Most of the public discussion on the Labour Codes has been about wages to be used for computing gratuity and the 50% wages rule. Leave has received far less attention, even though it touches every payroll, every HR policy manual and, for companies that report under AS 15 or Ind AS 19, a line in the actuarial valuation. Section 32 of the Occupational Safety, Health and Working Conditions Code, 2020 (the "OSH Code") — in force since 21 November 2025 — resets the statutory floor for annual leave. It does so for a defined category of employees and works alongside the state's Shops and Establishments legislation.
This article walks through what the statute now requires, who it reaches, where the boundaries are genuinely unclear, and what that means for a company's own leave policy.
What Section 32 Actually Provides
Section 32 of the OSH Code grants every worker in an establishment leave with wages in each calendar year. The mechanics, drawn from s 32(1) and the Ministry of Labour & Employment's (MoLE) clarifications, are summarised below.
| Feature | Position under s 32 |
|---|---|
| Eligibility | Worker must have worked at least 180 days in the calendar year |
| Accrual rate | 1 day for every 20 days worked (1 day for every 15 days for adolescents and workers employed below ground in mines) |
| Days counted towards the 180 | Lay-off, maternity leave and annual leave days count for eligibility, but earn no further leave |
| Intervening holidays | Holidays falling within a period of leave are not counted as leave taken |
| New joiners | Pro-rata entitlement for workers joining part-way through the year, subject to a minimum-days-worked test of one-fourth of the remaining days |
| Carry-forward | Unavailed leave carries forward, capped at 30 days. Leave that was applied for but refused carries forward without any limit (MoLE Additional FAQ 21, 16.03.2026) |
| Encashment during service | At the worker's request at the end of the calendar year; leave above the 30-day carry-forward cap can be encashed. The Code prescribes no maximum (MoLE Additional FAQ 26) |
| Exit | Wages in lieu of leave due on discharge, dismissal, resignation, superannuation or death — even where the 180-day threshold was not met. Payable within two working days of discharge, dismissal or resignation, and within two months of superannuation or death |
Who the Rules Actually Apply
The opening words of s 32 are "every worker". That is narrower than "every employee", and the gap between the two is material.
- "Employee" (s 2(1)(t)) is the wide term: any person employed on wages in skilled, semi-skilled, unskilled, manual, operational, supervisory, managerial, administrative, technical, clerical or other work.
- "Worker" (s 2(1)(zzl)) is employed to do manual, unskilled, skilled, technical, operational, clerical or supervisory work for hire or reward.
It excludes anyone employed mainly in a managerial or administrative capacity, and the provisions of leave accumulation dont apply to supervisors drawing more than ₹18,000 per month (or such higher amount as the Central Government notifies).
MoLE has confirmed the reading in its Additional FAQs of 16.03.2026: leave and leave encashment provisions apply to workers, and to supervisors whose wages do not exceed ₹18,000 a month (FAQ 20); sales promotion employees are workers (FAQ 20, 22). There is no pay ceiling for technical, clerical or operational staff. A software engineer, an accountant or a claims processor can be a "worker" regardless of salary, unless the actual job is managerial or administrative.
Where the Categories Blur
The definitions are simple on paper and awkward in practice, for three reasons.
The test is functional, not nominal. The exclusion applies to someone employed mainly in a managerial or administrative capacity. A "Manager" designation with no reportees and no authority to hire, discipline or commit the company may not be managerial in this sense; an "Executive" who runs a team and controls a budget may well be. The Code does not supply a checklist, and the Industrial Disputes Act case law on the "predominant duties" can serve as a guide. Company assigned designation alone cannot be used to ascertain the cateogry of employees under the heads mentioned in the Codes.
MoLE's FAQs leave loose ends. FAQ 22 asks whether relationship managers and salespersons earning above ₹18,000 are covered; the reply says sales promotion employees are workers but does not engage with the pay point. A cautious employer treats a field sales role as a worker unless the duties are clearly managerial.
What Wage Rate Encashes the Leave?
The Codes lead us to the definition given in the Code on Wages, 2019
Section 32 grants leave "with wages" and wages "in lieu" on exit, but, on our reading, neither s 32 nor the Central Rules we have reviewed prescribe a formula for the daily rate. The Factories Act, 1948 (s 81) used to specify an average-daily-wage computation; the OSH Code has no equivalent provision that we have been able to locate. What the Code does is import its own definition of "wages".
- OSH Code, s 2(1)(zzj) defines wages as all remuneration payable under the terms of employment, including basic pay, dearness allowance and retaining allowance, and excluding the items listed in sub-clauses (a) to (k) — employer contributions to provident fund and pension, house rent allowance, conveyance, overtime, commission, gratuity and retrenchment compensation among them — subject to a proviso under which excluded payments above one-half of total remuneration are added back.
- Code on Wages, 2019, s 2(y) carries the same structure and the same 50% add-back in its first proviso. MoLE's FAQs also state that annual performance-based incentives are not part of wages (30.12.2025 FAQ, Sl. No. 3).
For companies that have restructured pay to meet the 50% rule, the practical gap between wages as defined in the Codes and 'Basic' may not be material. For those that have not, the gap can be material. In either case, the salary used for computing liabilities on availment shall be the pay that employee receives while comsuming the leaves.
State Shops and Establishments Laws Have Not Gone Away
The OSH Code applies to workers. Employees who are not workers — managers, administrators and supervisors above the ceiling — are not covered by s 32. For them, leave continues to come from the state Shops and Establishments legislation in the state of work, and from the contract. Sick leave and casual leave, which the OSH Code does not address, remain governed by those statutes in any case.
The state positions diverge sharply:
| State | Position on privilege / earned leave |
|---|---|
| Maharashtra | Maharashtra Shops and Establishments (Regulation of Employment and Conditions of Service) Act, 2017, s 18: leave at 1 day for every 20 days of work, after 240 days in the year; accumulation up to 45 days; encashment of the excess where leave was refused. Managerial, confidential and supervisory staff are excluded from several provisions |
| Karnataka | Carry-forward cap of 20 days under the state Act |
| Delhi | Accumulation up to 45 days |
| Andhra Pradesh | Accumulation up to 60 days — the example MoLE uses in Additional FAQ 25 |
The interplay is governed by s 120 of the OSH Code. The Code prevails over inconsistent state provisions, but a worker keeps any state or contractual benefit that is more favourable (s 120 and its proviso; MoLE Additional FAQ 25). A Maharashtra worker with a 45-day accumulation right does not lose it merely because the Code caps carry-forward at 30 days. And a Karnataka worker whose state-law cap was 20 days gains the Code's 30-day cap.
State legislatures are also rationalising their own shops legislation. Several states have exempted establishments from separate registration or moved to repeal their older Acts, and state OSH rules are still being finalised. The state position should be checked for each location rather than assumed from this article.
Where the Company's Own Leave Policy Stands
A leave policy now sits within three layers: the Code (for workers), state Shops and Establishments law (for everyone not displaced by the Code, and for leave types the Code does not cover) and the contract or policy itself. The rules for reading them together are consistent:
- More favourable survives. Where the policy gives workers more than s 32 — say, 24 days a year, or accumulation up to 90 days — the policy continues to apply under the proviso to s 120.
- Less favourable yields for workers. A policy that lapses leave at year-end, counts intervening holidays as leave, or defers all encashment to exit is displaced to the extent it falls short of the Code. The worker is entitled to the Code's minimum without any need to amend the policy.
- Non-workers are governed by their own terms. For managers and others outside the Code, the policy and the state Act remain the authorities. The company may extend the Code's features to them voluntarily, but it is not required to.
Why This Reaches the Financial Statements
Leave is an employee benefit, and the Code changes its recognition and measurement inputs. Compensated absences that accumulate are treated as short-term benefits to the extent they are expected to be used within twelve months, and as other long-term employee benefits otherwise (AS 15, paras 7.2, 11–16 for short-term compensated absences and paras 7.8, 127–132 for other long-term benefits; the corresponding provisions of Ind AS 19 sit in paras 11–16 and 153–158). A change that lets workers encash at year-end on demand, or that raises the encashment wage, can move balances between the two classes and increase the obligation. The ICAI Accounting Standards Board's FAQs of 26 December 2025 address this directly: a past service cost on other long-term benefits is recognised immediately, and under AS 15 is not amortised even where unvested (FAQ 5).
How the change is presented — as a change in actuarial assumptions or as a plan amendment — and how the resulting amount flows through the statement of profit and loss is a topic on its own, and we will cover it in a dedicated follow-up article.
A Short Checklist
- Map every role to "worker" or not, documenting the duties test used for borderline cases.
- Compare each leave-policy term with s 32 for workers, and with the state Act for everyone else.
- Decide the policy's wage base for encashment and confirm it is not lower than s 2(1)(zzj) wages for workers.
- Decide how pre- and post-21 November 2025 balances will be treated.
- Give your actuary the classification, the revised policy terms and the wage base before the next valuation date.
This article is a general summary for information and is not legal advice. Statutory references are to the OSH Code, 2020, the Code on Wages, 2019, the Code on Social Security, 2020 and the Industrial Relations Code, 2020 as in force at the date of writing; MoLE FAQs are cited as published on 30.12.2025 and 16.03.2026. State rules are still evolving; confirm the position for each state of operation with labour counsel.