A travel agency in Kochi has 30 people, and every one of them wants the last fortnight of December off. For eleven years the leave policy was the founder: you asked him, he checked who else was away, and he said yes or no. Then he spent a month in Dubai with a client, nobody knew who could approve what, and three consultants booked the same week.
What follows is the policy they wrote after that, the numbers behind it, and the reasons for each clause, so you can change the ones that don't fit your business.
How much leave a small business should give
Two laws set the minimums. The OSH Code, in force since 21 November 2025, gives a worker in an establishment it covers one day of earned leave for every 20 days worked, once they've worked 180 days in the year. Your state's shops and establishments act sets its own, and they differ from state to state, so check both. Most small businesses end up somewhere near this:
| Leave | Days a year | How it is credited |
|---|
| Casual | 12 | All on the first day of the year |
|---|
| Sick | 6 | All on the first day of the year |
|---|
| Earned | 18 | 1.5 days at the end of each month |
|---|
| Loss of pay | No limit | Only once the others run out |
|---|
Those are also the leave types Facto Lite starts a new company with, and every figure in them can be changed. National and festival holidays are separate from all of this. Your holiday list sets them, and a leave request that spans one doesn't use it up.
Earned leave rules: credit, carry, pay out
Earned leave is the type that builds up, so it's the one that needs the most rules. Credit it monthly rather than all at once, so somebody who leaves in May hasn't already been given a year's worth. Hold it back from people on probation, or credit it at half, until they're confirmed. And set a ceiling on how much can come forward from one year to the next.
Here's one of the agency's senior consultants over three years, on the policy above, with a carry-forward ceiling of 30 days:
| Leave year | Available | Taken | At the year end |
|---|
| Year 1 | 18 days | 8 days | 10 carried |
|---|
| Year 2 | 28 days | 6 days | 22 carried |
|---|
| Year 3 | 40 days | 5 days | 30 carried, 5 paid out |
|---|
35 daysher balance at the end of year 3
₹4,000the 5 days over the cap, paid at ₹800 a day
₹28,000if she resigned that day instead
Her Basic plus DA is ₹20,800 a month, so a day of earned leave is worth ₹800: ₹20,800 ÷ 26, the same working month a full and final settlement uses. The 5 days above the cap are paid out at the end of year 3. If she resigned on the last day of that year instead, all 35 would be paid out in her settlement.
What a high ceiling costs you: every carried day is money you'll owe at exit, at whatever the salary is by then. A ceiling of 30 days means nobody starts a year with more than 30, so at exit you owe at most that plus whatever they've earned since. With no ceiling, a long-serving employee who never takes leave becomes a large cheque on their last day.
A leave policy for small business teams, written out
Copy this into your appointment letter or your staff handbook, and change the numbers to suit you.
- Leave year. The leave year runs from 1 January to 31 December.
- Casual leave. 12 days a year, credited on 1 January, or pro rata for anyone who joins during the year. It doesn't carry forward and isn't paid out.
- Sick leave. 6 days a year, credited the same way. A medical certificate is needed for more than two days in a row.
- Earned leave. 18 days a year, credited at 1.5 days a month. Employees on probation earn it at half the rate, credited from the date they're confirmed.
- Carry forward. Up to 30 days of earned leave carry into the next year. Anything above 30 is paid out with December's salary.
- Notice. Apply at least 7 days ahead for earned leave. Casual and sick leave can be applied for on the day.
- Length. No more than 10 working days of earned leave at a time without the director's approval.
- Counting days. Weekly offs and holidays inside a leave period aren't counted as leave.
- Loss of pay. Leave taken with no balance left is unpaid, and is deducted from that month's salary.
- Comp-off. Working on a weekly off or a holiday earns a day off, to be taken within 90 days.
- At exit. Unused earned leave is paid out in the full and final settlement at Basic plus DA ÷ 26 a day.
Clause 8 is a choice, and a common one. Some businesses count a weekend that falls between two days of leave as leave too, so a Friday and a Monday off cost four days instead of two. For holidays, the OSH Code settles it: a holiday inside or next to a worker's annual leave isn't counted as leave. Weekly offs are less clear, and counting them is unpopular and the clause people argue about most. The sandwich leave rule goes through it with dates. Facto Lite counts leave the way clause 8 is written: weekly offs and holidays inside a request are skipped.
Casual and sick leave policy: keep them apart or merge them
Plenty of small businesses merge casual and sick leave into one pot of 12 to 15 days. It's simpler, and nobody has to pretend to be ill. The case for keeping them apart is that sick leave then does its job: somebody who's used their casual days in April still has something left when they get dengue in September.
If you keep them apart, don't ask for a certificate for one day off. Ask for it only after two or three days, and it'll be taken seriously when it is asked for.
Leave encashment rules
Encashment means paying for leave instead of letting it be taken. There are two moments it happens.
- At exit, where unused earned leave is paid out in full. This is standard, and in most states it's the law.
- During employment. The days above the carry-forward ceiling are paid out each year, which for the consultant above is ₹4,000. For a worker the OSH Code covers, that isn't optional: the Code lets them encash leave above 30 days, and ask for encashment at the end of any calendar year, so a policy that simply lets the excess lapse won't hold for them. Facto Lite caps the carry-forward at the year end, but it doesn't pay out the days above the cap for you. After the year-end rollover, the leave balances screen shows how many days lapsed for each person, and you add their payout to that month's payroll as an ad-hoc earning.
Encashment paid while somebody's still working is taxable as salary. The exemption for leave encashment applies only when a person retires or resigns, and it has a lifetime limit.
The leave carry forward limit: pick a number
The Factories Act allowed 30 days of earned leave to be carried forward, and the OSH Code keeps 30 days as the cap. It also lets a worker ask for their leave to be paid out at the end of the calendar year. It's a sensible limit for any business: long enough that people can save up for a wedding or a long trip home, and short enough to stop the liability growing without end.
Why the founder's head wasn't enough
A procedure that lives in a document competes with habit and loses. A procedure embedded in the thing people already have to touch, the job card they fill or the issue slip they raise, is just how the work happens.Darshan Shah, From Owner-Run to Process-Run Manufacturing
Darshan was writing about factories, and a leave policy is the same problem in a smaller room. Written down in a handbook, it still loses to "just ask the boss". It holds up once the rules live in the place people apply for leave, so the notice period is checked before anybody has to say no, and the balance is right without a spreadsheet.
Unpaid leave also has to reach payroll every month, and how to run payroll for a small business covers where it fits in the month.
