For example, if an employee has 50 days of earned leave accumulated, and the Karnataka government policy allows a maximum accumulation of 45 days, the remaining 5 days will be encashed by the employer. Is this considered an employee benefit?
What if the employer states that the remaining leave will not be encashed and employees must use their leave instead? Is this permissible under Karnataka government policy?
Under the Karnataka Shops and Commercial Establishments Act, 1961, employees are entitled to annual leave with wages calculated at the rate of one day for every twenty days worked. The Act permits the carry forward of unused earned leave to the succeeding year, with a maximum accumulation limit of 45 days.
Regarding Leave Encashment:
Encashment of Excess Leave: The Act does not explicitly mandate the encashment of earned leave exceeding the 45-day accumulation limit. Therefore, if an employee has accumulated leave beyond this limit, the employer is not legally obligated to encash the excess leave. However, many organizations choose to offer encashment of excess leave as part of their internal policies to promote employee welfare.
Employer’s Discretion: Employers have the discretion to implement policies that require employees to utilize their leave instead of opting for encashment. Such policies are permissible under the Act, provided they are clearly communicated to employees and applied consistently.
If the company policy states that the maximum accumulation of earned leave is 30 days, then the company policy will take precedence over the general government-prescribed limit (e.g., 45 days under Karnataka Shops and Establishments Act).
How This Works:
Company Policies Can Be Stricter but Not More Lenient
If a company sets a lower accumulation limit (30 days instead of 45 days), it is legally permissible because employers can offer policies more favorable to themselves, provided they comply with labor laws.
However, a company cannot have a higher accumulation limit (e.g., 60 days) if the law sets a maximum of 45 days.
Leave Encashment of Excess Days
If an employee accumulates more than 30 days, the excess leave (beyond 30 days) must be managed according to company policy:
If the company allows encashment, the additional leave will be converted into monetary benefits.
If the company does not allow encashment, the employee may be required to utilize the excess leave before the year ends to avoid losing it.
Legal Considerations
Shops and Establishments Act (state-specific laws, e.g., Karnataka) provides minimum leave benefits but allows companies to set their own limits as long as they do not violate statutory rights.
The Factories Act, 1948, states that earned leave encashment is mandatory at the time of separation/resignation, but ongoing employment encashment is based on company policy.