Carry-Forward vs Encashment: The Emerging Conflict Between the OSH Code and State S&E Acts

[Shubhranshu and Nishaan Potluri are undergraduate students at NALSAR University of Law]

The Union Government recently notified the enforcement of India's new central labour codes. The new codes aim at consolidating twenty-nine fragmented central labour statutes into four comprehensive codes, the Industrial Relations Code, the Code on Wages, the Occupational Safety, Health and Working Conditions Code ("OSH Code") and the Code on Social Security. The  main reason provided by the government was to reduce complexity, eliminate archaic compliance burdens, and create a more business-friendly environment, all while enhancing worker welfare.

This ambition however, runs into a structural problem. Under the constitution of India, labour is placed in the Concurrent List (List III) of the Seventh Schedule. This common and shared jurisdiction has historically allowed states to enact their own Shops and Commercial Establishments Acts to govern commercial establishments. As the OSH Code extends to include establishments, overlaps between the two frameworks were always going to arise. One of  these conflicts involves the accumulation and encashment of annual leave, which is the subject of this article.

The OSH Code and Annual Leave: The Central Mandate

Chapter VII of the OSH Code deals with hours of work and annual leave with wages. Section 32 of the Code puts down the mechanism for leave accrual, carry-forward and encashment. Under Section 32(vii)(a), a worker is entitled to carry forward unused earned leave to the next calendar year, subject to a carry forward limit of thirty days. Where the accumulated leave balance at the end of a calendar year exceeds this ceiling, worker is entitled to demand encashment of the excess. In other words, leave can no longer simply lapse, it must either be carried forward within the thirty-day limit or paid out by the employer on demand.

This marks a highly significant departure from what has, so far, been the existing practice across much of the country. Historically, annual leave encashment was seen as something an employee received as a terminal benefit i.e., means ordinarily payable upon separation from the service. The OSH Code effectively converts what was historically a deferred exit benefit into an annual statutory entitlement exercisable during the course of employment itself.

The Non-Obstante Clause and the Question of "More Favourable" Benefits

The Section 120 of the OSH Code contains a non-obstante provision stating that this Code shall prevail in all matters it governs, unless an employee is given more favourable benefits through any award, agreement, contract of service, or otherwise. In Lilavati Bai v. State of Bombay 1957, the Supreme Court interpreted similar language in Section 6 of the Bombay Land Requisition Act, 1948 and held that the phrase "otherwise" was intended by the legislature in an all-inclusive sense, designed to capture every situation not already enumerated. By that analogy, it is reasonable to read the word "otherwise" in Section 120 of the OSH Code as extending to state-specific Shops and Establishments Acts, provided those Acts confer more favourable benefits upon the worker.

The real difficulty, however, lies in identifying what "more favourable" actually means when the two regimes offer categorically different kinds of benefit rather than simply more or less of the same thing.

The State Legislation: A Patchwork of Differing Regimes

Section 15 of the Karnataka Shops and Commercial Establishments Act, 1961 permits the carry-forward of unused earned leave up to forty-five days per year. There is, however, no provision for voluntary encashment of leave during the course of active service. Section 15(13) of the Act provides that leave encashment becomes payable when employment is terminated by the employer, or when the employee quits before availing the leave that was due to them.

Section 18(6) of the Maharashtra Shops and Establishments (Regulation of Employment and Conditions of Service) Act, 2017 similarly provides a carry-forward ceiling of forty-five days but restricts encashment during service to situations where a worker had applied for leave at least fifteen days in advance and was refused by the employer. The Delhi Shops and Establishments Act likewise caps carry-forward at forty-five days (three times the annual privilege leave entitlement of fifteen days i.e., 45 days). with no general right of encashment during service. Tamil Nadu's corresponding legislation follows a comparable pattern.

The thread common to these state regimes is a higher carry-forward ceiling paired with the absence of any mid-service encashment right. The OSH Code, by contrast, offers a lower carry-forward ceiling of thirty days but guarantees an annual right to encash the excess on demand. Neither of the model seems to be straightforwardly superior compared to the other.

The Conflict in Concrete Terms

This conflict could be better understood with the help of an illustration. Let us take the example of a worker in Karnataka who closes the calendar year with forty days of earned leave accumulated. Now, under the Karnataka Act, all forty days may be carried forward into the succeeding year without any reduction as forty days falls below the forty-five days ceiling. No encashment is triggered in this case and the worker continues to hold the full balance for future use or terminal encashment. On the other hand, under the OSH code, thirty days may be carried forward and the remaining ten days must be encashed at year-end. The employer is obligated to pay wages for those ten days immediately.

So Which regime is more favourable? There is no one conclusive answer, simply because it depends on what that particular worker in question actually needs. A worker who needs immediate cash would obviously prefer the OSH Code’s mandatory payout of ten days wages. A worker who values holding those leaves in reserve, perhaps anticipating a wage revision that would increase the future encashment value, would prefer the Karnataka Act's higher carry-forward. Judged by how many leave days a worker gets to keep, the state law comes out ahead. Judged solely by the immediate cash receipt, the central code may be the better deal. Section 120 speaks of benefits "in respect of any matter," but it provides no definitive framework for working through a conflict where the two regimes are not merely offering different amounts or types of the same benefit, but rather benefits that differ in kind entirely.

The "More Favourable" Standard and the Risk of Conflation

This ambiguity creates a real practical problem. The established principle in Indian labour law is that if two instruments govern the same aspect of employment, the one that is more favourable to the employee must prevail especially if the statute clearly says so. This was also affirmed in BCH Electric vs Pradeep Mehra, where the court noted thatif there are alternate options for the employee under the Act and under the terms of the contract, the employee is entitled to receive higher available benefit amongst the two available options.

The difficulty in the present scenario is that no single regime is unequivocally more beneficial. An employer who applies the state law for some workers and the OSH Code for others, or who attempts to apply whichever appears more favourable on a case-by-case basis, risks litigation from workers who may later argue the other instrument ought to have governed them. Furthermore, an employee may argue that since the OSH Code is a beneficial piece of legislation, it ought to be interpreted so as to give the worker the best of both worlds.

The Judicial Trajectory: Against Cherry-Picking

Since the labour codes have only recently been notified for enforcement, there is no direct litigation yet on the OSH Code versus state S&E Act conflict. However, courts have addressed the analogous question in the gratuity context with considerable consistency: may an employee select the most advantageous provision from each of two instruments and treat the result as a single composite entitlement?

The definitive answer came in Beed District Central Co-operative Bank Ltd. v. State of Maharashtra ,2006. The bank's employees claimed gratuity at the rate of twenty-six days' wages per year as provided under the bank's internal scheme, while simultaneously seeking the benefit of the higher statutory ceiling under the Payment of Gratuity Act, 1972. The Apex court rejected this by holding that an employee must elect one complete regime either the scheme in its entirety or the Act in its entirety.

The Delhi High Court applied this principle in National Airports Authority v. Sudershan Kumar and Ors., where employees who were already receiving wages above the statutory minimum sought to additionally claim overtime at double the rate prescribed under the Minimum Wages Act effectively combining the contractual base with the statutory overtime benefit. The court held following Beed District, that an employee cannot pick and choose between contract and statute and that the choice, once made must extend to the whole instrument.

The Chhattisgarh High Court reached the same conclusion in Chhattisgarh Rajya Gramin Bank and Ors. v. Arun Phansalkar and Ors. Under Regulation 72(3) of the Chhattisgarh Rajya Gramin Bank (Officers and Employees) Service Regulations, 2013, gratuity for an officer was to be computed on the basis of last pay drawn. The officers, having claimed under the Regulations, then sought to include dearness allowance in the computation of "pay" by borrowing that wider definition from the Payment of Gratuity Act. The court declined: having elected the Regulations, the officers were bound by the entire framework of that instrument, including its narrower definition of pay.

Conclusion

The conflict between the OSH Code's annual leave encashment provisions and the corresponding provisions of state-level Shops and Establishments Acts is genuine and, as of the date of this writing, unresolved. Both regimes govern the same workers in the same establishments; neither is unambiguously more favourable in all cases; and the non-obstante clause in the OSH Code does not supply a workable test for resolving the conflict where the two instruments confer categorically different benefits.

Until the government clarifies it, the most defensible position based on the existing case laws in that the employer allow workers to elect either of the regimes. Once this election is made, he is bound by all the consequences that emerge from this regime. So an employer cannot cherry pick the higher carry forward ceiling from a state’s act  while also claiming the OSH Code's year-end encashment right.

Although a beneficial legislation by its nature, this mix and match is not allowed. As the Supreme Court opined in Beed District case and as multiple courts there after have affirmed, beneficial legislation calls for a generous interpretation of the single applicable instrument. It does not call for the assembly of a composite instrument from the most favourable parts of two. That, ultimately, is what cherry-picking means in law and it is what the established jurisprudential position does not permit.