Leave accrual, carry over and encashment, explained
The PayLoom team2 min read
Leave accrual is how entitlement is earned over time, carry over decides how much unused leave moves into the next year, and encashment pays out a balance instead of it being taken as time off.
A leave balance looks like a single number, but it is the result of several policy decisions: how entitlement is earned, how it is adjusted for people who join or leave part way through the year, what happens to days that are not used, and whether a balance can ever be paid out. Getting these right is what makes the number on a payslip match the number in the leave system.
Accrual: how entitlement is earned
Accrual is the rule for how leave builds up. There are two common approaches. With upfront allocation, the full year's entitlement is credited at the start of the year. With periodic accrual, it builds up in instalments, usually monthly, so someone entitled to 24 days a year earns 2 days each month.
Periodic accrual tracks what has actually been earned, which matters when someone leaves part way through the year. Upfront allocation is simpler for employees to understand but can leave a negative balance to recover if someone leaves after taking more than they had earned.
Pro rata for joiners and leavers
People who join or leave mid-year should receive entitlement in proportion to the time they are employed. Decide whether you count by calendar days, working days or whole months, and apply the same rule to both joiners and leavers. Inconsistent pro rata rules are one of the most common causes of disputed final settlements.
Carry over: what happens to unused days
- A cap on how many unused days can move into the next year.
- An expiry date for carried days, so old balances do not build up indefinitely.
- Whether carried days are used before or after the new year's entitlement.
- Whether different leave types carry over differently. Sick leave often does not carry over at all.
Encashment: paying out a balance
Encashment converts unused leave into pay. It is commonly used at the end of employment and, in some policies, for balances above the carry over cap at year end. The policy needs to define which leave types can be encashed, the daily rate used, and how it is taxed. Because it creates a payment, it has to reach payroll as an input, not be calculated separately.
Minimum entitlement, carry over limits and encashment rules are set by law in many countries. Treat your policy as sitting on top of those rules, not replacing them.
Keep policy history
Leave policies change. When they do, the change should apply from a date, with the previous version kept on record. Otherwise a policy update silently rewrites balances people earned under the old rules.
How PayLoom does it
PayLoom's Leave module applies accrual, pro rata and carry over per policy, per country and per contract type, with effective dates on every policy. A request shows the balance it will leave behind before it is approved, and encashment and unpaid leave are priced into the pay run so the payslip and the balance agree.