Denying Leave Encashment is Violative of Constitutional Right

The Authors are Gyanendra Mishra, Partner, Dentons Link Legal and Mudrika Purohit, Associate, Dentons Link Legal

Introduction

In the case of Ahmedabad Municipal Corporation v. Sadgunbhai Semulbhai Solanki[1] the Gujarat High Court (“Hon’ble HC”) settled a crucial issue relating to an employee’s claim for leave encashment following his resignation, which the petitioner, Ahmedabad Municipal Corporation (“AMC”), contested on procedural and technical grounds. The Hon’ble HC’s judgment reaffirmed that denying an employee their earned leave encashment violates constitutional rights. It held that leave encashment is akin to salary which is property and depriving a person of his property without valid statutory provision is a violation of the provision of the Constitution of India. 

Brief Facts

A petition was filed by the Ahmedabad Municipal Corporation, challenging an order passed by the Labour Court in a recovery application. The AMC employed Sadgunbhai Semulbhai Solanki (“Employee”) as a Junior Clerk. Over the course of his employment, he faced multiple reversions in rank due to his inability to clear departmental examinations. Eventually, on March 6, 2013, he submitted a resignation effective from March 7, 2023, citing physical and personal reasons, indicating his readiness to deposit notice pay if required. However, the resignation went unattended by the AMC. Subsequently, the Employee ceased reporting to duty and reached the age of superannuation on April 30, 2014. The Employee filed a recovery application before the Labour Court, seeking leave encashment for 299 days. The Labour Court allowed the application, directing the AMC to pay the arrears along with costs. Aggrieved by this decision, AMC approached the Hon’ble HC.

Issue

The issue before the Hon’ble HC was whether the Employee, who had submitted a resignation, but whose resignation was neither formally accepted nor rejected within the stipulated period, was entitled to encash his accumulated leave, thereby answering if the Labour Court rightly granted the Employee leave encashment benefits.

Legal Analysis by the Hon’ble HC

In its analysis, the Hon’ble HC focused on the statutory framework governing resignations, leave encashment, and the employer’s obligations under the Gujarat Civil Services Rules, 2002, (“GCSR”) and the Industrial Disputes Act, 1947 (“ID Act”). The Hon’ble HC determined if the Employee’s resignation could be deemed effective despite the AMC’s claim of non-payment of notice pay. It noted that the Employee had submitted his resignation on March 7, 2013, expressing readiness to pay the notice amount upon acceptance. However, the AMC remained silent for seven months before communicating the requirement to deposit the notice pay. The Hon’ble HC held that this delay amounted to the AMC’s failure to address the resignation in a timely manner as required under service regulations. The Hon’ble HC emphasized Rule 49 of the GCSR, which states that a resignation or voluntary retirement application is deemed accepted if not acted upon within 90 days by the appointing authority. Applying this provision, the Hon’ble HC held that the Employee’s resignation was deemed effective on June 7, 2013, i.e. 90 days after its submission, as the AMC failed to communicate any acceptance or rejection during this period.

The Hon’ble HC also considered Section 33(c)(2) of the ID Act, which permits a workman to claim money or benefits capable of being computed in monetary terms. The Hon’ble HC upheld the Labour Court's decision, ruling that the Employee had a pre-existing right to claim leave encashment. Consequently, the application under Section 33(c)(2) of the Industrial Disputes Act, 1947, was maintainable. It concluded that the Labour Court rightly relied on the Employee’s pre-existing entitlement to 299 days of accumulated leave, as evidenced by the AMC’s own records. Further, the Hon’ble HC examined Rule 22 and Rule 63 of the GCSR, which govern leave encashment. The Hon’ble HC held that leave encashment is akin to salary which is property and depriving a person of his property without valid statutory provision is a violation of the provision of the Constitution of India. If an employee has earned the leave and the employee has chosen to accumulate his earned leave to his credit then encashment becomes his right and in the absence of any authority that right cannot be infringed by the AMC. The AMC itself had issued a certificate acknowledging the Employee’s accumulated leave, which further supported the Employee’s claim. The AMC’s argument regarding the non-payment of notice pay was dismissed, as the Employee had already expressed willingness to deposit the amount upon acceptance of his resignation. Additionally, the Hon’ble HC noted the petitioner’s failure to initiate departmental proceedings to classify the Employee’s absence as unauthorized, further weakening their case. Ultimately, the Hon’ble HC affirmed that leave encashment is akin to salary which is property and depriving a person of his property without valid statutory provision is a violation of the provision of the Constitution of India.

Ruling of the Court

The Hon’ble HC dismissed the petition filed by the AMC, affirming the Labour Court’s order. It held that the Employee was entitled to leave encashment for his accumulated leave. The Hon’ble HC reiterated that an employee’s right to encash earned leave is a recognized entitlement, and any unjustified deprivation of this right violates constitutional principles. The petition was dismissed as devoid of merit, the rule was discharged, and any interim relief granted during the proceedings was vacated.

Insights for the Employers

This judgment underscores the critical importance of procedural diligence and statutory compliance for employers. Timely action on resignation or retirement applications, transparent communication, and adherence to service rules are essential to avoid legal pitfalls. Employers must also recognize employee entitlements, such as leave encashment, as statutory rights and ensure their fair and timely disbursement. Maintaining accurate records and implementing efficient administrative processes can strengthen the employer’s position in any potential dispute.