annual leave with wages be carried forward up to 30 days.
  • Leave beyond this threshold may lapse or be encashed, depending on the employer’s policy.

2. Shops and Establishments Acts

Since the company has offices in Ahmedabad (Gujarat), Mumbai (Maharashtra), and Bangalore (Karnataka), it must also comply with the respective state Shops and Establishments Acts, which generally provide:

  • Minimum annual leave entitlement: 12 to 21 days.
  • Carry-forward limit: Usually 30 to 45 days.
  • Encashment on separation: Employers are bound to pay for all earned leave due at the time of termination, retirement, or resignation.

Maharashtra Shops and Establishments (Regulation of Employment and Conditions of Service) Act, 2017

  • Annual Leave Entitlement: 8 days after 240 days of continuous employment in a year.
  • Carry Forward: Allowed up to 30 days.
  • Encashment: Mandatory for any unavailed leave at the time of separation.

Maharashtra Factories Rules, 1963 (under Factories Act, 1948)

  • Annual Leave: 1 day for every 20 days of work.
  • Carry Forward: Maximum of 30 days (Section 79 of Factories Act).
  • Beyond 30 days: Leave must be availed, or the company may encash as per policy.
  • At separation: Entire earned leave balance must be encashed.

Official Notification: The Act was brought into force by Government Notification No. MSA. 07/2016/CR-218/Lab-10, dated 19th December 2017.

Gujarat Shops and Establishments Act, 2019

  • Annual Leave Entitlement: 1 day for every 20 days worked (after 240 days in preceding 12 months).
  • Carry Forward: Up to 45 days.
  • Encashment: At termination, resignation, or retirement — entire balance must be encashed.

Gujarat Factories Rules, 1963

  • Also under Factories Act, 1948:
    • Annual Leave: 1 day for every 20 days worked.
    • Carry Forward: Maximum 30 days.
    • Encashment: Mandatory on separation.

Official Notification: The Act was enacted by the Government of Gujarat vide notification no. GHR/2019/26/BSE/192016/428889/M-3 and came into effect on 1st May 2019

Karnataka Shops and Establishments (Amendment) Act, 2023 — Effective from 2023

Key Updates:

  • Leave Earned: Still remains 1 day for every 20 days worked in a calendar year.
  • Carry Forward Limit: Increased from 30 days to 45 days.
  • Encashment: Unavailed earned leave must be paid at the time of separation (resignation, discharge, dismissal, retirement, or death).

Implication:

The revised 45-day carry forward limit aligns Karnataka more closely with Gujarat, making it more employee-friendly compared to the earlier 30-day limit.

Notification Amendment: Karnataka Act No. 08 of 2021

Structuring the Cap on Leave Encashment

During Employment:

  • Employers may cap leave accumulation or encashment (e.g., maximum 30/45/60 days).
  • Any excess leave may be:
    • Lapsed, or
    • Auto-encashed periodically (e.g., yearly), or
    • Mandated to be used within a fixed time frame.

Note: Such a cap must be clearly notified and implemented prospectively, not retroactively affecting leave already accrued.

At Separation (Resignation, Retirement, Termination):

  • All unavailed earned leave up to the statutory maximum must be encashed. Caps cannot override this legal obligation.
  • Example: Karnataka mandates full encashment of earned leave at the time of separation.

Best Practices in the Industry for Policy Implementation

  1. Grandfather Existing Accruals:
  • Leave already accrued beyond the new cap should either be honored or encashed.
  1. Transparent Communication:
  • Update the leave policy in writing.
  • Communicate changes through employee handbooks or internal notifications.
  1. Compliance Mapping:
  • Align the cap with the most stringent of the applicable laws (between Gujarat, Maharashtra, Karnataka).
  1. Policy Review Mechanism:
  • Ensure regular reviews with legal/compliance teams.

Conclusion

Yes, a company can introduce a cap on leave encashment during employment, provided:

  • Statutory minimum entitlements are not infringed.
  • Earned leave due at separation is fully paid out.
  • Employees are given clear notice and the policy is applied prospectively.

Regards,
Bhuvana Anand

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A change in earned leave policy means updates to how employees accumulate, use, or carry forward their earned leave. This could include:

  • New accrual rates (e.g., more or fewer days per month/year)
  • Changes to carry-forward limits
  • Updated eligibility criteria or approval process
  • Adjustments in encashment rules
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