Unused leave exceeding 30 days will be compulsorily paid by employers under new labour laws

Sep 6, 2023

Synopsis
The four new labour laws are awaiting effective implementation date from the government. However, once they are implemented, it will impact the number of leave an employee can carry forward in a subsequent calendar year. Read on to know what four new labour laws says about carrying forward of leave.

The four new labour laws that are awaiting implementation will introduce a lot of changes for both the employer and the employee /worker. Some of the important changes/areas of impact will be: Lower take-home pay, higher contribution to the Employees' Provident Fund (EPF) account, calculation of number of paid leave available in a calendar year and the maximum working hours in a week.

One of the labour laws - the Occupational Safety, Health and Working Conditions Code - states that an employee cannot accumulate more than 30 days of paid leave in a calendar year. If the accumulated paid leave due to an employee exceeds 30 days in a calendar year, the company (employer) will have to pay for the excess leave. In this case, 'employee' means those workers who are not in managerial or supervisory positions. 

Here it is important to note that Occupational Safety, Health and Working Conditions Code, the Code on Wages, Industrial Relations Code and the Social Security Code are awaiting a government notification for the date from when these new laws will be effective. The new four labour laws have been passed by the parliament and notified by the government. They are only awaiting an effective date from which laws will come into effect. 

Sowmya Kumar, Partner at law firm INDUSLAW, says, "Section 32 of the Occupational Safety, Health and Working Conditions Code, 2020 (OSH Code), has a number of conditions with respect to availing annual leave, carry forward and encashment. Section 32(vii) allows a worker to carry forward annual leave to a subsequent calendar year, up to a maximum of 30 days. In case at the end of the calendar year the annual leave balance exceeds 30, then the employee will be entitled to encash the excess leave and carry forward 30 days to the next year."

Experts say the new rule will do away with the system of unused leave getting lapsed beyond a certain limit.

Puneet Gupta, Partner, People Advisory Services, EY India, says, "As per the Occupational Safety, Health and Working Conditions Code, 2020, if the leave balance exceeds 30, the worker will be entitled to encash the excess leave. Such leave encashment will be done at the end of each calendar year. The annual leave for workers cannot lapse under the labour codes and will have to be availed or carried forward or encashed. Currently, many organisations do not allow leave encashment on an annual basis as well as for the paid leave balance to exceed the carry forward limit. It is important to note that provisions relating to annual leave and leave encashment under the OSH Code are applicable only for 'workers' - that is, employees who are not in managerial or administrative or supervisory roles."

Hence, to avoid paying an employee/worker for unused 'paid leave' exceeding 30 days in a year, employers may ask workers to go on vacation i.e., utilise the excess 'paid leave'.

Both Kumar and Gupta are of the view that leave encashment on an annual basis will have financial impact on the employer. Gupta from EY India says, "The implementation of OSH provisions may entail a financial impact as well as a cash flow impact for employers."

Kumar of INDUSLAW says, "At present, similar requirements are present in shops and commercial establishments legislations of a few states (for example Andhra Pradesh and Telangana). However, enforcement is not very strong. Once the OSH Code comes into force, employers will definitely have to factor this into their employee costs."

How much will an employee be paid for excess leave?
Once the government implements the OSH code, encashment of leave in excess of the defined limit will become mandatory.

The next question, then, is how much an employee will be paid. Will the leave encashment be done on the basis of per-day basic salary or will other allowances such as special allowance, house rent allowance also be taken into account?

"Under the OSH Code, the amount of leave encashment will have to be calculated with reference to wages as defined under the Code on Wages. As per the definition, the term wages includes all remuneration payable as per the terms of employment in respect of work done in such employment, except certain components which are specifically excluded (such as house rent allowance, conveyance allowance, bonus payable under any law, etc) provided the excluded components do not exceed 50% of total remuneration. In layman terms, one can say that employees will be paid for all the allowances on a per-day basis except those allowances that are specifically excluded," says Gupta from EY India.

[The Economic Times]