Leave policy in a small company is usually a verbal tradition ('bol ke le lena') that works until the first dispute: the exit encashment demand nobody calculated, the maternity conversation nobody prepared for, the star performer burnt out because taking leave felt like betrayal. A written policy — one page, statutorily sound, consistently applied — prevents all of it. Here is the legal floor and a model structure that fits Indian SMEs.
The statutory floor (know your state)
- Shops & Establishment Acts set the leave minimums for most offices/shops — state-wise, commonly: earned/privilege leave ~15 days/year (often 1 day per 20 worked), casual leave ~7–12 days, sick leave ~7–12 days (states vary; some merge categories)
- Factories Act (manufacturing): earned leave at 1 day per 20 days worked after 240 days' service, with carry-forward rules
- National/festival holidays: state-specific mandatory lists (typically 3 national + 5–8 festival days)
- ESI interaction: employees under ESI get sickness benefit through ESIC (certified sickness at ~70% wages) — your sick-leave policy should acknowledge rather than duplicate it
- Maternity: 26 weeks paid (first two children; 12 thereafter), plus nursing breaks and the 50+-employee crèche duty — statutory, non-negotiable, and to be budgeted, not feared
A model structure that works
For a typical services/office SME: Earned Leave 15 days (accrual monthly at 1.25 days; usable after probation; carry-forward capped at 30–45 days; encashable at exit on Basic — the statutory expectation in most states); Casual Leave 8 days (short-notice life admin; no carry-forward); Sick Leave 8 days (certificate beyond 2–3 continuous days; no carry-forward or limited); Holidays: the state list published each January, plus 1–2 floating/optional holidays (the modern touch that handles festival diversity gracefully). Add the clarity clauses: leave year definition (calendar vs financial), probationer treatment (CL/SL yes, EL accrues but usable post-confirmation), sandwich rule stated honestly (whether intervening holidays count — pick one rule and apply it always), notice requirements (EL with 7 days' notice except emergencies), and approval authority.
Accumulated EL is a real balance-sheet item: 20 employees × 30 days average balance × per-day Basic is often several lakhs of quiet liability, payable at every exit. Cap carry-forward sensibly, consider annual encashment of excess (taxable to employees but liability-clearing), and — as audits formalise — provision for it. Leave records aren't HR trivia; they're accounting.
Administration that prevents disputes
- Records: a leave register/app per employee (statutory registers require it anyway) — balances visible to staff (transparency kills half the disputes)
- Consistency is the legal protection: policies applied unevenly (the favourite's leave versus others') create discrimination grievances; document exceptions with reasons
- Unpaid leave (LWP) rules: when granted, how it affects PF/ESI months and increments — decided in the policy, not per argument
- Exit math: EL encashment on Basic per policy/state rules in the full-and-final; unserved-notice adjustments against balances only where policy says so
- The cultural clause worth writing: leave is an entitlement, not a favour — teams that take planned leave outperform teams that hoard it; say so in the policy and mean it
Special situations the policy should pre-answer
Paternity (no central mandate for private sector — 5–7 days is the emerging SME norm and cheap goodwill); bereavement (3–5 days, the clause every family remembers); comp-offs for worked holidays (defined expiry, else they become a shadow currency); leave during notice (typically restricted to sick with certificate — say so); and long-absence protocol (the absconder ladder: contact attempts, written notices, abandonment treatment per appointment letter). Every clause you write today is an argument you don't have at a resignation tomorrow.
How Aidwish helps
Aidwish drafts leave policies matched to your state's S&E rules and your industry's rhythm — the policy document, register/app setup, encashment-liability modelling and the handbook integration — one afternoon of design against years of ad-hoc disputes.