Leave is often seen as a simple workplace benefit – an approved absence from work. In reality, it is one of the more structured and regulated aspects of employment in India. With the implementation of new labour codes, questions around leave entitlement, holidays and leave encashment have drawn renewed attention. This matters because these rules affect not just everyday working life, but also what happens when an employee leaves an organisation.For employers and employees, understanding how leave works today is not always straightforward. This is because two legal systems operate side by side: the new central labour codes and the older State-level Shops and Establishments (S&E) laws. While the intent is to move towards a simpler and more uniform system, the actual position still depends on job role, location and which law applies.Different types of statutory leaveIndian labour laws recognise several types of statutory leave. The most important is earned leave (also called privilege leave). This leave builds up over time based on how many days an employee works. In addition, there are provisions for sick leave, casual leave, and national and festival holidays.Earned leave is different from other types of leave because it has both time-off value and financial value. If it is not used, it can build up and may be paid out in cash – either during employment or when the employee leaves, subject to carry forward limits – depending on the applicable law and company policy.Sick leave and casual leave, on the other hand, are meant for short-term or urgent needs and are usually not designed to be encashed.National and festival holidays form a separate category. These ensure paid holidays on important national or regional days, based on State notifications and local rules.Labour codes vs Shops and Establishments lawsA frequent point of confusion is the interface between the labour codes and State Shops and Establishments Acts.The Occupational Safety, Health and Working Conditions Code introduces a common framework for leave, but for people classified as “workers” under that law. At the same time, State S&E laws continue to apply to many salaried employees working in offices, shops and service-sector businesses.Because of this, uniformity has not fully arrived yet. Different State laws and leave rules may still apply for employees depending on where they are employed and work. Those who fall under the labour code framework move towards a more standard national system. Where both laws could apply, guidance from authorities suggests that the more beneficial provision would generally continue to apply.
Employers are expected to apply these frameworks together and ensure consistency as the new system takes shape.How earned leave builds upEarned leave generally depends on how long an employee has worked.Under the labour codes, earned leave accrues at a standard rate of one day for every twenty days of work, subject to certain eligibility conditions. This is meant to create a common reference point across the country.State Shops and Establishments laws, however, follow different approaches. Some States grant a fixed number of leave days each year, while others link leave closely to days worked. States also differ on how much unused leave can be carried forward.Sick leave, casual leave and holidaysSick leave and casual leave are mainly meant for short-term protection rather than long-term accumulation. Sick leave helps employees during illness, while casual leave allows flexibility for sudden personal needs.These types of leave are mostly governed by State law and internal company policy, with limited direct impact from the labour codes. Usually, unused sick or casual leave does not carry forward.National and festival holidays are largely decided at the State level. Employers are expected to follow notified holiday lists or compensate employees who work on those days, as per State rules.Carrying forward unused earned leaveHow unused earned leave is treated is one area where the labour codes bring more structure.Earlier, State laws allowed different levels of leave accumulation. Under the labour code approach, carry-forward is subject to clear limits, after which settlement mechanisms may apply. This is intended to avoid unlimited build-up of leave while still protecting employee interests.If leave could not be taken because of work requirements, safeguards exist to ensure such leave is not lost automatically.Annual leave encashment under labour codesAnother change under the labour codes is clearer recognition of leave encashment during ongoing employment.Earlier, in many States, leave was typically encashed only when an employee resigned, retired or was terminated. Under the new labour codes framework, employees may be entitled to encash leave exceeding permissible carry forward limits even while they remain in service. As per provisions under labour codes, a worker shall be entitled on his / her demand for encashment of leave at the end of calendar year. Worker shall be entitled, where the total number of leave exceeds 30 days, to encash such exceeded leave.Leave encashment when employment endsAcross Indian labour laws, one position has remained largely consistent. Unused earned leave is expected to be settled when employment comes to an end, whether the employee resigns, retires, is retrenched or is terminated.How this amount is calculated depends on the applicable law. State S&E laws refer to specific wage definitions, while the labour codes require calculation using the definition of “wages” under the Code. This may differ from earlier practice.
What employees and employers should keep in mindFor employees, the key point is that leave is not only a company benefit but part of a legal framework. How it applies depends on role, location and legal coverage.For employers, the focus remains on aligning internal policies with both Central and State laws, while ensuring smooth implementation. Clear communication and regular policy reviews will continue to be important during this transition.Leave rules may not attract the same attention as pay or job security, but they play a quiet role in work-life balance and financial certainty. As India’s labour framework evolves, earned leave is increasingly seen not just as time away from work, but as a regulated employment benefit with defined outcomes.(The author, Puneet Gupta is Partner, People Advisory Services Tax at EY India)
