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
- Grandfather Existing Accruals:
- Leave already accrued beyond the new cap should either be honored or encashed.
- Transparent Communication:
- Update the leave policy in writing.
- Communicate changes through employee handbooks or internal notifications.
- Compliance Mapping:
- Align the cap with the most stringent of the applicable laws (between Gujarat, Maharashtra, Karnataka).
- 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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Madam,
Could you please elaborate for Telangana State as well?
Thank you.
Regards,
Sowjanya
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Hi Sowjanya,
Detailed summary of the leave encashment and related provisions as per Chapter VII of the Telangana Shops and Establishments Act, 1988:
Section 30 – Leave Provisions
Annual Leave with Wages
- Eligibility: Employee must have completed 240 days of continuous service in the preceding 12 months.
- Entitlement: 15 days of paid leave in the next 12 months.
- Accumulation: Leave may be accumulated up to 60 days.
Leave Encashment
- Entitlement:
- Every employee is entitled to encash 8 days of accrued leave every year.
- Separate provision (Section 30(4)) confirms that employees serving for ≥240 days are entitled to encash 8 days’ leave with wages in the subsequent 12 months.
- Payment Timeline: Employer must pay within one week of receiving the employee’s application for encashment.
Application for Leave
- Must be submitted in writing at least 7 working days in advance.
- Leave can be taken in no more than 3 instalments per year.
Advance Payment of Wages for Leave
- If leave of ≥5 days is granted and the employee requests payment, wages must be paid before the leave begins.
Sick & Casual Leave
- Employees are entitled to:
- 12 days of sick leave, and
- 12 days of casual leave with wages annually.
Special Casual Leave
- After 2 years of continuous service, employees are entitled to 6 days special leave for vasectomy/tubectomy, once in service, with a valid medical certificate.
Termination Cases
- If the employee is discharged or resigns without being granted due leave:
- The employer must pay monetary equivalent of the unused leave.
- Additional compensation applies if discharge occurs during sickness or accident.
Hostel/Boarding Employees
- Entitlements apply proportionately to actual continuous service during the year.
Section 31 – Holidays
- 9 paid holidays per year, including:
- Republic Day (26 Jan)
- May Day (1 May)
- Independence Day (15 Aug)
- Gandhi Jayanti (2 Oct)
- Andhra Pradesh Formation Day (1 Nov)
- Government may notify additional holidays.
- If employees in restaurants, theatres, etc., work on holidays:
- They must be granted a compensatory holiday within 30 days.
- A maximum of 7 compensatory holidays per year is allowed.
- If denied, extra wages at ordinary rates are payable.
Section 32 – Pay for Leave and Holidays
- Wages during leave or holiday = daily average of wages from preceding month, excluding overtime.
Section 33 – Power to Increase Leave
- State Government may notify:
- More than 15 days of annual leave, and/or
- Accumulation beyond 60 days, for specific establishments or classes of establishments.
Summary: Leave Encashment Key Points
- 8 days encashment per year is mandatory.
- Accrual capped at 60 days unless increased by government notification.
- Encashment amount is to be paid within 1 week of request.
- Additional monetary settlement is required on discharge or resignation if leave is due.
https://labour.telangana.gov.in/content/ActsRules/TELANGANASHOPSANDESTABLISHMENTSACT1988.htm
Regards,
Bhuvana Anand
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Thank you for your reply madam. This is very much useful to those who has some doubts in implementing the policy.
Regards,
Sowjanya
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Hello Bhuvana,
If employees are allowed to carry forward their leave balance up to 40 days, but can claim only 20 days as leave encashment during their exit and the remaining leave balance will lapse, is this permissible under Karnataka labour laws, or will it create any legal issues?
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As per Karnataka’s leave carry forward rules,
Carry Forward Limit: Unused earned leave can be carried forward to the next calendar year, up to a maximum of 45 days. Any earned leave exceeding this limit will lapse, unless the employer has a more generous policy.
Regards,
Bhuvana Anand
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Madam,
Could you please elaborate for Kerala State as well?
Thank you.
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Hi @sojin.thomas ,
As far as I know,
Kerala Leave carry forward / encashment rules
1. Annual Leave (Privilege / Earned Leave)
- Entitlement: 12 days of privilege leave after 12 months of continuous service
- Carry-forward Limit: You can accumulate unused leave up to 24 days (i.e., you can carry forward up to 12 days into the next year)
- Encashment: If leave isn’t availed before employment ends (e.g., resignation or termination), the employer must pay for the unused days
2. Sick Leave
- Entitlement: Up to 12 days per 12 months continuous service
- Carry-forward: Not permitted; unused sick leave lapses each year
- Encashment: No statutory requirement, purpose is medical leave; encashment is typically only if contract provides.
3. Casual Leave
- Entitlement: Up to 12 days per 12-month period .
- Carry-forward: Not allowed; unutilized casual leaves are forfeited
- Encashment: Not required under statute.
4. Leave Encashment
- Encashable privilege leave if:
- Employment ends before availing leave; or
- Employee applied and was refused and quits
- Calculation Basis: Employer should pay wages for each unused leave day. Wage typically means basic pay plus allowances; details depend on company policy and contract
- No Statutory Encashment: For sick or casual leave, encashment is neither required nor expected under the Act.
Regards,
Bhuvana Anand
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Could you pl share the latest leave rules as per West Bengal shop & estab. act.
Regards,
Rajshree
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Hi Rajshree,
Leave Entitlements in West Bengal (per 12 months continuous service)
- Privilege/Earned Leave (EL/PL): 14 days, with full pay.
- Sick Leave (SL): 14 days at half pay.
- Casual Leave (CL): 10 days with full pay.
Carry‑Forward Limits
- Privilege Leave: Can be carried forward, with a maximum cap of 28 days in total balance.
- Sick Leave: Can be accumulated up to 56 days.
- Casual Leave: Not eligible for carry forward or encashment.
Leave Encashment
- Employees are entitled to encash unused Privilege Leave at the time of termination, resignation, or superannuation, calculated on their current wage rate.
- No specific annual encashment outside of employment end is mandated, though many employers choose to allow it in their policies.
regards,
Bhuvana Anand
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