Encashment of Leave is a part of work life. In the case of Industrial Establishments provisions of Factories Act, 1948 are applicable. Provisions of Encashment of Leave for workers employed in a factory are governed under Chapter VIII of the Factories Act, 1948 –
Section 79(3) of the Factories Act, 1948 states that –
“If a worker is discharged or dismissed from service or quits his employment or is superannuated or dies while in service, during the course of the calendar year, he or his heir or nominee, as the case may be, shall be entitled to wages in lieu of the quantum of leave to which he was entitled immediately before his discharge, dismissal, quitting of employment, superannuation or death calculated at the rates specified in sub- section (1), even if he had not worked for the entire period specified in sub- section (1) or sub- section (2) making him eligible to avail of such leave, and such payment shall be made–
(i) where the worker is discharged or dismissed or quits employment, before the expiry of the second working day from the date of such discharge, dismissal or quitting; and
(ii) where the worker is superannuated or dies while in service, before the expiry of two months from the date of such superannuation or death.”
The Hon’ble Bombay High Court in the year 1994, in the matter of Hindustan Lever Employee’s Union V/s Regional Provident Fund Commissioner and Anr., W.P. No. 527 of 1992 with W.P. No. 530 of 1992, observed that Basic Wages under Section 2(b) of the EPF Act included leave Encashment. The Hon’ble Court held that if an employee who has earned leave, goes on leave, his salary or wages shall obviously fall within the terms, “basic wages” and if such employee does not avail such leaves but encashes them, the amount the employee gets as leave encashment should be included within his basic wages. Therefore contribution under Provident Fund Act has to be paid on Leave Encashment as well.
However, the latest view on the matter has been laid down in Manipal Academy of Higher Education V/s Provident Fund Commissioner, 2008, wherein the Hon’ble Supreme Court held that leave encashment cannot be a part of basic wages for the purpose of calculating Provident Fund contributions. The Hon’ble Court, replying upon the decision of Bridge & Roofs Co. Ltd V/s Union of India, 1963 and applying the ‘test of universality’ opined that, leave encashment cannot part of the wages which is paid universally across the board to all employees, as leave encashment is paid to those who voluntarily avail the opportunity. In many cases the employees do not take leave and encash it at the time of retirement and the same is encashed after their death which can be said to be an uncertainty and contingency. Therefore, leave enchashment couldn’t be considered as a part of basic wages given out to all employees.
In coming to the above conclusion the Hon’ble Supreme Court also replied upon the decision of TI Cycles of India V/s MK Gurumani, 2001 where it was held that, “The test is one of universality. In the case of encashment of leave the option may be available to all the employees but some may avail and some may not avail. That does not satisfy the test of universality.”