Most of us know that, Leave encashment is calculated on Basic + DA salary, we must have seen this practice have been following majorly in to industry since long time.

Most of us know that, Leave encashment is calculated on Basic + DA salary, we must have seen this practice have been following majorly in to industry since long time.

But, do you know that, Leave encashment calculation not only on Basic +DA, but, also on other component too (Gross salary)..?

Yes, if you see the definition of “Wages” of any of shops & Establishment act. Section 2, most of state S&E act. Mentioned that, “wages” means wages as defined in the Payment of Wages Act, 1936.

And, when you see the “wages” definition in the Payment of Wages Act,1936, its clearly mentioned that,

“wages” means all remuneration (whether by way of salary, allowances, or otherwise) expressed in terms of money or capable of being so expressed which would, if the terms of employment, express or implied, were fulfilled, be payable to a person employed in respect of his employment or of work done in such employment, and includes— (a) any remuneration payable under any award or settlement between the parties or order of a Court; (b) any remuneration to which the person employed is entitled in respect of overtime work or holidays or any leave period; (c) any additional remuneration payable under the terms of employment (whether called a bonus or by any other name); (d) any sum which by reason of the termination of employment of the person employed is payable under any law, contract or instrument which provides for the payment of such sum, whether with or without deductions, but does not provide for the time within which the payment is to be made

We have been observed that, many of employer defend that, there is “No word mentioned in S&E act that called as Encashment” hence, leave encashment is not applicable to employees.

So, we would like to clear you that, Leave encashment is mandatory to provide while separation of employees irrespectively, any reason.  However, it is not mandatory to employer to encash leave during services of employees. It’s only applicable at a time of separation.

For giving you the better understanding on this doubt or question, I have mentioned clauses by referring to some of states’ Shops & establishment act. In India under leave encashment.

Clauses, of referred states’ Shops & establishment, its described employer need to pay leave encashment at time of retirement, discharge, retirement, & termination.

Now, if we interpreted the clauses correctly, so, the word “termination”  the termination of employment by employer is shouldn’t be only interpreted on ground of any negative clause like, misconduct, misbehave, or unethical action,

Dismissal-       Dismissal is the termination of employment by an employer against the will of the Employee. It could be varies reason like removal by the organization asPunishment, Layoff / downsize- ranging from an economic /financial situations.

Discharge-       Absolving from the charges framed, mutually relieved by any of party.

Termination- End of tenure of job by superannuation, retirement, resignation, voluntaryRetirement etc.

Retirement: - it may be on superannuation or on voluntary like as resignation.

1) Any agreement or contract made with employee during joining for non-encashment of leave during separation, such agreement or contract should be approved under “The Industrial Employment (Standing Orders) Act, 1946” to set up formal define conditions of employment by “Certifying officer” (Labour Commissioner).

If such agreement or contract, appear to deprive or restricting to avail benefits, fundamental rights, of employees under any law (s), such agreement or contract will stand as null & avoid.

Below mentioned are S&E acts are seems to be allow leave encashment at time of separation …

1) As per The Maharashtra Shops and Establishments (Regulation of Employment and Conditions of Service) Act, 2017.

Section (5) Every worker shall be permitted to accumulate earned leave up to a maximum of forty-five days. (6) Where the employer refuses to sanction the leave under sub-section (3) which is due when applied fifteen days in advance, then the worker shall have a right to encash leave in excess of forty-five days:

Provided that, if a worker is entitled to leave other than causal and festival leave under this section, is discharged by his employer before he has been allowed the leave, or if, having applied for and having been refused the leave, he quits his employment on account of retirement, resignation, death or permanent disability, the employer shall pay him full wages for the period of leave due to him

2) As per The Punjab Shops and Commercial Establishments Rules, 1958.

Section 14, (b) if an employee is discharged or dismissed from or leaves service during the course of the year he shall be entitled to leave with wages or wage in lieu of unavailed leave.

3) As per The Andhra Pradesh Shops and Commercial Establishments ACT, 1988

Section (7) If any employee entitled to any leave under sub-section (1) is discharged by his employer before he has been allowed such leave, or if the leave applied for by such employee has been refused and if he quits his employment before he has been allowed the leave, the employer shall pay him the amount, payment under this Act in respect of the period of leave.

4) As per  the Karnataka Shops and Commercial Establishments ACT, 1961

Section (4) if an employee is discharged or dismissed from service during the course of the year he shall be entitled to leave with wages at the rates laid down in sub-section (1) even if he has not worked for the entire period specified in sub-section (1).

5) As per  the Uttar Pradesh Shops and Commercial Establishments ACT 1962

Section (7), where the services of an employee are terminated by his employer, or where the employee terminated the employment, the employer shall liable to pay to the employee wages for the number of days for which the earned leave is due to him.

6) As per  the Bihar Shops & Establishments Act, 1953

Section [(9) If the employment of an employee who is entitled to leave under sub-section (1) or sub-section (2), as the case may be, is terminated by the employerbefore he has taken the entire leave to which he is entitled or if, having applied for and having not been granted such leave, he quits his employment before he has taken the leave, the employer shall pay him the amount payable under section 17 in respect of the leave not taken, and such payment shall be made before the expiry of the second working day after the day on which his employment is terminated and to an employee who quits his employment on or before the next pay day.

7) As per Rajasthan Shops and Commercial Establishments Act, 1958 Complete Act

Section 14 under Explanation 2 (3) If an employee is discharged or dismissed from service during the course of the year he shall be entitled to leave with wages at the rate laid down in sub-section (1) even if he has not worked for the entire period specified in sub-section (1) or sub-section (2) entitling, him to earn leave.

8) As per the Kerala Shops and Commercial Establishments Act, 1960

Section (3) If an employee entitled to any holidays under sub-section (1) is discharged by his employerbefore he has been allowed the holidays, or if having applied for and been refused the holidays, he quits his employment before he has been allowed the holidays, the employer shall pay him the amount payable under this Act in respect of the holidays.

9) As per the Kerala Shops and Commercial Establishments Act, 1960 (In Kerala, Leave called as “Holiday”)

Section 25 (3), If person entitled to any holiday under sub-section (I), is discharged by his employer before he has been allowed the holidays or if having applied for and been refused the holidays, he quits his employment before he has been allowed the holidays, the employer shall pay him the amount payable under this act. In the respect of the holidays. (In Kerala, Leave consider as “Holiday”)

Reference of “The Income- Tax Act, 1995” 

Thus both ‘retirement’ and ‘resignation’ mean the conclusion of the service career from that particular employer i.e. resignation from service is also one of the modes of retirement from service. Once an employee resigns, his service stands terminated from the date on which his letter of resignation is accepted by the appropriate authority, unless there is any law or statutory rule governing the conditions of service to the contrary. In other words, on acceptance of resignation, the employee stands retired from service.

The word ‘retirement’ has not been used in the law in the restricted sense to mean ‘retirement on superannuation’. On the other hand, it is clear from the language of Section (10AA) itself that it has been used in the widest possible terms to mean and include all cases of retirement, whether on superannuation or otherwise. What is relevant is ‘retirement’— how it took place is immaterial for the purpose of this clause.

Therefore, it is clear that if on retirement, even on resignation by the employee, he/she gets by way of leave encashment any amount, Section 10 (10AA) would apply and the assesse will be entitled to the benefit of the said clause to the extent mentioned therein.

The same view is supported by the decision of the Madras High Court in the case CIT vs R J Shahney (1986) 54 CTR (Mad) 360. In that case also the assesse had resigned and retired from employment. The high court had held: “The retirement may be of various kinds. It may be on superannuation or voluntary. If there is any voluntary retirement from service, we are satisfied that the provisions of S 10 (10AA) would apply.