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Understanding Impact of New Labor Laws on Employee Leave and Compensation

Rashmi , Last updated: 06 September 2023  

New Labor Laws to Bring Changes for Employers and Workers

Four new labor laws are on the horizon, promising significant changes for both employers and employees. These changes will impact take-home pay, contributions to the Employees' Provident Fund (EPF), calculations of paid leave, and maximum working hours. One of these laws, the Occupational Safety, Health and Working Conditions Code, states that employees who are not in managerial or supervisory roles cannot accumulate more than 30 days of paid leave in a calendar year. If they do, the employer must compensate for the excess leave. It's important to note that these laws have been passed by the parliament and notified by the government but are pending an effective date for implementation. 

Understanding Impact of New Labor Laws on Employee Leave and Compensation

Annual Leave, Carry Forward, and Encashment

The Occupational Safety, Health and Working Conditions Code allows workers to carry forward annual leave to the next year, up to a maximum of 30 days. If the balance exceeds 30 days at the end of the calendar year, the excess leave can be encashed.

This rule prevents the lapse of unused leave beyond a certain limit, which is common in many organizations today. Leave encashment will occur at the end of each calendar year. These provisions apply only to non-managerial and non-administrative employees.

To prevent paying for unused paid leave exceeding 30 days, employers may encourage employees to take vacations and utilize the excess leave. Annual leave encashment will have a financial impact on employers.


Implementation Impact

Currently, some states have similar leave requirements, but enforcement is weak. When the Occupational Safety, Health and Working Conditions Code is implemented, employers will need to consider these provisions in their employee costs, potentially affecting their finances and cash flow.


Calculating Leave Encashment

Once the government implements the Occupational Safety, Health and Working Conditions Code, leave encashment for excess leave will become mandatory. The calculation will be based on the employee's wages as defined under the Code on Wages.

Wages include all remuneration payable according to the terms of employment for work done, except for certain excluded components like house rent allowance, conveyance allowance, and certain bonuses, provided these exclusions do not exceed 50% of total remuneration.

In simpler terms, employees will be paid for all allowances on a per-day basis, except for those specifically excluded components.

The author is a Chartered Accountant with 2 decades of experience into Accounting, Taxation, Auditing, Risk & Compliance, Credit Controls, Due diligence. Currently, the author is the founder and managing partner at RRL Global Services. She can also be reached at rrlglobal@yahoo.com


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