The implementation of four new labour laws will bring significant changes for employers and employees/workers. These changes include lower take-home pay, higher contribution to the Employees’ Provident Fund (EPF) account, calculation of paid leave in a year, and maximum working hours in a week. One of these labour laws, called the Occupational Safety, Health and Working Conditions Code, specifies that an employee cannot accumulate more than 30 days of paid leave in a calendar year. If an employee exceeds this limit, the employer will have to pay for the unused leave. This rule applies to non-managerial and non-supervisory workers.
It is important to note that the Occupational Safety, Health and Working Conditions Code, the Code on Wages, Industrial Relations Code, and the Social Security Code are awaiting a government notification to determine the effective date of these new laws. The parliament has passed these laws, and they are currently awaiting implementation.
Sowmya Kumar, a partner at the law firm INDUSLAW, explains, “Section 32 of the Occupational Safety, Health and Working Conditions Code, 2020 (OSH Code), outlines conditions for taking annual leave, carry-forward, and encashment. According to section 32(vii), a worker can carry forward up to 30 days of annual leave to the next calendar year. If the balance exceeds 30 days at the end of the year, the employee can encash the excess leave and carry forward 30 days to the following year.”
Experts believe that this new rule will eliminate the practice of unused leave expiring after a certain limit.
Puneet Gupta, a partner at EY India, states, “As per the Occupational Safety, Health and Working Conditions Code, 2020, if the leave balance exceeds 30 days, the worker has the right to encash the excess leave. This encashment will occur at the end of each calendar year. Under the labour codes, annual leave cannot be forfeited and must be utilized, carried forward, or encashed. Currently, many organizations do not allow annual leave encashment and limit the carry-forward of paid leave. It is important to note that the provisions regarding annual leave and leave encashment under the OSH Code only apply to non-managerial, non-administrative, and non-supervisory employees.”
To avoid paying for unused paid leave exceeding 30 days, employers may require workers to utilize the excess leave by going on vacation.
Both Kumar and Gupta believe that annual leave encashment will have financial implications for employers. Gupta states, “The implementation of OSH provisions may have financial and cash flow impacts for employers.”
Kumar adds, “Currently, some states have similar requirements in their shops and commercial establishments legislation (e.g., Andhra Pradesh and Telangana), but enforcement is not stringent. Once the OSH Code comes into force, employers will have to factor in this aspect when calculating employee costs.”
How much will employees be paid for unused leave?
Once the government implements the OSH code, it will be mandatory to encash leave exceeding the defined limit.
The next question is the amount employees will be paid. Will the encashment be based on the per-day basic salary or will it include other allowances such as special allowance and house rent allowance?
Gupta explains, “Under the OSH Code, the amount of leave encashment will be calculated based on the wages defined in the Code on Wages. The definition of wages includes all remuneration payable for work done, except for certain components that are specifically excluded (e.g., house rent allowance, conveyance allowance, bonus provided under the law) as long as the excluded components do not exceed 50% of total remuneration. In simple terms, employees will be paid for all allowances on a per-day basis, except for those specifically excluded,” according to Gupta from EY India.
