Leave and attendance policy for a small business: leave types, proration and a sample

A leave and attendance policy for a small business needs four things: the leave types and counts your state Shops and Establishments Act requires (typically earned, casual and sick leave plus a weekly off and national holidays), a reliable way to record attendance, a written proration formula so that loss of pay is calculated the same way every month, and rules for carry-forward and encashment. This guide gives you each piece and a sample policy you can adapt.

Why a written policy matters even with three employees

Leave disputes are the most frequent friction point in small teams, and they almost always come from ambiguity: was the Diwali week paid, does sick leave need a certificate, did the 31-day month shrink my salary. A one-page policy removes the argument, and it doubles as the record a labour inspector asks for under your state Shops Act. It also makes payroll mechanical: paid days go in, net pay comes out, and the salary slip explains the difference.

Write the policy before you hire, attach it to the appointment letter, and update it once a year. If you are still at the hiring stage, start with hiring your first employee.

Types of leave and what the law requires

Leave rules for shops and offices come from each state's Shops and Establishments Act; factories follow the Factories Act (one day of earned leave for every 20 days worked). The figures below are typical statutory minimums; you can always give more.

Some states let you merge CL and SL into one bucket; others keep them separate. The Maharashtra 2017 Act, for instance, provides eight days of casual leave and treats sick leave as a matter for the employer's rules, while Karnataka's Act specifies separate sick and casual leave. Read your state's Act once, note the figures, and put them in the policy. Where a state amends leave rules under the new Labour Codes, follow the latest notification.

Paternity leave has no statutory basis in the private sector. Many small businesses give 3 to 5 days as a goodwill measure; if you do, write it down so that it is applied equally.

Weekly off, holidays and working hours

State Shops Acts fix a working day of 9 hours and a week of 48 hours, with overtime at twice the ordinary wage beyond that, a weekly off, and a limit on continuous working hours before a rest break (usually 5 hours). If your shop is open seven days, rotate the weekly off and record who was off on which day; the register must show it.

For holidays, publish a list at the start of the financial year: the three national holidays, any state-mandated day such as 1 May in Maharashtra, and the festival holidays you choose (Diwali, Holi, Eid, Christmas, Onam, Pongal, according to your team). A business that needs to stay open on a holiday can do so in most states by giving a substitute paid holiday or double wages, but check your state rules first.

Recording attendance

The Shops Act rules require an attendance or muster register, and the wage register must reconcile to it. For a team under 20 people, the practical options are a printed monthly sheet signed daily, a shared spreadsheet, a biometric device, or a phone app. Whatever you pick, record for each employee and each day one of: present, weekly off, holiday, leave type (EL, CL, SL), half day, or absent without leave. Mark late arrivals separately if your policy penalises them; three late marks equals a half day is a common and defensible rule if it is written down and applied evenly.

Close the attendance sheet on the last day of the month, have each employee initial it (or confirm on the app), and only then run payroll. Corrections after salary is paid become adjustments in the next month, which are confusing for everyone.

Paid days and the salary proration formula

Proration is where most small-business payroll errors live. Fix one method in writing and use it every month.

Monthly gross salary is for a full month regardless of whether the month has 28, 30 or 31 days. Paid days are all days in the month minus days of loss of pay (LWP). Weekly offs, holidays and approved leave within entitlement are paid days.

Method 1: actual calendar days. Salary for the month = monthly gross × paid days ÷ calendar days in the month. This is what most wage registers and labour officers expect, and it is the method most payroll tools use by default.

Method 2: fixed 30-day base. Salary for the month = monthly gross × paid days ÷ 30, with paid days capped at 30. Simpler, but a person absent one day in February loses 1/30 of salary while the same absence in July costs 1/31.

Method 3: working days only. Salary for the month = monthly gross × (working days minus LWP) ÷ working days, excluding weekly offs. This makes each day of LWP more expensive (1/26 instead of 1/31), and it needs care if the weekly off is not fixed. Use it only if you have a clear reason and state it in the appointment letter.

Whichever method you pick, per-day deductions for LWP, per-day additions for encashment, and joining or leaving mid-month should all use the same divisor. Do not use 30 for one and 26 for another.

Worked example: a Bengaluru cloud kitchen

A Bengaluru cloud kitchen employs a kitchen supervisor on a monthly gross of ₹22,000 (basic ₹11,000, HRA ₹5,500, other allowances ₹5,500). In August 2026 (31 days), the supervisor takes 2 days of approved casual leave, is off on 4 weekly offs and 1 national holiday (15 August), and is absent for 2 days without leave after CL is exhausted. Approved leave, weekly offs and the holiday are all paid, so LWP is 2 days and paid days are 29.

Method 1 (actual days): ₹22,000 × 29 ÷ 31 = ₹20,581 (rounded). Method 2 (30-day base): ₹22,000 × 28 ÷ 30 = ₹20,533, because the 30-day base caps paid days at 30 and the 2 LWP days reduce it to 28. The difference is small in one month but adds up across a team and a year; more importantly, the employee will ask why the divisor is 30 in a 31-day month.

The kitchen is in Karnataka with 12 employees, so ESI registration applies to the establishment, but the supervisor earns ₹22,000, above the ₹21,000 wage ceiling, so no ESI is deducted from this salary (it is deducted for co-workers under the ceiling). Professional tax in Karnataka is ₹200 for salary above ₹25,000, so none here. The kitchen has fewer than 20 employees and has not opted for PF. Net pay under Method 1 is therefore ₹20,581, shown on the slip as gross ₹22,000 less LWP deduction ₹1,419.

Loss of pay, carry-forward and encashment

Loss of pay (LWP). Once an employee exhausts the relevant leave bucket, further absence is unpaid. Deduct it using the same divisor as proration and show it as a separate line on the salary slip. LWP days also reduce paid days for PF and ESI wages, so contributions fall proportionately.

Carry-forward. Earned leave accumulates up to the state cap (30 to 45 days in most states); beyond the cap it lapses or, in some states, must be encashed. Casual and sick leave normally lapse at year end. Keep a leave ledger per employee with opening balance, accrued, availed and closing balance, updated monthly.

Encashment. Most state Acts require unused earned leave to be paid out when an employee leaves. The rate is the daily wage on the date of exit (basic plus DA, or gross, according to your policy and state rules) multiplied by the balance. Encashment during service is optional and fully taxable; encashment at exit is exempt for the employee up to ₹25 lakh under Section 10(10AA), subject to the formula in that section. Confirm the computation with your CA for senior employees.

Sample leave and attendance policy

Use this as a starting point and change the numbers to match your state Act.

Common mistakes

• Using a different divisor for LWP than for mid-month joiners. Both should use calendar days (or both 30), never a mix.
• Treating weekly offs adjoining leave as leave. A Sunday between two days of earned leave is a weekly off, not leave, unless your policy states otherwise and the state Act allows it.
• Letting earned leave lapse silently. If an employee had 20 days accrued and you never told them, you owe the balance at exit anyway.
• Not recording attendance for the owner's family members on the payroll. If they draw salary, they need a record too.
• Deducting pay for national holidays or for sick leave within entitlement. Both are unlawful in every state.
• Ignoring maternity obligations. The 26 weeks applies once you have 10 or more employees and the employee has worked 80 days in the last 12 months; the salary during leave is the employer's cost unless covered by ESI.
• Forgetting that LWP reduces PF and ESI wages. Contributions should be computed on the paid salary, not the full gross. Our EPF guide for employers explains the wage base.

How VyaparKit helps

VyaparKit keeps attendance and pay on the same page. Mark presence, leave and weekly offs on the attendance sheet, then run the month on payroll run, which prorates salary on paid days and applies PF, ESI and professional tax before generating an NEFT bank file. Each employee gets a salary slip with paid days, LWP and every deduction shown. The free plan includes one payroll run of up to three employees and three slips a month; Pro removes the limits.

Next steps

• Look up your state Shops and Establishments Act leave figures and put them in the policy table.
• Choose one proration method (we recommend actual calendar days) and state it in the appointment letter.
• Start a monthly attendance sheet this month and have employees confirm it before payroll.
• Open a leave ledger per employee with opening balances as of today.
• Publish the holiday list for the rest of the year.