Bahrain's Leave Salary Calculation: A Comprehensive Guide

Understanding how to calculate leave salary is crucial for both employers and employees, as it ensures compliance with labour laws and helps avoid legal issues. In Bahrain, the concept of leave salary or leave encashment is important for businesses to grasp, as it applies to all Bahrain-based companies and their employees. This process involves calculating and crediting an amount to an employee's account based on their leave entitlements, specifically their unused paid leave days.

The calculation of leave salary in Bahrain is based on the employee's gross salary and the number of leave days. The formula for this is: Leave Encashment = Gross Salary/30 * Leave Days. It's important to note that gross salary includes basic pay, allowances, and bonus incentives. Additionally, the timing of the calculation can be either at the closing of the financial year or when an employee resigns.

Another aspect to consider in Bahrain is gratuity, which is a lump sum payment to employees upon termination or for those who meet certain contractual terms. Gratuity calculations are based on the employee's most recent basic wage, including any social allowance. For employees working on a daily salary, production basis, or commission structure, gratuity is calculated using the average wage of the last three months.

Understanding the leave encashment process

The leave encashment process in Bahrain involves several steps, including checking eligibility, initiating and processing requests, calculation and approval, evaluation, and payment. This process is essential for converting an employee's unpaid leave days into monetary benefits as part of their compensation package.

Checking Eligibility

The first step is to check and confirm the employee's eligibility for leave encashment. This involves reviewing their annual leave calendar and determining the number of paid leave days available, including any carry-forward options.

Initiating and Processing Requests

Once an employee is confirmed eligible for leave encashment, a formal request must be initiated with the governing body. This typically involves submitting written requests, including HR personnel, and following established procedures and formalities.

Calculation and Approval

The next step is to calculate the leave encashment amount based on the employee's gross salary and the number of leave days. The formula for this calculation is: Leave Encashment = Gross Salary/30 * Leave Days. The calculated amount is then submitted to upper management for approval.

Evaluation and Payment

After approval, the final step is to evaluate the leave encashment and process the payment to the employee's account. This may be a one-time payment at the end of the annual leave calendar or the employee's tenure. It is important to note that monetary compensation includes special tax deductions and compliance norms.

Understanding Gratuity

Gratuity is a related concept, referring to a lump-sum payment made to an employee by the employer for their service. It is typically paid out to employees who meet certain contractual terms or have been unfairly dismissed. Gratuity is calculated based on the employee's most recent basic salary, including any social allowance.

Digital Solutions

To streamline the leave encashment process, many organisations in Bahrain utilise digital HR software solutions. These platforms automate calculations, track leave balances, and facilitate approval processes, enhancing efficiency and accuracy in managing employee benefits.

Calculating leave encashment

The term for leave salary in Bahrain is "leave encashment". It is the process of calculating and crediting an amount to the employee's account based on their leave entitlements. This covers the unused paid leave of an employee over a year.

The timing of the calculation is flexible and can be done at the closing of the financial year or when the employee resigns. The calculation models can also be adjusted based on the organization's needs.

Understanding the Process

First, understand the whole leave encashment process from both the employer and employee's perspectives.

Leave Salary Calculation Formula

The leave salary or encashment formula is as follows:

> Leave encashment of an employee = Gross salary/30 * leave days

Gross salary represents the total salary of the employee, including basic pay, allowances, and bonus incentives. Leave days represent the number of earned paid leaves in a calendar year.

Implementing the Process

Implement the leave encashment calculation process, ensuring it is employee-friendly, cost-effective, and timely.

Actual Leave Encashment Calculation

Calculate the actual leave encashment amount for each employee, referencing their leave calendar and the defined formula.

Crediting the Amount

After evaluating the leave encashment contribution, credit the amount to the employee's account. This step involves a strategic approval process and technical formalities.

Feedback and Support

Finally, wait for feedback from employees and provide support for any further steps or missteps in the calculation.

Process and Types of Leave Encashment

The leave encashment process involves converting an employee's unpaid leave into monetary benefits. The types of leave encashment depend on the different types of leave in an organization.

Some common types of leave include:

• Casual leaves
• Sick or medical leaves
• Privilege leaves
• National and special holidays
• Compensatory off
• Maternity, paternity, and parental leaves
• Reimbursement leaves
• Marriage leave

Implementing the leave encashment process

This step involves putting the leave encashment calculation process into action. The process should be efficient, cost-effective, and timely. It is important to ensure that the process is easy for employees to understand and use.

The first step is to calculate the actual leave encashment amount for each employee. This is done by applying the leave encashment formula to each employee's leave calendar and salary information. The formula for leave encashment is:

> Leave encashment of an employee = Gross salary/30 * leave days.

Here, "gross salary" refers to the total salary of the employee, including basic pay, allowances, and bonus incentives. "Leave days" refers to the number of paid leave days earned by the employee in a calendar year.

Once the leave encashment amounts have been calculated, the next step is to credit the amounts to the employees' accounts. This typically involves a strategic approval process and technical formalities.

After the amounts have been credited, it is important to receive feedback from employees to ensure that they have received the correct amount and to address any concerns or questions they may have.

Process and types of leave encashment

The leave encashment process involves converting an employee's unused leave days into a monetary benefit. This is typically done at the end of the financial year or when an employee resigns. The process can also include carrying forward unused leave days to the next year.

The types of leave that can be encashed depend on the organisation's policies and the specific leave types offered. Common types of leave that can be encashed include casual leave, sick leave, privilege leave, and holiday leave.

Steps to process leave encashment

• Check and confirm the employee's eligibility for leave encashment. This involves reviewing the employee's leave calendar and confirming the number of unused leave days available.
• Initiate and process the request for leave encashment. This may involve submitting a written request to the HR department or using a digital portal.
• Calculate the leave encashment amount using the defined formula.
• Seek approval from upper management or the relevant authorities.
• Evaluate the leave encashment and process the payment to the employee's account. This may be a one-time payment or included in the regular salary cycle.

Gratuity and indemnity payments

Article 47 of the Bahrain Labor Law outlines the basis for calculating gratuity or leaving indemnity. It states that the calculation should be based on the worker's most recent basic wage, including any social allowance. For employees who are paid on a daily salary, production basis, or those who receive a fixed wage plus commission, the calculation is based on the average wage during the last three months.

Article 116 of the Bahrain Labor Law further elaborates on the calculation of leaving indemnity. It states that workers who are not subject to the Social Insurance Law are entitled to a leaving indemnity of half a month's wage for each of the first three years of employment and one month's wage for each subsequent year. For fractions of a year, the indemnity is prorated based on the period of service.

In January 2024, an update was announced regarding the payment of leaving indemnity to non-Bahrainis. The key change is that employers are now required to remit end-of-service entitlements to the Social Insurance Organisation (SIO) on a monthly basis. Upon termination or resignation, employees will then apply to the SIO for their end-of-service entitlements. This update aims to protect employees and ensure they receive their entitlements without jeopardising the company's financials.

The calculation of gratuity remains unchanged, with a rate of 4.2% of the employee's annual salary for the first three years of employment and 8.4% for subsequent years. Employers are mandated to make monthly contributions to the SIO, and failure to do so may result in penalties and sanctions.

Annual leave rules and regulations

The Labour Law in Bahrain grants employees several types of leave, including annual leave, sick leave, maternity leave, and other official leaves. These leave entitlements are protected by law, and employers must comply with the regulations regarding leave salary calculations and leave duration. Here is a comprehensive overview of the annual leave rules and regulations in Bahrain:

• Annual Leave Entitlement: According to Article 58 of the Bahrain Labour Law, employees who have completed at least one year of service with an employer are entitled to a paid annual leave of no less than 30 days. If an employee has worked for less than a year, they are entitled to leave corresponding to their period of work.
• Leave Salary Calculation: The leave salary or encashment formula in Bahrain is as follows: Leave Encashment = Gross Salary/30 Leave Days. Gross salary includes the basic pay, allowances, and bonus incentives. This calculation ensures employees receive their full salary during their annual leave.
• Carry Forward Option: Employees have the option to carry forward their unused paid leave days to the next year or opt for leave encashment. This flexibility allows employees to choose between additional monetary benefits or taking leave at a later date.
• Notice Period for Leave: As per Article 61, employees must provide at least 30 days' notice before taking leave for an educational exam. This advance notice helps employers plan and manage their workforce effectively.
• Employer's Obligations: Employers are required to compensate employees for their annual leave before the commencement of the leave period. This compensation should include the employee's full salary, encompassing basic pay, housing allowance, and any other applicable allowances.
• Discrimination Protection: The Bahrain Labour Law prohibits employers from discriminating against employees regarding annual leave entitlements. According to Article 2 bis, discrimination based on sex, ethnicity, religion, or belief is not permitted. This protection ensures equal leave rights for all employees.
• Maternity Leave: Female employees are entitled to 60 days of maternity leave on full pay, including the period before and after confinement. They can also avail of additional leave without pay for 15 days. During this period, employers are prohibited from employing female workers and cannot terminate their contracts due to marriage or maternity leave.
• Sick Leave: As per Article 65, employees who have worked for at least three months are entitled to sick leave: 15 days on full pay, 20 days on half pay, and 20 days without pay in the same year. This leave ensures employees can address their medical needs without worrying about income loss.
• Other Official Leaves: The Bahrain Labour Law also grants workers official leave for specific occasions, such as marriage (3 days), the death of a spouse or relative (3 days), and the birth of a child (1 day). These leaves are provided with full pay, recognising the importance of these life events.
• Non-Discrimination Clause: The new Labour Law includes a clear non-discrimination clause, ensuring that female employees are subject to the same provisions as male workers, without any discrimination based on their employment conditions. This clause promotes gender equality in the workplace.
• Termination of Contract: Both employers and employees can terminate an employment contract by providing 30 days' notice. If an employer terminates a contract without a legitimate cause, the employee is entitled to compensation. The law distinguishes between unjustified termination and unfair dismissal, with specific compensation calculations for each type.
• Grievance Resolution: The new Labour Law has improved the efficiency of labour courts by specifying timeframes for examining and resolving cases. This reform has led to a reduction in the number of cases brought before the labour courts, providing quicker resolution for employees and employers alike.

Frequently asked questions