What is leave encashment and how is it calculated?

Leave encashment is the monetary compensation provided for unused annual leave days. It is calculated based on the employee’s basic salary plus any fixed allowances specified in the employment contract. For example, if an employee has 10 unused leave days, the encashment is calculated by dividing the monthly salary by 30 (days) and multiplying by 10. Employers must follow MOHRE leave regulations when processing these payments.

When can employees claim leave encashment in the UAE?

Employees can claim leave encashment in the following situations:

• When they resign or are terminated and have unused leave days.
• When their contract ends and leave balances remain.
• Some companies also allow encashment annually in lieu of taking leave (depending on the company’s HR policy).

Legally, any leave encashment must be settled at the time of final settlement if the employee has any pending leave balance UAE.

How does leave encashment differ from gratuity payments?

Leave encashment is compensation for unused leave days, whereas gratuity is an end-of-service benefit calculated based on years of service. Gratuity is mandatory after one year of continuous service, while leave encashment applies only if the employee has pending leave days. In short, gratuity is a reward for service tenure, while leave encashment is compensation for untaken leave. Many businesses in the UAE now rely on cloud HRMS solutions to automate these calculations and minimize errors.

What is the role of MOHRE in leave encashment?

MOHRE oversees the enforcement of labour laws, including matters related to leave encashment in the UAE. If an employer refuses to pay leave encashment or miscalculates it, employees can file a complaint with MOHRE. The ministry provides clear guidelines on how encashment should be calculated and ensures that employees receive their rightful dues. Employers are also expected to comply by using accurate payroll processes or HR software to calculate leave encashment in line with labour standards and avoid penalties.

Frequently Asked Questions

Can employees encash unused leave every year in the UAE?

By law, annual leave is meant to be taken as rest rather than encashed each year. However, some employers allow yearly encashment of unused leave based on company policy. Legally, employees are entitled to encashment at the time of final settlement.

How is leave encashment calculated upon resignation?

When an employee resigns, leave encashment is calculated based on their basic salary plus any fixed allowances. The employer divides the monthly salary by 30 and multiplies it by the number of unused leave days. This amount isincluded in the employee’s final settlement.

Is leave encashment included in gratuity?

No, leave encashment and gratuity are separate entitlements. Gratuity is calculated based on the length of service, while leave encashment is based on unused annual leave. Both are payable at the time of final settlement, if applicable.

What salary components are considered for leave encashment?

Typically, leave encashment is calculated based on the employee’s basic salary. In some cases, fixed allowances such as housing or transport (if specified in the employment contract) may also be considered. Variable components like bonuses, incentives or overtime are not considered.

Can an employer deny leave encashment?

Employers cannot deny leave encashment at the time of final settlement if the employee has accrued unused leave. However, they may decline requests for mid-service encashment if such a provision is not included in the company’s policy.