Leave encashment is the payment an employee receives for unused annual leave days, usually at resignation, termination, or retirement. Formula: Daily Wage = Monthly Salary ÷ 30. Leave Encashment = Daily Wage x Unused Leave Days. It is calculated using the employee's full wage and paid as part of the final settlement.
Quick Summary
- Leave encashment converts unused annual leave days into a cash payment, made when employment ends.
- Eligible employees: Any employee with unused annual leave at resignation, termination, or retirement.
- Formula: Daily Wage = Monthly Salary ÷ 30. Leave Encashment = Daily Wage x Unused Leave Days.
- Salary components included: Basic salary plus fixed allowances - variable pay like bonuses and commissions is excluded.
- UAE Labour Law reference: Article 29, Federal Decree-Law No. 33 of 2021.
- Leave encashment is mandatory - employers must include it in the final settlement, typically within 14 days of the last working day.
- Leave continues to accrue during a working notice period - any remaining balance is included in the encashment.
- Leave encashment is separate from gratuity - both are typically paid together as part of the final settlement.
Leave Encashment at a Glance
| Factor | Details |
|---|---|
| What is leave encashment | Payment for unused annual leave days |
| Who is eligible | Employees with unused leave at resignation, termination, or retirement |
| Formula | (Monthly Salary ÷ 30) x Unused Leave Days |
| Salary components | Basic salary plus fixed allowances |
| When is it paid | With the final settlement |
| UAE Labour Law | Article 29, Federal Decree-Law No. 33 of 2021 |
| Calculator | Divide monthly wage by 30, multiply by unused days |
What Is Leave Encashment?
Definition
Leave encashment converts an employee's unused annual leave days into a cash payment, usually made when employment ends.
Why Leave Encashment Exists
It ensures employees are fairly compensated for leave they earned but did not get the chance to use, protecting their right to the value of that time off.
Benefits for Employees & Employers
Employees receive fair payment for unused leave instead of losing it entirely. Employers get a clear, standardized method to close out leave balances during final settlement.
Leave Encashment Under UAE Labour Law
Employee Rights
Employees have a legal right to be paid for any unused annual leave balance at the end of their employment, regardless of whether they resign or are terminated.
Employer Responsibilities
Employers must calculate and include leave encashment accurately in the final settlement, typically within 14 days of the employment ending.
Private Sector Rules
This applies to all private sector employees under Federal Decree-Law No. 33 of 2021, excluding free zones with independent regulations such as DIFC and ADGM.
Public Sector Considerations
Government sector employees follow separate human resources regulations that may differ from private sector leave encashment rules.
Who Is Eligible for Leave Encashment?
Full-Time Employees
Any full-time employee with an unused annual leave balance is eligible for encashment at the end of their service.
Part-Time Employees
Part-time employees are eligible on a pro-rata basis relative to their working hours.
Employees Resigning
Employees who resign are entitled to encashment for any leave accrued but not used, regardless of their notice period status.
Employees Terminated
The same encashment rule applies whether the employee is terminated with or without cause.
Employees Retiring
Employees retiring after long service are also entitled to full encashment of any remaining leave balance.
How to Calculate Leave Encashment
Leave Encashment Formula
Daily Wage = Monthly Salary ÷ 30
Leave Encashment = Daily Wage x Unused Leave Days
Daily Wage Calculation
Divide the employee's full monthly wage by 30 to get the standard daily rate used across UAE payroll practice.
Monthly Salary Calculation
The monthly salary used should reflect the employee's full fixed wage at the time of leaving, not an earlier or averaged figure.
Components Included
Basic salary and fixed allowances that are part of the regular contractual wage.
Components Excluded
Bonuses, commissions, overtime pay, and other variable or one-time payments.
Leave Encashment Examples
AED 5,000 Salary
Daily wage = 5,000 ÷ 30 = AED 166.67
Encashment for 15 unused days = 166.67 x 15 = AED 2,500
AED 10,000 Salary
Daily wage = 10,000 ÷ 30 = AED 333.33
Encashment for 20 unused days = 333.33 x 20 = AED 6,666.60
AED 20,000 Salary
Daily wage = 20,000 ÷ 30 = AED 666.67
Encashment for 25 unused days = 666.67 x 25 = AED 16,666.75
Partial Leave Balance
An employee with a monthly salary of AED 6,000 has 7 unused leave days at resignation.
Daily wage = 6,000 ÷ 30 = AED 200
Encashment = 200 x 7 = AED 1,400
Resignation Example
An employee resigns after 2 years with 18 unused leave days and a monthly salary of AED 9,000.
Daily wage = AED 300
Encashment = 300 x 18 = AED 5,400, included in the final settlement.
Termination Example
An employee is terminated with 10 unused leave days and a monthly salary of AED 12,000.
Daily wage = AED 400
Encashment = 400 x 10 = AED 4,000.
Leave Encashment During Different Situations
Resignation
Encashment is calculated based on the leave balance at the resignation date and paid with the final settlement.
Notice Period
Leave continues to accrue during a working notice period, and any remaining balance at the actual last working day is included in the encashment calculation.
Termination
The same calculation method applies regardless of whether the termination is with or without cause.
Retirement
Employees retiring receive encashment for their full unused leave balance as part of their retirement settlement.
End of Service
Leave encashment is typically paid together with gratuity and any other dues as part of the end-of-service settlement, usually within 14 days.
Leave Encashment vs Leave Salary
| Factor | Leave Encashment | Leave Salary |
|---|---|---|
| Trigger | End of employment | Approved leave taken |
| Paid for | Unused leave days | Days actually taken as leave |
| Formula | Daily wage x unused days | Daily wage x leave days taken |
Leave Encashment vs Final Settlement
| Factor | Leave Encashment | Final Settlement |
|---|---|---|
| Scope | One component of the final payment | The complete final payment, including salary dues, gratuity, and leave encashment |
| Calculation | Daily wage x unused leave days | Sum of all outstanding dues |
Leave Encashment vs Gratuity
| Factor | Leave Encashment | Gratuity |
|---|---|---|
| Basis | Unused annual leave days | Length of service |
| Formula | Daily wage x unused leave days | Based on years of service and basic salary, per UAE Labour Law gratuity rules |
| Purpose | Pays for leave not taken | Rewards long-term service |
Common Payroll Mistakes
Common errors include using gross salary instead of the full fixed wage, forgetting to include fixed allowances, and miscounting the actual unused leave balance at the time of exit.
Frequently Asked Questions
Who is eligible for leave encashment?
Any employee with an unused annual leave balance at resignation, termination, or retirement.
Is leave encashment mandatory under UAE Labour Law?
Yes, employers must pay out unused annual leave as part of the final settlement.
Is leave encashment calculated on basic salary or gross salary?
It is calculated on the full fixed wage, meaning basic salary plus fixed allowances, not the entire gross salary with variable pay.
When is leave encashment paid after resignation or termination?
It is typically paid together with the final settlement, usually within 14 days of the last working day.
What is the difference between leave salary and leave encashment?
Leave salary is paid for leave actually taken while employed. Leave encashment is paid for leave that was earned but never used.
Can unused annual leave be encashed in the UAE?
Yes, unused annual leave must be encashed and paid to the employee at the end of employment.
Does leave encashment form part of the final settlement?
Yes, it is one of the standard components of the final settlement, alongside gratuity and any outstanding salary dues.
Can employers refuse to pay leave encashment?
No, this is a statutory entitlement and cannot be withheld if the employee has an unused leave balance.
Author(s)
greytHR
greytHR is a full-suite HRMS platform that automates HR processes and empowers employee self-service. It ensures all-around productivity and engaged employees — the crucial ingredients for growth.Share this
