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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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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Hi @SowmyaJagadish

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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Hi @Bhuvana_Anand

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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@Bhuvana_Anand would like to understand your take on this, came across any organization which say this in their policy based in Karnataka .

”EL Carry forward of is not allowed from one year to the next” - basically zero EL to next years plus no leave encashment.

Is this normal and okay ? I am guessing this doesn’t go hand in hand with what Laws talks.

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Hi Rathod,

That is an important observation and worth clarifying from a compliance standpoint.

Under the Karnataka Shops & Commercial Establishments Act, 1961 (Section 15), every employee is entitled to annual leave with wages at the rate of one day for every 20 days worked, with the statutory right to carry forward unavailed leave to the succeeding year (up to the prescribed cap, i.e., now 45 days post-amendment).

So, a company policy that says “Earned Leave (EL) cannot be carried forward or encashed” effectively takes away a statutory right, and would therefore not be compliant with the Act.

Employers may certainly offer more generous terms than the law (for instance, higher accruals or flexible encashment), but not less than what the statute guarantees. Zero carry-forward and no encashment would contradict Section 15 and Section 16 obligations on leave with wages and wages during leave period.

In short:

“No carry forward + no encashment” is not aligned with Karnataka’s statutory framework.
Minimum compliance requires allowing carry-forward up to 45 days and payment for unavailed earned leave upon separation.

Policies that override these minimum statutory entitlements could invite compliance risk during inspections or audits, even if widely followed in practice.

Regards,

Bhuvana Anand

Founder - Verisync Advisory

bhuvana.anand@verisync-advisory.com

bhuvana.anand@verisync-advisory.com

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In the ever-evolving world of employment policy, one significant change making news recently involves the introduction of a cap on earned leave encashment by employers with offices across multiple states. A case in point: a company operating in Ahmedabad, Mumbai and Bengaluru proposed adding a cap on leave encashment—something it hadn’t previously enforced.

Here’s what this change means, why it matters, and how organisations can implement it fairly and legally.

1. What’s Changing?

Originally, the company allowed employees to accumulate earned (or “privilege”) leave without any cap on how much could be encashed later. Now, the proposed policy introduces a ceiling—a maximum number of leave days that can be carried forward or encashed.

In simpler terms:

  • Employees may still accrue earned leave as before—but once the cap is reached, further unused days may either lapse or be auto-encashed.

  • Encashment rules and carry-forward limits are now being explicitly defined and time-bound.

2. Why This Shift Matters

For employees, earned leave is not just a benefit—it’s a right under various labour and shops & establishments laws across states. For example:

  • In Maharashtra, under the Shops & Establishments Act, after 240 days of service an employee is eligible for annual leave and unused earned leave must be encashed at the time of separation.

  • In Gujarat, the carry-forward for unused earned leave can be up to 45 days.

    In Karnataka, the carry-forward limit has been amended from 30 days to 45 days recently.

By imposing a cap on encashment during employment, companies are aiming to manage liabilities and encourage utilisation of leave—but they must tread carefully to avoid violating statutory entitlements.

3. What to Keep in Mind Legally & Practically

Legality:

  • Yes—you can introduce a cap on earned leave encashment while employment continues. But you must ensure you do not reduce the statutory minimum entitlements.

  • At separation (retirement, resignation, termination), the law mandates that all earned leave up to the statutory limit must be encashed. A policy that denies this would be non-compliant.

Implementation best practices:

  • Grandfather existing accruals: Leave already accrued before the new policy should either remain unaffected or be appropriately encashed.

  • Transparent communication: Update the policy clearly, notify employees in writing (employee handbook, intranet, etc.), and get acknowledgement.

  • Uniform compliance across locations: Since different states have varying rules (e.g., carry-forward limits in Gujarat vs Karnataka), the policy should align with the most stringent applicable rule for each location.

  • Review mechanism: Put in place a process to periodically review the leave policy as laws evolve.

4. What This Means for You — As an Employer or Employee

If you’re an employer:

  • Use the cap to encourage genuine leave utilisation (which helps employee wellbeing) while keeping earned leave liability manageable.

  • But never at the cost of wiping out employee rights or creating a policy that says “no carry-forward, no encashment” (which courts may view as non-compliant). For example, a policy in Karnataka that denied both carry-forward and encashment was flagged as not aligning with statutory norms.

If you’re an employee:

  • Understand your leave accrual, carry-forward and encashment rights—especially if you change employers or resign.

  • Check whether your employer’s policy is aligned with the local state’s shops & establishments or factories act rules (whichever applies).

  • If you have a large unused leave balance, consider proactively planning for utilisation or encashment, as future caps may limit options.

5. Quick Checklist for Policy Change

  • Has the policy update been communicated in writing to all employees

  • Are the accrual, carry-forward and encashment limits clearly defined?

  • Does the cap respect the statutory minimums in every applicable state (Maharashtra, Gujarat, Karnataka etc.)?

  • :white_check_mark: Are employees aware of their rights at separation—especially encashment of unused leave?

  • :white_check_mark: Is there a timeline for periodic review of the policy as laws change?

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