'Leave Encashment Rules Must Be Strictly Interpreted' : Supreme Court Denies Leave Encashment To Govt Servant Re-employed After Retirement

In a case concerning Sikkim Government Service, the Supreme Court recently held that a Government Servant who has been re-employed after retirement cannot take the benefit of leave encashments if he had availed the maximum of 300 days of leave encashment before his retirement.

The Court also held that while the policy of leave encashment is made for the welfare of the deserving employees, it cannot be allowed excessively at the behest of the Public Exchequer. 

"Interpreting leave encashment provisions goes beyond financial compensation and connects to broader legal principles of dignity and welfare during service. However, such interpretations must carefully balance the interests of both employees and the financial stability of the organization, especially when public exchequer is involved. Courts must tread carefully to prevent employees from claiming leave encashment multiple times for the same accrual, which could lead to unjust enrichment and may go against the public interest of largesse." 

The bench of Justice JK Maheshwari and Justice Rajesh Bindal was considering the issue of whether a retired government servant who has been re-employed by the State can be allowed to avail leave encashments meant for those employees who initially retire at 58 years of age. 

The question of law framed was : “Whether an employee of the State who had availed the benefit of leave encashment maximum of 300 days once on attaining the age of superannuation under Rule 36 of Sikkim Leave Rules, can further be entitled for leave encashment again on relieving after the period of re-employment?”

The respondent was appointed on deputation to the Sikkim State services in 1980. He retired on January 31, 2005, upon reaching the age of superannuation, as per Rule 982 of the Sikkim Government Service Rules, 1974. At retirement, he served as the Medical Advisor and Chief Consultant at STNM Hospital in Gangtok. While processing his retirement benefits, he was granted leave encashment for up to 300 days of unused leave, under Rule 63 of the Leave Rules.

After retirement, the respondent was re-employed on the same post for 2 years, w.e.f. from 01.02.2005 to 31.05.2005, which was extended time to time upto 28.05.2019,- the date on which he was officially relieved. He was through a 2019 office order allowed cash equivalent to leave salary of 300 days of earned leave standing to his credit for the period of re-employment.  

The present issue arose when the State found that the Leave Rules do not allow leave encashment beyond 300 days in cases of re-employment, which was already paid during their initial retirment. 

The State noticed that despite this, leave encashments were being paid for re-employed persons. Resultantly, an Office Memorandum (OM) was issued on February 27, 2020 clarifying that a maximum of 300 days of leave encashment specified in Rule is inclusive of the period of leave earned during extension of service, re-employment, etc. 

Consequently, the extended benefit of the leave salary to the Respondent was cancelled during his period for re-employment through order dated May, 21, 2020. 

The Respondent then filed a writ petition seeking the quashing of the order dated May 21, 2020 and to declare that the respondent is entitled to receive Rs.20,51,100/- towards leave encashment alike similarly placed other re-employed employees.  

The Single Bench of High Court allowed the plea and interpreted Rule 36 in conjuction with Rule 32 and held that the phrase 'retires from service' in Rule 36 is broad enough and includes the re-employed employees. It also held the OM issued by the State as arbitrary. 

The State then challenged the order before a Division Bench, which upheld the orginal order. It held that Rule 36 applies to re-employed government servants also. 

Notably, Rules 36 reads "The Government may sanction to a Government servant who retires from service under the Sikkim Government Service Rules, 1974, cash equivalent of the leave salary in lieu of the period of earned leave on full pay standing at his credit on the date of his retirement subject to a maximum of 300 days." 

While Rule 32 reads "In the case of a Government servant re-employed after retirement, the provisions of these rules shall apply as if he had entered government service for the first time on the date of his re-employment." 

Arguements By The Parties

The Counsel for the State mainly argued that the impugned order was contrary to the real intent behind Rule 36. He added that Rule 32 and Rule 36 of Leave Rules deal with different spheres and they cannot be read in conjunction, therefore, the interpretation as made in the impugned judgment is not correct. 

The State argued that a bare reading of the Rule provides the leave encashment benefit only for those who attained the age of retirement of 58 years. The rule does not deal with the persons being re-employed after initial retirement. 

The counsel for the Respondent on the other hand argued that the sanctioned leaves were cancelled by the Order of May 2020 without giving the respondent any adequate hearing. Further such a rejection of representation is discriminatory and violates Article 14 of the Constitution of India because similarly situated other re employed relieved employees have been allowed the same benefits. 

Further the order cancelling the sanctioned leave was an unfair action by the State and in violation of Principles of Natural Justice. 

He added that Rule 32 is appplicable to the persons re-employed and have to be read conjointly with Rule 36. 

Analysis Of Rule 36 In Relation To Rule 32 By The Court 

The bench noted that Rule 36 is divided into two fagments : (i) the retirement of the government servant ought to be under Sikkim Government Service Rules, 1974 and; (ii) the earned leave on full pay standing at his credit on the date of retirement, maximum of 300 days may be granted.  

Only upon the satisfaction of the two conditions, can the leave salary be obtained. 

The Court marked a clear distinction between the phrasing of the words under Rules 32 and 36. Under Rule 32, the Leave Rules will apply only to those persons who have been re-employed after the retirement as if they are being applied for the first time. But Rule 36 expressly deals with those employees who are serving till the age of initial retirement of 58 years. 

 "Mere applicability of Leave Rule 32 would not ipso facto bring an employee within the connotation “government servant” to whom Leave Rule 36 applies. The said fact is discernable from the language employed in Leave Rule 32 which specifies “government servant re-employed after retirement” and “the provision of these rules shall apply as if he had entered in government service for the first time on the date of his re-employment”. So, Leave Rule 36 shall apply to those government servants who were in regular service prior to their retirement upto attaining the age of superannuation, i.e., 58 years." 

Secondly, the Court observed that Rule 36 only deals with those employees who retired from service not bring those employees in its ambit who have be re-employed after the initial service. 

"By using the words “the government may sanction to a government servant who retires from service under the Sikkim Government Service Rules, 1974”, makes the legislative intent clear that the government servant can get leave encashment on retirement from regular service and not on relieving after re employment. Thus, after granting leave encashment once on retirement to a maximum of 300 days, the employee cannot get benefit of leave encashment second time in lieu of his relieving on completing the period of re-employment." 

The Court thus concluded that " 32 cannot be read in a manner to revive the 300 days of unutilized leave afresh for the re-employed employees who have already availed the benefit of leave encashment maximum of 300 days during regular service. As such, there is no interplay of Rule 32 with Rule 36 and both are independent and apply in different spheres. The unutilized leave in credit beyond period of 300 days during re-employment would not be inclusive for leave encashment under Rule 32 of Leave Rules. Therefore, in our view Rule 36 cannot be read in conjunction to Rule 32." 

Thus the Court set aside the impugned decision and allowed the challenge of the State. 

Bench Explains The Concept Of Leave Encashment & Principle Of Deferred Compensation 

The Court explained that the concept of leave encashment caters to employee welfare and is an entitlement for employees to encash the salary for those days where they worked instead of taking leave as due. 

It explained, "Leave encashment is a legal entitlement that exists within the framework of service law and in the welfare of the employee. It allows employees to receive a monetary benefit in exchange for leave they have earned but not taken during regular employment." 

The Court added that such a right arises out of the principle of deferred compensation, where the employer shall compensate the employee for those working days which were supposed to be his leave days. This principle is also reflected in Service Laws, including Rule 36 as discussed above. 

"This right is based on the principle of deferred compensation to an employee who has not taken leaves and served, for which the employer must compensate not only for his/her work, but also for benefits of leave accumulated over time limited to 300 days maximum. This entitlement is often established in statutory provisions, service rules (such as Rule 36 of the Leave Rules) or employment contracts, ensuring that employees are fairly compensated for their unutilized leave." 

The Court disagreed with the interpretation of leave Encashment done in the ase of State of Rajasthan and Another Vs. Senior Higher Secondary School, Lacchmangarh and Others' which held that it referred to "'nothing but salary for the unavailed leave to the credit of the employee." 

The bench went a step ahead and dissected the leave encashment policy to be a reflection of equity and economic security. The Court explained as follows : 

"Jurisprudentially, leave encashment is grounded in two key principles: equity and economic security. The principle of equity ensures that employees who forgo their right to take leave for the benefit of the organization are not deprived of its monetary value. The principle of economic security treats leave encashment as a form of deferred wages, similar to gratuity or pension benefits. This reinforces the employer's duty to maintain fair labour practices and protects employees' financial rights." 

However, the Court also flagged the need to balance the welfare of the employee with the interests and financial conditions of the the employer. It added that Courts must also consider the burden on the public exchequer when allowing such pleas which may be and the undue behest of public interest.

"Interpreting leave encashment provisions goes beyond financial compensation and connects to broader legal principles of dignity and welfare during service. However, such interpretations must carefully balance the interests of both employees and the financial stability of the organization, especially when public exchequer is involved. Courts must tread carefully to prevent employees from claiming leave encashment multiple times for the same accrual, which could lead to unjust enrichment and may go against the public interest of largesse." 

"Naturally, courts must interpret leave encashment rules and statutes in a manner that prevents undue financial burden on employers while ensuring that employees receive what they are lawfully entitled to." 

The bench also upheld the clarificatory OM by the State of Sikkim and also negated the claim of the respondent that no fair hearing was done. The Court reasoned that : 

"When the respondent is unable to justify his claim of leave encashment and unable to set forth his right even allowing him reasonable opportunity, in our view, no prejudice was caused in cancelling the order granting leave encashment second time. As such, the argument of not granting an opportunity and violation of natural justice is hereby repelled." 

The Court thus concluded that a re-employed government servant cannot make use of leave encashment under Rule 36 which is only meant for those employees who have reached their retirement age of 58 years. 

Case Details : STATE OF SIKKIM AND OTHERS VERSUS DR. MOOL RAJ KOTWAL|SPECIAL LEAVE PETITION (C) NOS. 23709-23710 OF 2023

Citation : 2025 LiveLaw (SC) 472

Click here to read the judgment