How To Calculate Leave Encashment In Singapore

Aside from the monthly salary, overtime pay and yearly bonuses, there are a few other occasions when an employer might need to top up your income. Leave encashment is one of those instances.

In Singapore, employers are required to give their employees a certain number of days of annual leave. This leave can be taken by employees at their discretion, or it can be encashed in exchange for money.

In this article, we will teach you how to calculate your leave encashment. We will also provide you with the pros and cons of encashing your leave and help you understand whether it is worth the trouble.

What is leave encashment?

Leave encashment or leave payout is the process of converting your annual leave credits into cash before you retire or at a negotiated time with your employer. It is a common practice in Singapore and many other countries where employees are entitled to a certain amount of leave per year. 

In Singapore, the number of days for annual leave is governed by the Employment Act. Employees are generally given between 7 to 14 days of paid annual leave, depending on their length of service.

The table below reflects the number of days of annual leave that an employee is entitled to in Singapore according to the Employment Act. 

This is the minimum number of leave days that employers are required to give their employees. Nonetheless, you can also negotiate with your employer for a higher number of leave days, which is generally in the range of 15 to 21 days.

Leave encashment calculation in Singapore

Encashment of leave is basically a conversion of leave days into cash.

In 2020 in particular, there were fewer options for employees to use up their vacation days since borders were closed and global travel was restricted. Furthermore, as many businesses embraced work-from-home policies, it’s conceivable that some workers didn’t need to take leave to address personal matters because they were already working from home.

As an employer or manager, it is worth noting that allowing your employees to accumulate too many unused leave days might trigger a problem with your manpower in the future if they all decide to take their leave at the same time. 

Thus, converting the unused leave days for your employees is one of the ways to avoid a labour shortage without compromising your employees’ needs.

To calculate your leave encashment, you need to know the following:

• Your length of service
• Number of annual leave days to which you’re entitled
• Current market rate for one day’s work (or overtime pay)
• Annual salary

Once you have these figures, it is easy to calculate your leave encashment. According to the Ministry of Manpower (MOM), the formula of leave encashment is as follows:

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

For example, if you have worked in a company for four years and your monthly basic or gross rate of pay is $2,000, and the average number of days an employee is required to work in a week is five, this could be a possible scenario: 

Leave balance = 10 days

Monthly salary = S$2,000

Working days per week = 5 days

Annual salary = S$2,000X12 months = S$24,000

Total workdays in a week = 5 days X 52 weeks in year = 260 days

Daily rate = S$24,000/260 days= S$92.31

Total annual leave encashment = 10 days X S$92.31= S$923.10

Compensation in lieu of notice

Most employed people have a contract that stipulates a notice period before termination of employment. If you seek to terminate employment you ought to serve the notice period or pay your employer compensation for the notice period.

It is important to note that both parties can decide to waive the notice period by mutual consent. As a rule this should be done in writing.

In the event that your contract does not specify the length of a notice period, it should be determined by your period of employment. The table below reflects MOM’s recommendation. 

Whenever an employee or an employer pays or receives compensation in lieu of notice, no CPF contributions are to be paid.

Factors resulting in not taking annual leave in Singapore

As mentioned earlier, there are many reasons why employees might not be able to take their leave. Some of the most common ones include:

• Employees in essential services having to work more to deliver necessary services. This frequently applies to those in the public sector, healthcare institutions, and logistics industries.

• Employees may have been asked to work more or differently due to a change in their company’s business practices.

• The employer might also ask the employees not to take leave if they are short on manpower, especially during peak periods such as Christmas and Chinese New Year. However, it is worth noting that employers should offer some form of compensation for those working during these periods.

• The employee might have chosen to work from home instead of taking leave. This is a result of the many businesses now adopting work-from-home policies.

• Many countries have been restricting global travel due to COVID-19, making it difficult for employees to take their annual leave. Singapore is no exception.

• The employee might have been unable to take leave because of prior commitments such as family or medical issues.

Paid annual leave is a statutory requirement in Singapore, and all employees are entitled to it, regardless of their designation, role, or length of service. However, the number of days employees can accumulate depends on the terms of their employment contract.

Should employers allow workers to encash annual leave?

At this point, it is crucial to mention that employers do not have any legal obligation to allow their employees to encash their annual leave. However, each company may have varying contractual terms and conditions regarding this.  

Employees should be given this choice because it allows them to determine their own work-life balance. It also addresses the employees’ individual needs and interests, which is key in creating a happier workforce that will contribute more towards company objectives. The employer can derive great benefits from offering flexible leave options as well since they are likely to attract and retain better talent.

That being said, it is still advisable for employers to ensure they manage their employees’ leave schedules properly. This means that the company should have a clear understanding of how many days each employee has left and whether he or she can be expected to continue working during this period.

In addition, if the employer allows an employee to take time off from work, he or she should have a clear idea of when the employee might return so as to plan accordingly.

Pros and cons of allowing employees to encash their annual leave

Pros

It’s a way to be fair and just to your employees 

If you allow your employees to encash their annual leave, you are also being fair with them and removing the need for workers to be calculative. You don’t want your staff to feel obligated to take annual leave just so they don’t feel taken advantage of, especially when your company and other employees benefit from their labour.

It boosts employees’ morale

Your employees will be more satisfied and can stay committed. This can help your employees weather an economic downturn with greater morale and extra cash on hand. Even if they were not affected in terms of job security or pay cuts as a result of the COVID-19 recession, their loved ones could have been. 

It’s a sign of trust

Allowing your employees to encash their annual leave shows them that you respect and trust the work they do, and are willing to compensate their efforts. This can help improve the company culture and make your employees feel more valued.

Encourages greater productivity

Employees who feel that they are being treated fairly and justly at the workplace will be more motivated to work harder. This can lead to increased levels of production, which is something every business owner wants. After all, you want your employees to put in their best efforts so the company can succeed.

Cons

It may cost you more money in the short term

Allowing employees to encash their annual leave might cost your company more in the short run. This is because you are paying your employees more than their monthly salary.

However, longer-term benefits such as increased loyalty and better staff retention should be taken into consideration as well, so the costs of encashing annual leave might not be that high after all.

Employees may save annual leave for a cash payout

It is possible that some employees might save their annual leave so they can get a cash payout instead. While this defeats the purpose of allowing them to encash their leave, it’s something you will have to keep in mind when making your decision.

In conclusion, encashing annual leave is a great way to be fair and just with your employees while encouraging increased productivity. It can be an especially useful option when employees are restricted by the pandemic from taking leave, and would appreciate the flexibility of encashing their leave balance. 

In need of extra credit? Besides encashing your leave, you can explore and compare the best personal loans as a way to secure funds. 

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