How To Calculate Leave Encashment Or Salary-In-Lieu Of Notice Period For Your Employees

Beside the monthly salary, over-time pay and annual bonuses, there are a few other occasions where an employer may need to pay additional wages. Two such common instances are when there is leave encashment and salary-in-lieu of notice period to be paid out to their employees. 

Read Also: Ordinary Wage (OW) VS Additional Wage (AW): What’s The Difference (And Why It Matters To Employers And Employees)

How To Calculate Amount To Be Paid To Employees For Leave Encashment?

Encashing leave days is a way of converting an employee’s unconsumed annual leaves into money. 

This was a big consideration in 2020 and 2021, when there were fewer opportunities for workers to take leave since overseas travel was restricted. Moreover, with work-from-home being adopted by many companies, it’s possible that some workers may not have needed to take leave to handle personal errands since they are already working from home.

Allowing employees to accumulate too many unused leave days may cause potential problems in the future, such as lack of manpower if many employees choose to take their leaves during the same period. For example, if your employees have 21 days of annual leave each year and were able to bring forward all of their leaves from this year, they will end up with 42 days of annual leave in 2023, which equates to more than 8 weeks of non-work.

Converting unused annual leave into cash is one way of allowing employees to “consume” their leaves. This may also be preferred by your employees instead of forcing them to take block leaves or even forfeiting unused leaves.

Read Also: Should You Allow Employees To Encash Their Remaining Annual Leave This Year?

The amount to be paid for leave encashment is based on the employee’s salary. Here’s how you can calculate leave encashment.

Step 1: Since annual leave is based on a per year basis and not per month, you will need to find out the per day working rate of the employee. 

According to the Ministry of Manpower (MOM), the formula to calculate a worker’s per day rate is:

(12 × monthly basic or gross rate of pay) / (52 × average number of days an employee is required to work in a week)

For example, for an employee who earns $4,000 a month and works five days a week, his daily rate is:

(12 x $4,000) / (52 x 5 days) = $184.62 (daily rate)

However, for an employee who works 6 days a week, his daily rate will be: 

(12 x $4,000) / (52 x 6 days) = $153.85 (daily rate)

Step 2: Find out the leave balance and multiply the daily rate with the leave days meant to be encashed.

For example, for an employee who earns $4,000 a month and works five days a week and has 10 days of annual leave left. The total encashment to be paid will be: 

$184.61 x 10 = $1,846.20 (Total encashment to be paid to employee)

Do note that leave encashment is considered as part of additional wages and subject to both employer and employee’s CPF contribution if it falls within the AW ceiling.

Read Also: Additional Wage (AW) Ceiling: How Much CPF Contributions To Make For Bonus & Leave Encashment To Employees

How To Calculate Amount To Be Paid For Salary-In-Lieu of Notice Period?

Employers may get into a situation when they need to pay salary-in-lieu of notice. This situation typically arises if an employee resigns, and according to the employment contract, is required to serve notice, but is told by the employer that he does not need to do so or can serve part of it. 

In this instance, the employer is required to pay salary-in-lieu of notice not served. There may also be situations when the employee chooses to leave earlier and not serve notice. When this occurs, the employee has to pay salary-in-lieu of notice to the employer. Both parties may also agree to waive the notice period by mutual consent. In such situation, a waiver should be done in writing.

When either situation happens – whether the employer or employee is required to pay salary-in-lieu of notice – the employer will need to calculate the amount. Since notice periods are typically by months (i.e. one month or three months), the salary-in-lieu of notice can be simply be calculated with the employee’s one month salary. However, if the notice period is counted in weeks, then the number of days the employee was supposed to work should be taken into account.

Scenario 1: An employee earns $3,000 a month and decides to resign but is required to serve one month notice. However, his employer requests him to leave earlier and does not want him to serve the one month’s notice. The employer is required to pay him salary-in-lieu of notice since he was told that he does not need to serve the notice period. 

Since the notice period in our example is one month, the salary-in-lieu of notice period is simply $3,000 (one month). This amount will be paid to the employee, unless there is a mutual agreement from both parties about not serving the notice period then no payment is required.

Scenario 2: An employee works five days a week and earns $3,000 a month. She decides to resign but is required to serve two weeks’ notice. The employer requests her to leave earlier and not to serve the notice. As a result, the employer has to pay salary-in-lieu of notice for the two weeks. 

In this situation, the daily rate of pay needs to be worked out first. According to the MOM formula above, the employee’s daily rate of pay is $138.46. Since the employee works five days a week, his two weeks’ notice period will be 10 days in total. Therefore, the salary-in-lieu of notice that the employer is required to pay him is $1,384.60.

CPF Contributions Are Not Applicable For Salary-In-Lieu of Notice Period

When an employer terminates an employee and pays them a salary-in-lieu of notice, CPF contributions are not payable. Similarly, if an employee is leaving and has to pay the employer a salary-in-lieu of notice, CPF contributions are not payable.

Read Also: 10 Types Of Employee Payments (Apart From Salary) That Businesses Need To Pay CPF For

This article was first published on 11 January 2021 and has been updated with the latest information.

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